MONETARY POLICY AND BANKING PERFORMANCE IN NIGERIA

ABSTRACT

The research study is directed towards a monetary policy and banking performance in Nigeria. The research investigates the effectiveness of monetary policy on the bank's profitability by using first bank of Nigeria: as a case study.  The structure of commercial bank's general policies and principles.

The research composition was based on secondary data. The data collected from various sources was statistically analyzed with the' multiple regression analysis.

The study found out that there is positive relationship among various economic variables including gross domestic product, interest rate, exchange rate and money supply.

The study recommends that government should pursue sound and more coordinated monetary policy. The growth rate of money supply should be kept at a level consistent with real gross domestic product (GDP) growth rate so that it will not affect the position of exchange rate adversely. The study also recommends that the government and the central bank of Nigeria should be cautious of their intervention in the Foreign Exchange Market to ensure non-violent fluctuation of the exchange rate as too much interference breeds uncertainty which' may hamper the realization of the achievement of monetary of monetary targets.

TABLE OF CONTENTS

Page

Title Page

Certification

Dedication

Acknowledgement

Abstract

Table of Contents

CHAPTER ONE: BACKGROUND OF THE STUDY

CHAPTER TWO: LITERATURE REVIEW

2.0     Introduction

2.1     Theoretical Review of Monetary Policies

2.2     Monetary Policy in Nigeria

2.3     Techniques of Monetary Policy Control

2.4·   Commercial Banking

2.5     Theoretical Framework of Islamic Banking

2.6     Empirical Review on Monetary Policies and

Banking Performance

CHAPTER THREE: RESEARCH METHODOLOGY

3.0    Introduction

3.1     Sources of Data

3.2      Scope of Study

3.2.1 Analytical Techniques

3.3     Model Specification

3.4     Estimation of the Model

3.4.1 Various Statistical Tests Used

CHAPTER FOUR: DATA ANALYSIS AND INTERPRETATION·

OF RESULTS

4.1    Introduction

4.2     Restatement of Hypothesis

4.3     Model Specification

4.3.1 A Priori Expectation

4.3.2 Limitation of the Study

4.4     Empirical Results and interpretation of the Regression

Results

4.5     Policy Implication

CHAPTER FIVE: SUMMARY, CONCLUSION AND POLICY                                                          RECOMMENDATIONS

CHAPTER ONE

1.0    INTRODUCTION

There are several factors that affect the performance of banks. In this research work profitability shall be used as the performance indicator of banks. The mostly direct factors that affect profitability are the· regulatory framework under which banks operate. This framework can be divided into two broad aspects: monetary and banking policies. In all economies, these policies are normally rooted through banking institutions because of the vital roles these institutions play in the intermediation process. Through this process, banks play very important roles in determining the price of money and creation of high-powered money. This characterizes the main functions of banks - mobilizing funds from surplus income units and channeling this surplus to deficit spending units. However, such license to create many is controlled by the Central Bank in the overall public interest. For example, through the use of monetary policy instruments, banks are required to hold reserves in form of cash in their vaults or a deposit at the Central Bank, which is equal to certain fractions of their various types of deposits.

Monetary policy deals with the discretionary control of money supply by monetary authorities in order to achieve stated or desired economic goals. Governments attempt to control. the supply of money because they believe its rate of growth has a significant effect on' the inflation rate. ·.Therefore, monetary policy comprises those government's actions, which are designee; to influence the bebaviour of the monetary sector.  The policies-are desired: 'in an attempt. to change the trends of same monetary variables in particular directions so as to induce the desired behavioural change in the monetary sector. The Central Bank's role is to conduct appropriate monetary policy that is consistent with the main economic objectives of achieving real growth in Gross Domestic Product; low inflation rate and a stable balance of payment position. This is irrespective of whether direct or indirect approach is being used to control money supply and availability of credit. The main objective of monetary policy is to ensure that over time, the expansion of money and credit will be adequate for the long run needs of the _ growing economy at stable prices.

In order to optimize earnings for bank's shareholders, there is tile need for banks to adjust their portfolio of assets and liabilities so as to meet the profitability objective under the solvency and liquidity constraints. This profitability objective - is greatly influenced- by the Central Bank's stance on monetary and banking policies. Other factors such as managerial efficiency of bank, labour cost, size and capital investment in banking, do influence bank's profitability. The extent to which a bank succeeds in collecting deposits and making a profitable use of such goes a long way in determining the level of profitability of such a bank.

However, the impact of monetary policy variables on .bank's profitability and effectiveness of monetary policy will be' considered in this study. Profitability Is regarded' as art important measure of a bank's performance: It is defined as the ability of banks-to make  excess revenue over expenditure or excess returns made in, the course of carrying out their business activities while maintaining their liquidity and solvency requirement.

1.1    STATEMENTOFTHEPROBLEM

Each year the monetary authorities formulate policy guidelines geared towards the enhancement and the effectiveness of policy variables designed to ensure' optimal performance of Ute banking sector. But' in the implementation of such policy variables, banks encounter certain problems. The problems that banks encounter include inability to comply with the various monetary policy guidelines. For instance, a change in the required reserve ratio alters the magnitude of money multiplier, credit expansion, money supply, and hence banks profitability. Similarly" the use of interest rate policy, credit ceilings and discount rate policy among other policy instruments are meant' to alter the level of profitability of banks.

Another problem is in the event of stringent policies faced by banks that are used in regulating their levels of profitability. For instance, the use of stabilization securities has met with bitter complaints from bankers.

