IMPACT OF GOVERNMENT MONETARY POLICIES ON BANK PERFORMANCE IN NIGERIA (A CASE STUDY OF UNION BANK OF NIGERIA PLC)

ABSTRACT

The aim of this study is to examine impact of government monetary policies on bank performance in Nigeria Economy. Although the reform of financial system has enhanced the banking sector to improve on their potential roles within and outside the Nigeria Economy. Monetary policy refers to any of a number of government measures undertaken to affect financial markets and credit conditions with the ultimate objective of influencing the overall behavior of the economy. In Nigeria, monetary policy is the responsibility of the Central Bank of Nigeria, a federal crown corporation that implements its policy decisions largely through its ability to alter the Nigerian money supply. The objectives are to determine the impact and evaluate the performance of government monetary policies on banks performance in Nigeria, the problems and factors affecting government monetary policies on banks performance in Nigeria, the implications of fluctuations in government monetary policies on the performance of commercial banks in Nigeria and to proffer solutions to the problems and factors affecting government monetary policies on banks performance in Nigeria. This is study made use of the survey research through which questionnaires were distributed.

The total numbers of the questionnaires or administered were 100 copies. The respondents were randomly selected from stratified random sampling within the Head Office of Union Bank of Nigeria Pic, Lagos. Out of this number, 60 were male and 40 were female while 90 of the questionnaire were collected back from respondents. A 5-point Likert scale method was developed and validated to collect information from the respondents. Both primary source of data and secondary source of data were used for this study. The data collected was analyzed based on the structured research questionnaire which was based on frequency and percentage. The tests of hypotheses were based on chi-square statistical methods. The core findings from the results obtained showed that the potential roles of banking have failed to perform their function while it has negative effect on Nigerian economy. There is need to ensure effective and efficient roles of banking operation which will contribute to the growth of Nigeria economy. The Nigerian Government should acknowledge the challenges of unavailability of long term funds to the Banking industry and enact policies that will encourage the growth of institutions like pension and mutual funds that can provide long term funds for the industry. Nigerian Government should strengthen the legal framework for the enforcement of loan repayments from borrowers to banks upon loan maturity and shorten the legal time required for the realization of collaterals pledged against delinquent loans. Nigerian banks should embrace modern interest risk management tools and in particular interest rate forecasting and gap management techniques should be applied in the pricing of Loan Assets and Deposit Liabilities.

TABLE OF CONTENTS

CHAPTER ONE:

1.0            Introduction

1.1     Statement of the Problem

1.2     Objectives of the study

1.3     Significance of the Study

1.4     Research Questions

1.5     Statement of research Hypothesis

1.6     Scope and limitation of study

1.7     Definition of Terms

1.8     Historical background of Case Study: Union Bank of Nigeria Plc  

CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.0     Introduction

2.1     Concept of Banking Consolidation on Nigeria Economy

2.2     Banks as Catalysts to Economic Development

2.3     Challenges and Problems Affecting the Role of Banking

2.4     An Overview of the Nigerian Economy

2.5     The Nigeria Banking Industry before the Reform

2.6     Meeting the N25 Billion Benchmark: Methods Adopted

2.7     Immediate Challenges of the Post Reform Era

2.8 The Relationship between the Real Sector and Economic Development

2.9     Reforms and the Real sector of Nigeria’s Economy

2.10   Other Benefits of the Reform

2.11   Negative Consequences of the Reform

2.12   Other Aspects of the Banking Sector Reforms

2.13   Summary

          References

CHAPTER THREE: METHODOLOGY

3.0     Research Design

3.1     Research Design

3.3     Sample and Sampling Techniques

3.4     Research Instruments

3.5     Procedure for Data Collection

3.6     Data Analysis

References

CHAPTER FOUR

4.0 Introduction

4.1 Data Analysis and Interpretation

4.2 Hypothesis testing

CHAPTER FIVE:

SUMMARY, CONCLUSIONS AND RECOMMENDATION

5.0     Introduction        

5.1     Summary of Findings

5.3     Discussions of findings

5.4     Recommendations

          Bibliography

          Appendix

              CHAPTER ONE                 

INTRODUCTION

1.0     BACKGROUND OF THE STUDY.

Monetary policy refers to any of a number of government measures undertaken to affect financial markets and credit conditions with the ultimate objective of influencing the overall behaviour of the economy. In Nigeria, monetary policy is the responsibility of the Central Bank of Nigeria, a federal crown corporation that implements its policy decisions largely through its ability to alter the Nigerian money supply. The money supply is that portion of the financial wealth of Nigerian households which has sufficient liquidity to be considered money. At the least it includes coin, currency, and checking ­account deposits in chartered banks, all of which have perfect liquidity in that they represent, at face value, an immediate means of payment for purchases made. Some economists broaden the money-supply definition by including additional chartered-bank deposits (e.g, savings accounts) or deposits in other financial institutions such as trust companies or credit unions.

