ABSTRACT
The study examined the effect of monetary policy on commercial banks credit creation in Nigeria using time series data from 2000-2016. The data used for the study was sourced from Central Bank of Nigeria statistical bulletin. The model used was estimated using Nigeria commercial banks total credit and monetary policy tools such as monetary policy rate, liquidity ratio and cash reserve ratio for the period of 2000 to 2016. For the analysis, ordinary least squares (OLS) multiple regression technique was employed. The study hypothesized that monetary policy rate have a negative and significant effect on commercial banks credit creation. It was also found that cash reserve ratio has a positive and significant effect on commercial banks credit creation. Again, the effect of liquidity ratio on credit creation was negative and insignificant. Hence, it was recommended among other things that prior to making any adjustments in the current monetary rates, the concerned authorities in this case the Central Bank should adequately assess the influence of their monetary tools on current credit supply in the economy.
TABLE OF CONTENTS
Title
Page i
Declaration
ii
Certification
iii
Acknowledgements iv
Dedication
v
Table
of Contents vi
List
of Tables
ix
Abstract
x
CHAPTERONE
INTRODUCTION
1.1 Background of the study
1
1.2 Statement of problem
4
1.3 Objectives of the study
5
1.4 Research questions 6
1.5 Research hypothesis 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 of monetary policy 8
2.1.1
Meaning of monetary policy
8
2.1.2
Objectives of monetary policy 9
2.1.3
Administration of monetary policy in Nigeria 10
2.1.4
Categories of monetary policy
11
2.1.5
Credit creation by commercial banks 19
2.1.5.1
Process of credit creation
20
2.1.6 Limitations of credit creation
23
2.2
Theoretical Framework of monetary policy
and credit creation 24
2.2.1 The
Keynesian theory 25
2.2.2 The Real bills doctrine 25
2.2.3 Anticipated income theory 26
2.2.4 Credit creation theory 26
2.3
Empirical Review 27
CHAPTER
THREE
RESEARCH
METHODOLOGY
3.1
Research design
32
3.2 Area
of study 32
3.3
Types and sources of data
32
3.4
Validity and reliability of the instrument 33
3.5
Analytical techniques 33
3.6
Model specification
33
3.7
Description of variables
34
3.7.1
Dependent variable
34
3.7.2
Independent variable 34
CHAPTER
FOUR
PRESENTATION
OF DATA ANALYSIS AND DISCUSSION
4.1
Presentation of data
36
4.2 Data
analysis
36
4.2.1
Descriptive statistic
37
4.2.2
Regression analysis
38
4.3
Discussion of results and hypotheses testing 39
CHAPTER
FIVE
SUMMARY
OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of findings
41
5.2
Conclusion
41
5.3
Recommendations 42
REFERENCES
APPENDIX
LIST OF TABLES
Table
4.1: Aggregate data used for the
analysis (2000 to 2016) 36
Table
4.2: Descriptive statistic 37
Table
4.3: Regression results (Dependent
variable, TCRD) 38
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The banking sector in any economy serves as a catalyst
for growth and development. Banks are able to perform this role through their
crucial functions of financial intermediation, provision of an efficient
payment system and facilitating the implementation of monetary policies. In
intermediation, banks mobilize savings from the surplus units of the economy
and channel such funds to the deficit ones, particularly private business
enterprises for the purpose of expanding productive capacity, (Afolabi, 2005).
It is a known fact that commercial banks (deposit
money banks) exists primarily to make profits. They make profits by accepting
deposits from customers and granting credits to interested individuals,
companies, and other organizations and institutions at an agreed interest rate.
Therefore, since banks do not operate in a vacuum, their overall lending
behaviour may generally be influenced by the environmental factors particularly
the regulatory and other macroeconomic factors. The regulatory environment is
more stringent and must be observed but the economic environment is perhaps the
more challenging since it affords them the opportunity to exercise their
discretion at least relatively, in a manner that will impact positively on
their business in the long run (Odior, 2013).
The monetary authority (CBN) formulates guidelines and
policy variable designed to ensure optimal performance of the banking industry.
However, in the implementation of such policy variable, certain conflicting
issues are to be addressed, ranging from the ability to comply with the various
monetary policy guidelines as well as satisfying depositors and shareholders.