There are diverse groups in the society that have investment interest in the Nigeria banking system and bank profitability. Therefore banks must be reasonably profitable. Reasonable returns also re­assure the' depositors that the business is efficiently managed. It, has been agued that' unprofitable banks are likely to be liquidated and distressed: in Nigeria' the rising cases' of bank distress have become a.' major source of concern. for Policy makers. Between 1994 and 2004, a total of 33 banks were closed (Adam 2004) and about five (5) banks was summoned in 2009. Monetary authorities attempt at achieving broad economic objectives through monetary control. To achieve these, Central Bank of Nigeria employs various instruments such as Open Market Operation (OMO), Cash Research Rate, Liquidity Ratio, and credit ceilings selective credit policies among others. It should be noted that direct monetary control techniques were in vogue, in the 1.960's, 1970;s and until June 1986.

This resulted into inefficiency and misallocation of resources in the financial system and at present the government has adopted the indirect tools and the use of direct techniques has reduced and other problems confronting the monetary policy there is the need to examine and analyse some fundamental issues and prospects for monetary control in the nearest future in the Nigerian economic.

The main thrust of the study shall be to evaluate the effectiveness of the CBN's monetary policy over the years. This will go a long way in assessing the extent to which the monetary policies have impacted on the economic growth process in Nigeria.

1.2     AIM AND OBJECTIVES OF THE STUDY.

The aim of the study is to examine the relationship between monetary policy and banking performance in Nigeria. The objective is broken down into the following:

a.       To examine the influence of monetary- policy variable on bank's. profitability.

b.       To highlight the various monetary policy measures that have been used for the years under review on commercial banks.

.c.      To examine way$ by which government authorities regulate banking operations in Nigeria.

d.       To examine the effectiveness of monetary policy measures used for the years under various economic conditions.

1.3     SIGNIFICANCE OF THE STUDY

Nowadays, most African scholars and policy makers increasingly subscribe to a conventional view of central banking. That view prioritizes the objective of monetary policy much more strongly than did either theoretical orthodoxy or the African central banks themselves in the 1960s and 70s. lt argues that central banks that fail to specialize in monetary stability  making low inflation a clearly overriding priority as against output stabilization, fiscal support to government, or a competitive real exchange rate - end up with excessive inflation and with no offsetting gains in economic performance. Independent central banks statutorily charged either primarily or exclusively with the goal of price stability, have become the norm in theory and proposal if not yet often in practice. There is little room here for an active development role; rather, long-run growth is promoted through the maintenance of low inflation, which increases investment and growth by reducing macroeconomic uncertainty.

The modem 'view also recognizes: that, in order to, achieve-price stability on a sustainable basis, however, the monetary authority may require some flexibility with respect to the evolving economic and political environment. Rigid or automatic policy rules may destabilize prices, for example, in the face of shifts in key behaviour relationships like the' actions. If the pursuit of price stability is' so single-minded as to induce recession, the political consensus within which the monetary authorities operate may be fractured.

Finally, the smooth functioning of the monetary system may itself be a necessary concomitant of price stability. If the liquidity of monetary assets is compromised by bank insolvency, or if the volatility of interest rates strongly discourages the 'emergence or survival of efficient financial market, then indirectly the objective of price stability has been impaired. It is evident from the aforementioned that it is crucial to evaluate the performance of the monetary policy in order to adopt appropriate measures that would ensure the achievement of both primary and secondary goals of monetary policy in Nigeria.

1.4     RESEARCH METHODOLOGY

The ordinary least square (OLS) technique shall be employed in obtaining the numerical estimates of the coefficients in different equations. The. multiple linear regression analysis will be used With Gross Domestic Product (GOP) as the. dependent, variable while money supply, exchange rate and interest' rate as the explanatory variables. The method would be .applied with the use of statistical package for social sciences"(SPSS). '

1.4.1 Collection of Data

Secondary data shall be used in this research. This includes the use of relevant, text; journals, annual reports, publication from Federal Bureau of Statistics and Central Bank of Nigeria Statistical Bulletin etc.

1.4.2 Method of Data Analysis

The study shall make use of econometric tools and basically regression analysis in analysing the research problem.

MODEL SPECIFICATION

GDP = f(Exch, Mst, Int)

GDP = β_O + β₁Exch + β₂Mst + β₃Int + µt)

Where;

GDP           =       Gross Domestic Product

EXCH         =       Exchange Rate

Mst              =        Money Supply

INT             =       Interest Rate

µt                =       Error term

1.5     RESEARCH HYPOTHESIS

The hypothesis to be tested given the above objectives is;

HYPOTHESIS ONE

H_o:    Monetary policy variables .such as-exchange rate have no effect on bank's profitability.

H_a:    Monetary policy variables such a exchange rate have effect on bank's profitability. '

HYPOTHESIS TWO

H_o:    There is no significance relationship between exchange rate and gross domestic product (GDP)

H_a:   There is a significance relationship between exchange rate and gross domestic product (GDP).

HYPOTHESIS THREE

H_o:    There is no positive relationship between the money supply (MS) and interest rate.

H_a:   There is a positive relationship between the money supply (MS) and interest rate.

1.6    SCOPE/LIMITATION OF THE STUDY

This study will focus on the relationship between monetary, policy and banking performance (probability). It is designed to cover 1986 to 2009. The years are selected in order to capture the period of the deregulation while the study of effectiveness of monetary policy will cover both before and after SAP's period. 'the major constraints on the study is the non-comprehension of official data. Largely because of inadequate data, time, funds and resources limiting' the research work to twenty three years.