ABSTRACT
This study investigated the extent the two major instruments of monetary policy (CRR and MPR) have impacted on commercial bank lending in Nigeria within the period 2002–2017. The problem that prompted this study was to critically examine the extent the two major instruments of monetary policy have impacted on commercial bank lending in Nigeria. The research objective was to investigate the impact of cash reserve ratio (CRR) and monetary policy rate (MPR) on commercial bank loan and advances in Nigeria. In the course of this study, the secondary data were extensively used and the method of analysis used in testing the hypothesis was the multiple regression analysis. The major findings were: Cash reserve ratio has a negative and insignificant impact on commercial bank lending in Nigeria; monetary policy rate has a negative and significant impact on commercial bank lending in Nigeria. Based on the findings some suggestions and policy recommendations were made: Due to the negative and insignificant impact of cash reserve ratio on commercial bank lending, there is an urgent need for CBN to reduce their cash reserve ratio on commercial banks in order to increase commercial bank lending ability. Also due to the negative and significant impact of monetary policy rate on commercial banks lending, CBN should redefine their monetary policy rate to make it more attractive to banks so that banks can reduce their interest rate on loans so as to make borrowing more attractive to investors and businessmen alike.
Table of Contents
Title
Declaration i
Certification ii
Dedication
iii
Acknowledgement iv
Table
of Contents v
Abstract ix
Chapter one:
introduction
1.1 background
of the Study 1
1.2 Statement of the Problems 4
1.3 Objectives of the Study 5
1.4 Research Questions 5
1.5 Research Hypotheses 6
1.6 Significance of the Study 6
1.7 Scope of the Study 7
1.8 Limitations of the Study 7
CHAPTER TWO: LITERATURE REVIEW
2.1 Conceptual Framework 8
2.1.1 Monetary Policy 8
2.1.2 Institutional Framework of Monetary
Policy in Nigeria 9
2.1.3 Instruments of Monetary Policy 10
2.1.4 Commercial Bank 17
2.2 Theoretical Review 19
2.2.1 Theory of Monetary Transmission
Mechanism 19
2.2.1.1 The Credit Channel Theory 20
2.2.1.1.1 Balance Sheet Channel 20
2.2.1.1.2 Bank Lending Channel 21
2.2.1.2 Interest Rate Channel 22
2.2.1.3 Asset Pricing Channel 22
2.2.1.4 Exchange Rate Channel 23
2.2.2 Monetary Policy Implementation in
Nigeria 24
2.3 Empirical Review 25
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Research Design 28
3.2 Nature and Sources of Data Collection 28
3.3
Area and Population of Study 28
3.4 Model Specification 28
3.5 Techniques of Analysis
29
3.6 Description of variables
29
CHAPTER
FOUR
4.1 Introduction 31
4.2 Presentation of Ordinary Least Square
Regression (OLS) 32
4.2.1 Impact of monetary policy on commercial bank
lending in Nigeria 32
4.2.2 Evaluation Based On Theoretical Criteria 33
4.3 The statistical criteria (first order) test 34
4.3.1 Coefficient of determination (R2) 34
4.3.2 The t-statistic 35
4.3.2 The f- test 36
CHAPTER FIVE
5.1 Introduction 37
5.2 Summary of Findings 37
5.3 Conclusion 37
5.4 Recommendation 38
Reference
Appendixes
CHAPTER ONE
INTRODUCTION
1.1
Background of the study
There is always a regulatory policy in
every country to regulate the value, cost and supply of money and this
regulatory policy is called the “Monetary Policy” of that particular country.
Monetary policy is one of the macroeconomic instruments with which nations
(including Nigeria) do manage their economies (Ajie and Nenbe, 2010). According
to Ubi, Lionel and Eyo (2012), monetary policy is an aspect of macroeconomic
policy which deals with the use of monetary instruments designed to regulate
the value, supply and cost of money in an economy.