To achieve its objectives, the CBN uses various instruments, which include:
Open Market Operation (OMO), Required Reserve Ratio (RRR), Bank Rate, Liquidity
Ratio, Selective Credit control and Moral Suasion (Chimezie, 2012 cited in
Udude, 2014).
One of the most important functions of commercial
Banks which is also known as “Deposit-taking Institutions (DTIs) or monetary
financial institutions (MFIs) is the creation of credit or money. It is this
function that distinguished commercial banks from other financial institutions.
The creation of credit is accomplished by the lending and investing activities
of commercial banks in cooperation with the Central Bank of the nation which is
the apex bank (Ekezie, 2014).
The Central Bank of Nigeria was at its inception
charged with the responsibility of creating appropriate monetary and financial
environment for economic growth and development. (Exeuduji, 2014). The Central
Bank of a nation plays an important role in the ability of the commercial
banking system to create money or credit. This is done through the Central
Bank’s monetary and credit policy, whose main objective is to provide a money
supply commensurate with the national objectives of stable prices, sound
economic growth, and a high level of employment (Central Bank of Nigeria Circular
No 27 of 1993).
In Nigeria, for instance, the Central Bank of Nigeria
uses monetary policy control mechanisms as enumerated in the Central Bank of
Nigeria circular No 26 of 1992 to check the money creation ability of Nigerian
commercial banks. Such measures or mechanisms include the Reserve Requirements
(Cash Ratio and Liquidity Ratio), open market operations, and stabilization
securities. Since commercial banks play a very important role in the
implementation of these policies, they serve as a conduit through which the
money supply is increased or decreased in an effort to attain stated economic
objectives (Afolabi,2005).
Wright-man views monetary policy as a deliberate
effort by the Central Bank or apex monetary authority to control money supply
and credit conditions for the purpose of achieving certain broad economic
objectives. For the purpose of this study, we will adopt monetary policy before
the structural adjustment programme and under the structural adjustment
programme era,(Ekezie, 2014).
The economic environment which guided monetary policy
in the Pre-SAP era, which could be termed the period of boom and burst, was
characterized by the growing importance of the oil external sector, the
expanding role of the public sector in the economy and the over dependence on
the external sector. In this particular setting, the most popular instruments
of monetary policy was the issuance of credit rationing guidelines, mostly in
the form of setting the rates of changes for the components and aggregate
commercial bank loans and advances to the private sector. The sectorial
distribution of bank credit in Central Bank of Nigeria guidelines was to
stimulate the productive sectors and thereby stem inflationary pressures.
Occasionally, special deposits were imposed to reduce the amount of free
reserves and credit-creating capacity of the banks. Minimum cash ratios were
imposed on the banks in the mid-1970s on the basis of their total liabilities,
but since such cash ratios were usually lower than the ratio voluntarily
maintained by the banks, they proved less effective as a restraint on their
credit operations,(Ekezie, 2014).
In order to reduce the observed excess liquidity in
the economy in the 1980s, measures such as reduction in credit growth by banks,
special deposit requirements against outstanding external payment arrears,
abolition of foreign guarantees/currency deposits as collateral for Naira loans
and the withdrawal of public sector deposits from the banks and their
consolidation at the Central Bank of Nigeria, were introduced. As a way of
inducing a market-oriented financial system and generally improving its
efficiency, the sectorial credit guidelines were revised to give banks total
credit guidelines and a good measure of flexibility in their credit operations.
The sector-specific credit distribution targets were compressed into four
sectors in 1986. In august 1987 all controls on interest rates were
removed,(Emerenini, 2007).
However, in 1991, banks maximum lending rates were
pegged at 21 percent, while a minimum of 13.5 percent was stipulated for
savings deposit rates. Therefore, it is expected that the issues highlighted,
analyzed and discussed in this study will enable the apex monetary authority
take a second look at the credit creation function of commercial banks.
