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
1.1 Statement of
of the study
of the Study
1.5 Statement of
1.6 Scope and
limitation of study
1.8 Historical background of Case Study: Union Bank of Nigeria
REVIEW OF RELATED LITERATURE
2.1 Concept of
Banking Consolidation on Nigeria Economy
2.2 Banks as
Catalysts to Economic Development
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
Challenges of the Post Reform Era
2.8 The Relationship between the Real Sector and Economic
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
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
4.1 Data Analysis and Interpretation
4.2 Hypothesis testing
SUMMARY, CONCLUSIONS AND RECOMMENDATION
5.1 Summary of
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
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
long term interest
velocity of money
through the economy;
bonds and equities
(corporate ownership and debt);
private sector spending/savings;
flows of money on large scales;
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.
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
of the Study
The purpose of study in this research study is as
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
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
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.
The research questions will be as follows:
What are the impacts
of government monetary policies on banks performance in Nigeria Economy?
What are the problems
and factors affecting government monetary policies on banks performance in
What are the
solutions to the problems and factors affecting government monetary policies on
banks performance in Nigeria Economy?
What are the
implications of fluctuations in government monetary policies on the performance
of commercial banks in Nigeria Economy?
What are the
performances of monetary policies on banks performance in Nigeria Economy?
1.5 STATEMENT OF
For the purpose of this research study, the following
hypotheses derived from the statement of the problems are rested:
(1) Ho: Effective
and efficient government monetary policies does not contribute to the growth of
H1: Effective and efficient government
monetary policies contribute to the growth of Nigerian economy.
(2) Ho: There is
no relationship between government monetary policies Bank Performance and
H1: There is relationship between government monetary policies and Bank
1.6 SCOPE AND
LIMITATION OF STUDY
The scope of study is within the concept of government
monetary policies on banks performance in Lagos metropolis Also problems and
challenges being faced by the banking sector and how it has affected the
economic growth and development of Nigeria.
The limitation of study is as a result of time
constraints and distances to be covered by the researcher. The problems of
restricted information by the staff members who are the respondents also
affected the research study.
Currency board: A currency board is a monetary arrangement which pegs the
monetary base of a country to that of an anchor nation
Bank: It is an establishment which
deals in money, receiving it on deposit on demand, collecting cheques for
customer and investing the surplus until it is required.
Monetary policy: this 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 Monetary theory provides insight into
how to craft optimal monetary policy.
Bills of Exchange: It is an
unconditional order in writing addressed by one person to another. Signed by
the person giving it, requiring to whom it is addressed to pay on demand or at
a fixed or determinable future time, a sum certain in money to or to the order
of specified person or to bearer.
Treasury bill: This is a
short-time instrument use by the government in raising funds. They are
financial asset which can be easily converted into cash.
Foreign Exchange: The mechanism
by which international debts between countries under difference currencies are
discharge without the passing of actual money.
Equity: The value of an
asset of company after all debts, mortgages and other charges attaching to the
asset have been discharged. Hence, it is the ordinary shares of companies also
known as "Net worth".
Liquidity Ratio: The proportion
of specified liquid asset to total deposit of a bank. The minimum proportions
required of commercial banks vary from time to time under the directories of
the Central Sank.
Cash Rate: This is the
cash a commercial bank must hold in order to meet the cash requirement of its1
CIBN: The Chattered
Institute of Swanker of Nigeria. They are professional body, which upholds and
further helps in regulating and ensuring the observation of professional ethics
and norms, reviewing and tackle problems confronting it members in the banking
Issuing Houses: A business
organization that helps companies to sell their new issue including
underwriting while complying with the stock regulations.
BOFID: The Sank and
Other Financial Institution Decree 1991. This was professional body established
by the decree of 1991 SOFID now bank and other financial Act "SOFIA"
to regulates and control banking industries and other non-bank financial
institution in Nigeria.
Unit Banking: This is that
system where an Individual bank undertake banking business either though a
single office or through a few branches operating within a limited area.
Nigeria Deposit Insurance Corporation (NDIC): The NDIC is an agent of the Federal Government. It was
established by Decree No. 22 of 15th June, 1988. The purpose is to
insure the deposit liabilities of licensed banks and other deposit taking
institutions in Nigeria.
BACKGROUND OF CASE STUDY: UNION BANK OF NIGERIA PLC.
Union bank of Nigeria pic was established in 1917 as a
colonial bank with its first branch in Lagos. In 1925, Barclays bank acquired
the colonial bank, which resulted in the changed of bank name to Barclays bank
(dominion, colonial and overseas.). Following the enactment of the companies'
act 1968 and the legal requirement for all foreign subsidiaries to be
incorporated locally, Barclay bank (d c 0) in 1969 was incorporated as Barclays
bank of Nigeria limited. The ownership structure of Barclay bank remains
un-changed until 1971 when 8.33% of the bank's share were offered to Nigerians.
In the same, the bank was listed in the Nigeria stock exchange. As a result of
the Nigerian enterprises promotion act 1972,the federal government of Nigeria
acquired 51.67% of the bank shares, which left Barclays bank pic London , with
only 40% enactment of the 1972 and 1977 Nigeria enterprises promotion act,
Barclays bank international disposed its shareholding to Nigerians in 1979. To
reflects the new ownership structure and in compliance with the companies and
allied matters act of 1990, it assumed the name union bank of Nigeria plc.
In consonance with the government's programmes
privatization and commercialization of public enterprises, the federal
government in 1993 sold its shares in union bank to private individuals. Thus
union bank became fully owned by Nigeria citizen and organizations.
In line with the central bank of Nigeria's banking
section consolidation policy, union bank of Nigeria pic acquired the former
universal trust bank pic and broad bank ltd and absorbed erstwhile subsidiary
union merchants' bank ltd. The bank also increased its shareholder's fund
through public offer right
issue in the last quarter of 2005. With these development, union bank remain
one of the most capitalized bank in Nigeria. It has a shareholder's fund of N
119.160 billion and operates through 405 networks of branches that are well
spread across the country, all of which are on-line real time.
Union homes savings
and loans plc
Union bank UK plc
du benin, cotonue
UBN property company
Union capital market
HFC bank Gbana
capital management co. ltd
Union bank group operates and interlocking organizational
structure where by some board members of union bank of Nigeria pic act as
external directors in the subsidiaries and associated companies. This
arrangement ensures effective oversight and participation in decision making
process of these companies, thereby safeguarding the bank's investments.
Today, the bank is a leading regional bank in sub-Sahara
Africa in terms of its diverse investment across the globe. A glance at the
bank's financial summary reveals its solidity. As at 31's march 2009, the
bank's gross earnings was N112.988billion; profit after tax was N33.012billion;
total asset was N1, 128.890billion; and shareholder's fund was