In Nigeria, the monetary policy is the
macroeconomic policy laid down by the Central Bank of Nigeria. Akatu (2008)
explains that monetary policy in the Nigeria context encompasses actions of the
Central Bank of Nigeria (CBN) that
effect the availability and cost of bank reserve balances and thereby the
overall monetary and credit conditions in the economy. Monetary policy involves
the management of money, the supply of money and interest rates. It is the
demand side economic policy implemented by the government to achieve
macroeconomic objectives like growth, consumption, liquidity and inflation.
Without firm and well organized monetary policy, there would be continuous
instability, irregular inflation and deflation and unbalanced monetary
circulation in the economy.
Monetary policy is essentially a program
of action undertaken by the monetary authorities, generally the Central Bank,
to control and regulate the demand and supply of money with the public and the
flow of credit with a view of achieving predetermined macroeconomic goals
(Dwivedi, 2008).The responsibility for monetary policy and implementation in
Nigeria rest with the Central Bank of Nigeria (CBN). Monetary policy in Nigeria
has been conducted under wide ranging economic environments.
Monetary policy has to do with financial
markets and constitutes measures taken by government and monetary authorities
to control money supply in a way as to achieve certain macro-economic
objectives (Ezeugo, 2000). The monetary policy attempts to maintain a balance
as possible between the supply and demand for the monetary assets of the
economy in order to achieve adequate economic growth. This broad purpose may be
transmitted or rather translated into several specific objectives such as price
stability, high level of employment or an acceptance growth rate of the real
gross domestic product (GDP), as well as balance of payment equilibrium. The
major way monetary policy is achieved by the Central Bank of Nigeria is through
the ‘money supplied’ in the money circulation systems.
The extent to which monetary policy
influences financial and economic activities has been widely argued over the
years, it is equally accepted that monetary policy affects economic and
financial performance of any economy. There are divergence views on the extent
of the effects and the channels through which these effects are achieved. This
is particularly relevant in the Nigeria setting where the money and capital
market are under-developed and Nigerian government has over the years adopted
various instruments of monetary policy to regulate and control the cost,
volume, availability and direction of money credit and also the performance of
commercial banks (Ekpung and Udude, 2015).
Commercial bank means any bank in Nigeria
whose business includes the acceptance of deposits withdrawable by cheques
(BOFIA, 1991). In every economy commercial banks act as a key mover of economic
growth and development through their intermediation role of channeling funds
from the surplus to the deficit units for investment needs. Credit expansion
(lending) is one of the most important function of the commercial banks.
Commercial banks are legally required to keep a fixed percentage of their
deposits in cash reserve with the Central Bank of Nigeria (CBN). They lend or
invest the remaining amount known as excess or free reserve. A single bank can
lend equal to its excess reserve but the entire banking system can lend or
create credit up to multiples of its excess reserve.
Although Commercial Banks lend or create
credits, credit control is an important function of the Central Bank of Nigeria
(CBN). The ability of Commercial Banks to lend or create credit depends largely
upon the policy created by the Central Bank of Nigeria (CBN).
Monetary policy and Commercial Banks are
inextricably linked together. In fact, the assessment of the Banking System
(particularly in the area of loans and advances) can be evaluated through the
performance of monetary policy tools, which can be broadly classified into two
categories- the portfolio control approach and market intervention. Olokoyo
(2011) expressed that commercial banks decisions to lend out loans are
influenced by a lot of factors such as the prevailing interest rate, the volume
of deposits, the level of their domestic and foreign investment, banks
liquidity ratio, to mention a few. Many developing countries, including Nigeria
have adopted various policy measures to achieve targeted objectives. Ajie and
Nenbee (2010) contended that reserves of the banks are influenced by the
Central Bank through its various instruments of monetary policy. These
instruments include the cash reserve requirement, bank rate, open market
operations and also the direct control measures as deemed fit by the Central
Banks. All these activities affect the banks in their operations and thus
influence the cost and availability of loanable funds. Thus, monetary policy
instruments are critical in the demand for and supply of reserves held by
depository institutions and consequently on availability of credit.
Through the credit control instruments,
Central Banks affect the rate of growth of the money supply, the level of
interest rate, security prices, credit availability and liquidity creation of
Commercial Banks. These factors, in turn can exert monetary imbalances on the
economy by influencing the level of investment, consumption, imports, exports,
government spending, total output, income and price level in the economy.