In August 1992, the Central Bank of Nigeria embarked
on a phased implementation of the indirect or market oriented approach to
monetary and credit control. Effective 1st Sept; 1992 in pursuit of
the new monetary policy framework, the ceiling imposed on individual bank’s
credit growth was removed for banks which met the specified performance
criteria set by the Central Bank of Nigeria. The lifting of the credit ceiling
became possible as some of the pre-requisites for the transition had been
reasonably established. As had been emphasized earlier, this measure is aimed
at eliminating the distortions and inefficiency in the financial system caused
by the prolonged used of credit ceilings, which in turn had continued to pose
major problems for monetary and credit policy implementation. Meanwhile,
efforts are been intensified to resolve the outstanding issues to make the
environment more congenial for the extensive adoption of the indirect approach
during the first quarter of 1993. Under the new system, the main instruments of
policy will be Open Market Operations (OMO), cash reserve requirement,
liquidity ratio and the discount rate.
1.2 Statement of the Problem
With the commencement of the Central Bank of Nigeria
operations in 1959, there was the need by the government through the Central
Bank of Nigeria to use monetary policy to drive the economy.
Often, it is erroneously believed that the purpose of
required reserve is to protect the depositors by maintaining liquidity.
Required reserve is used to control the lending of Commercial Banks. Another important
consideration that informs the money creating behaviour of a commercial bank is
the avoidance of “Panic” or “run” on the bank. In addition, the interest rate
charged by banks for credit has continue to rise, thereby causing much
distortion in the financial intermediation process leaving the increase in
interest rate unchecked and performance of credit extended by banks to the
general public even in the light of slight inflationary pressures. The refusal
of some banks to adhere to the stipulated requirements for issuing of loans and
advances to customers has caused many set-backs in the achievement of the
desired macroeconomic objectives. The above problem is the major reason why the
monetary policy committee (or Central Bank of Nigeria) should employ the
strategies necessary to regulate the credit creation activities of commercial
banks, (Emerenini, 2007).
1.3 Objectives of the Study
The main objective of the study is to examine effect
of monetary policy measures on commercial banks credit creation in Nigeria
while the specific objectives of the study are:
1. To
determine the effect of monetary policy rate on commercial banks credit
creation in Nigeria.
2. To
ascertain the effect of liquidity ratio on commercial banks credit creation in
Nigeria.
3. To
evaluate the influence of cash reserve ratio (CRR) on commercial banks credit
creation in Nigeria.
1.4 Research Questions
Following the specific objectives adopted, the study
sought to provide answers to the following questions:
1. What
is the extent of the effect of monetary policy rate on commercial banks credit
creation in Nigeria?
2. How
far has liquidity ratio on commercial banks credit creation in Nigeria?
3. To
what extent has cash reserve ratio influence commercial banks credit creation
in Nigeria?
1.5 Research Hypotheses
Based on the research objectives and research question
the hypotheses to be tested which are in the null form, includes the following:
Ho1: Monetary
policy rate has no significant effect on commercial banks credit creation in
Nigeria.
Ho2: Liquidity
ratio has no significant effect on commercial banks credit creation in Nigeria.
Ho3: Cash
reserve ratio has no significant influence on commercial banks credit creation
in Nigeria.
1.6 Significance of the Study
The major significance of this study is to evaluate
the effect of monetary policy measures on commercial banks credit creation in
Nigeria, covers measure on how to increase profitability, moderate the extent
of bank credit and also to throw more light on the appropriate monetary policy
instrument to be used under different economic situation in order to achieve
the desired objective. This study will also be of relevance to researchers for
further research as well as to students who will need it for further study on
this topic or related topic. This study is relevant to policy makers since it
tries to establish a link between monetary sector and the financial sector.
This study is also important and significant in that it will examine the
various ways of improving the banking sector towards raising the standard of
living of Nigerians.
1.7 Scope of the Study
The scope of the study will cover the range of 2000 –
2016 (16 years). The base year was chosen because the study intends to
contribute to the existing literature on the subject matter and also to bridge
the gap on the empirical studies already conducted.
1.8 Limitations of Study
In the course of carrying out this
research, the researcher was confronted with challenges and limitations of
obtaining the model of the study, the current data and materials from Central
Bank of Nigeria statistical bulletin and also circulars such as the monetary
policy circulars which are regarded as confidential documents of the Central
Bank.
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