The responsibility for monetary policy formulation rests with the Central Bank of Nigeria (CBN). Monetary policy objective is couched in terms of maintaining price stability and promoting non-inflationary growth. The primary means adopted to achieve this objective is to set aggregate money supply targets and to rely on the open market operations (OMO) and other policy instruments to achieve the target. Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy Ball Laurence, 1999. Monetary theory provides insight into how to craft optimal monetary policy.

Monetary policy is referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supply. Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy involves raising interest rates in order to combat inflation. Monetary policy is contrasted with fiscal policy, which refers to government borrowing, spending and taxation. Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (in order to achieve policy goals). The beginning of monetary policy as such comes from the late 19th century, where it was used to maintain the gold standard.

A policy is referred to as contractionary if it reduces the size of the money supply or raises the interest rate. An expansionary policy increases the size of the money supply, or decreases the interest rate. Furthermore, monetary policies are described as follows: accommodative, if the interest rate set by the central monetary authority is intended to create economic growth; neutral, if it is intended neither to create growth nor combat inflation; or tight if intended to reduce inflation.

There are several monetary policy tools available to achieve these ends: increasing interest rates by fiat; reducing the monetary base; and increasing reserve requirements. All have the effect of contracting the money supply; and, if reversed, expand the money supply. Since the 1970s, monetary policy has generally been formed separately from fiscal policy. Even prior to the 1970s, the Bretton Woods system still ensured that most nations would form the two policies separately.

Usually, the short term goal of open market operations is to achieve a specific short term interest rate target. In other instances, monetary policy might instead entail the targeting of a specific exchange rate relative to some foreign currency or else relative to gold. For example, in the case of the USA the Federal Reserve targets the federal funds rate, the rate at which member banks lend to one another overnight.

The other primary means of conducting monetary policy include: (i) Discount window lending (lender of last resort); (ii) Fractional deposit lending (changes in the reserve requirement); (iii) Moral suasion (cajoling certain market players to achieve specified outcomes); (iv) "Open mouth operations" (talking monetary policy with the market).

Monetary policy is primarily associated with interest rate and credit. For many centuries there were only two forms of monetary policy: (i) Decisions about coinage; (ii) Decisions to print paper money to create credit. Interest rates, while now thought of as part of monetary authority, were not generally coordinated with the other forms of monetary policy during this time. Monetary policy was seen as an executive decision, and was generally in the hands of the authority with seignior age, or the power to coin. With the advent of larger trading networks came the ability to set the price between gold and silver, and the price of the local currency to foreign currencies. This official price could be enforced by law, even if it varied from the market price.

With the creation of the Bank of England in 1694, which acquired the responsibility to print notes and back them with gold, the idea of monetary policy as independent of executive action began to be established. The goal of monetary policy was to maintain the value of the coinage, print notes which would trade at par to specie, and prevent coins from leaving circulation. The establishment of central banks by industrializing nations was associated then with the desire to maintain the nation's peg to the gold standard, and to trade in a narrow band with other gold-backed currencies. To accomplish this end, central banks as part of the gold standard began setting the interest rates that they charged, both their own borrowers, and other banks who required liquidity. The maintenance of a gold standard required almost monthly adjustments of interest rates.