1.2
Statement of the problem
Monetary policy being a deliberate action
by the monetary authorities which aims at controlling and influencing the cost
as well as the availability of credit in order to influence the economic
performance of a nation, is conducted and controlled by the central bank.
Similarly, monetary policy is one of the most used policies in macro-economic
and unlike the fiscal policy, it is implemented with an aim of influencing the
level of aggregate economic activity. Monetary policy implementation by central
bank of Nigeria have some positive returns if it is wisely applied, but the
monetary policy becomes a problem when it conflicts among the objections and
instruments of monetary policy and other policies as well as the constraints it
faces.
Despite the use of several monetary policy
tools, the volume of loans granted by the commercial banks to the Nigerian
economy appears not to have improved as to accelerating investment,
consumption, full employment output, income and price level as well as economic
growth in the economy. Lending is undoubtedly the heart of banking business
(Adedoyin & Sobodun, 1996). However, factors such as; a stringent monetary
policy, cash reserve ratio volatility, monetary policy rate volatility and a
poor liquidity ratio has to a great extent influence commercial banks decision
to expand credit.
Hence, the good implementation,
compliance, enforcement and achievement of the monetary policy instrument of
the Central Bank of Nigeria always pose problems to commercial bank lending
ability; this is why this study intends to critically ascertain or evaluate the
extent the two major instruments of monetary policy (Cash Reserve Ratio and Monetary
Policy Rate) have impacted on commercial bank lending in Nigeria.
1.3
Objective of the study
The broad objective of this study is to
show how the commercial bank’s activities are being regulated by the monetary
authorities through the various instruments of monetary control, using Zenith
Bank Nigeria Plc as a case study. Therefore, the major objectives of this study
are:
1. To
examine the relationship between Cash Reserve Ratio (CRR) as it affects commercial
banks loans and advances.
2. To
critically examine the impact of Monetary Policy Rate (MPR) on commercial bank
lending in Nigeria.
1.4
Research Questions
The attempt to arrive at the above stated
objectives has led to the following research questions:
- To
what extent has Cash Reserve Ratio influenced commercial banks loans and
advances in Nigeria?
- What
is the impact of Monetary Policy Rate on commercial bank lending in
Nigeria?
1.5
Research Hypotheses
Based on the above stated research
questions, the following hypotheses have been stated for testing in this study:
Hypotheses
1:
H01: Cash Reserve Ratio (CRR) has
no significant impact on commercial banks loans and advances in Nigeria.
Hypotheses
2:
H02: Monetary Policy Rate (MPR)
has no significant impact on commercial bank lending in Nigeria.
1.6
Significance of the study
This research work being an appraisal of
the effect of monetary policies on commercial banks’ lending (precisely Zenith
Bank Nigeria Plc.) will enable the Apex bank (CBN) to restructure and relax the
assumed stringent measures that would enhance the operations of Commercial
Banks in Nigeria. The result of this study will also act as a source of
information to the government and monetary authorities in an attempt to
stabilize the economy through the use of effective and efficient monetary policy
instruments.
Furthermore, this study will help to
advance knowledge and hence be of great value and reference to researchers in
other related field to carry out further research on the subject matter in the
future.
1.7
Scope of the study
This study is an empirical one which
concerns the effect of monetary policy on commercial banks’ lending (credit
expansion) and the research work spans from 2002 - 2017.
1.8
Limitation of the Study
In the course of this study, the
researcher encountered problem which in one way or the other challenge the easy
flow of this work. These include: Time factor as the researchers is a student
who is still doing other course work; Paucity of information and difficulty in
accessing relevant data, since data is gotten from secondary sources; Also the
financial strength of the researcher as at the period of the research was a setback
as it made things a little more difficult as finance was inadequate to carry out
a comprehensive research as at when needed. Last but not the least, the human
factor also tried to hamper this study by constant body breakdown as a result
of fatigue, tiredness and distraction. Despite all challenges the research work
is well conducted and the result is valued for any consideration.
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