During the 1870-1920 periods the industrialized nations set up central banking systems, with one of the last being the Federal Reserve in 1913. By this point the role of the central bank as the "lender of last resort" was understood. It was also increasingly understood that interest rates had an effect on the entire economy, in no small part because of the marginal revolution in economics, which focused on how many more, or how many fewer, people would make a decision based on a change in the economic trade-offs. It also became clear that there was a business cycle, and economic theory began understanding the relationship of interest rates to that cycle. (Nevertheless, steering a whole economy by influencing the interest rate has often been described as trying to steer an oil tanker with a canoe paddle.) Research by Cass Business School has also suggested that perhaps it is the central bank policies of expansionary and contractionary policies that are causing the economic cycle; evidence can be found by looking at the lack of cycles in economies before central banking policies existed. Batini, Nicoletta, 2003. Monetarist macroeconomists have sometimes advocated simply increasing the monetary supply at a low, constant rate, as the best way of maintaining low inflation and stable output growth. However, when U.S. Federal Reserve Chairman Paul Volcker tried this policy, starting in October 1979, it was found to be impractical, because of the highly unstable relationship between monetary aggregates and other macroeconomic variables. . Therefore, monetary decisions today take into account a wider range of factors, such as:

·                    short term interest rates;

·                    long term interest rates;

·                    velocity of money through the economy;

·                    exchange rates;

·                    credit quality;

·                    bonds and equities (corporate ownership and debt);

·                    government versus private sector spending/savings;

·                    international capital flows of money on large scales;

·                    Financial derivatives such as options, swaps, futures contracts, etc.

The sometimes complex financial transactions that make big business (especially international business) easier and safer would be much more difficult if not impossible. Moreover, shifting risk to different people/companies that specialize in monitoring and using risk can turn any financial risk into a known dollar amount and therefore make business predictable and more profitable for everyone involved.

1.1     STATEMENT OF THE PROBLEM

The statement of problem is on the impact of government monetary policies on Banks performance in Lagos metropolis. The major problems of study lies in the levels of political instability which has a lot of adverse effects on the micro and macro-economics in a developing economy like Nigeria. Debates over targets and structure of monetary policies are as old as the economic systems that engender them. Thoughts have varied on the framework for conducting monetary policy (the rules versus discretion debate), structure of institutions supporting them, nature of policy instruments as well as the stability or otherwise of the target variables. For several decades up to the 1990s, many countries adopted base-money targeting and fixed their exchange rates. However, questions about stability of money demand, multiplier and velocity have tended to force countries to rethink monetary policy frameworks.

Also, excess of importation of goods and services (both finished goods and production inputs) cost more in naira currencies. Specifically, the accelerated rise in the cost of imported raw materials and spare parts was partly responsible for the depreciation of national currency.

Other factors that are responsible for unstable government policies in the Nigerian economy are the factor that causes changes in the economic growth and development in Nigeria. There are: changes in the level of national income; inflation rates movements in different countries; investment activities of both local and international; foreign exchange speculation and external debt services obligations. Therefore, the depreciation of naira currency occurs mostly when the price of a currency falls due to market forces.

1.2     Objectives of the Study

The purpose of study in this research study is as follows:

Ø To determine the impact of government monetary policies on banks performance in Lagos metropolis.

Ø To determine the problems and factors affecting government monetary policies on banks performance in Lagos metropolis.

Ø To determine the implications of fluctuations in government monetary policies on the performance of commercial banks in Lagos metropolis

Ø To evaluate the performances of government monetary policies on banks performance in Lagos metropolis.

Ø To proffer solutions to the problems and factors affecting government monetary policies on banks performance in Lagos metropolis.

1.3     SIGNIFICANCE OF THE STUDY

The significance of this research study is on the impact of government monetary policies on banks performance in Lagos metropolis. The outcome of this research may likely increase the commitment of managers of commercial banks in Nigeria to embrace sound interest rate management policies and minimize their exposure to interest rate risks. The significance of the study will be of benefit to the bankers, stakeholders, management, government and investors. The result of this study would also enable banking industry to assess its contribution to the growth of Nigerian economy.

It would also be improve the efficiency of banking and non-banking industry to the Nigeria economy. This research is also expected to encourage Nigerian policy makers and bank regulators to implement fiscal and monetary policy regimes that will ensure interest rate stability.

1.4     RESEARCH QUESTIONS

The research questions will be as follows:

1.                 What are the impacts of government monetary policies on banks performance in Nigeria Economy?

2.                 What are the problems and factors affecting government monetary policies on banks performance in Nigeria Economy?

3.                 What are the solutions to the problems and factors affecting government monetary policies on banks performance in Nigeria Economy?

4.                 What are the implications of fluctuations in government monetary policies on the performance of commercial banks in Nigeria Economy?