Effect Of Fiscal And Monetary Policy On Commercial Banks And Other Financial Institution
This project work is focused on the impact of monetary and fiscal policies on the commercial banks activities, central Bank of Niger Abuja was the case study, in carrying out this study, the instruments employed in obtaining the data used for the study was the questionnaire, a total of 50 questionnaires were issued out which 45 were returned fully and completed and 5 were declared void. These questionnaire responses were analyzed using percentages and chi-square. The hypothesis formed in chapter one was tested using 5% confidence with chi-square. The question used to test the hypothesis were question 9 and 17 of the research for hypothesis. The null hypothesis was accepted for hypothesis one and two. The summary of the finding revealed that, the monetary policy instrument was statistically insignificant. There is no relationship between the profit of the commercial bank. Based on the analysis, the researcher proffered the following in commendation. The central bank of Nigeria should be independent. The problem of excess liquidity in the banking industry should be addressed through liquidity map up exercise.
1.1 Background to Study
In the last two decades of the 20th century, countries worldwide have had to face an unprecedented number of commercial bank failures. As a result, attention is turning to the need for more appropriate ways to improve the performance of national financial systems. Indeed, a substantial literature is already emerging on the causes and consequences of financial-mostly banking-crises, and on various reforms that might help prevent future crises. Although the proposed reforms differ in important respects, nearly all include changes in existing financial fiscal and monetary policy and supervisory standards.
This core of agreement is certainly understandable insofar as the financial crises in countries ranging from the United States and Japan to Korea and Mexico, to Chile and Thailand, to India and Russia, and to Ghana and Hungary have been blamed at least in part on “bad” regulation and supervision (Barth et al. 2006) The special role that banks play in the economic system implies that banks should be regulated and supervised not only to protect investors and consumers but also to ensure systemic stability.
More specifically, bank fiscal and monetary policy exist for safeguarding the industry against systemic risk, protecting consumers from excessive prices or opportunistic behaviour and finally to achieve some social objectives, including stability (Llewellyn, 1999). Last but not least regulation is important for the efficiency of the banking industry. In this respect, it is noticeable that whenever regulation is implemented with the aim of restricting or limiting banking activities, the banks’ conduct of business and the efficiency with which they operate will be affected. This in turn could induce banks to engage in riskier activities and /or to invest in ways to circumvent regulation. According to some studies, it could even ultimately affect economic growth (Jalilian et al., 2007).
The capital requirement is one of the bank fiscal and monetary policy, which sets a framework on how banks and depository institutions must handle their capital. The Categorization of assets and capital is highly standardized so that it can be risk weighted. Capital adequacy has been the focus of many studies and regulator as it is considered to be one of the main drivers on any institution’s 2 performance (Bourke, 1989). In contrast other studies argue that in a world of perfect financial market, capital structure and hence capital regulation is irrelevant (Modigliani and Miller, 1958). However, White and Morrison (2001) posited that the regulator ensures that banks enough of their own capital at stake. Financial performance is the primary goal of all commercial bank. Without financial performance the business will not survive in the long run
1.2 Statement of the Problem
Among the factors responsible for the ineffectiveness of fiscal and monetary policy measure, has been the lack of co-ordination between monetary and fiscal authority on compliance with the fiscal and monetary policy directives coupled with the ambiguity of the policy objectives which has made it difficult for the policy implementation to grasp the crux of the policy.
Perhaps the monetary serious restrain on the impact of fiscal and monetary policies on commercial banks activities are:
- Shortage of access liquidity problem
- Inadequate capital
- Problem of shortage of excess cash
- Inconsistent discount and interest rate policy
- Uncontrolled extension of credit to different sector
- Inadequate means of mopping excess liquidity
- Poor reserve ratio with CBN.
1.4 Objectives of the Study
- If monetary and fiscal policy have had any influence on the profit of commercial Banks in Nigeria and also on its loans and advances, over the study period.
- To make necessary recommendation that could improve monetary and fiscal policy in Nigeria.
- To determine the instrument of monetary and fiscal policy and their individual roles as a control measure on commercial banks.
- Finally, to determine the effect of monetary and fiscal policies on commercial bank.
1.5 Significance of the Study
Today, it is great important in the study of the impact of monetary and fiscal policies on commercial banks to different sector of our economy. This time banking activities have occupied an enviable role in the economic and social development of our nation.
The study has wealth of fiscal, statistical and discursive information on the meaning of monetary and fiscal policies and its effect on commercial banks. The banking industry will benefit from the study since it is set out to demonstrate to CBN and commercial houses, the consequence and implication of these policies. This is used to demonstrate to the investing public, the effect of various instrument of monetary and fiscal policies on commercial banks and how the government uses them to encourage or discourage economic and social activity.
The solution to the identified problem will be significant to monetary and fiscal policy that will render their policies objective unrealizable. It will also be significant to banks, finance houses and the industrialist who are affected by government policies.
1.6 Research Question
The following would be the research question for the study.
- When can monetary policy have influence on the performance of Nigeria commercial bank
- Which monetary policy instrument influence Nigeria banks the most?
- What extent can monetary policy influences the activities of commercial banks?
- Which monetary policy tool is insignificant of negligence.
1.7 Research Hypothesis
This section would include some hypothesis which would be tested during the course of research there will be two main hypothesis. Assume negative statement to be the Null hypothesis (H0), while the positive statement to be the alternative hypothesis (Hi) they are as follows:
H0: Cash reserves ratio, interest rate policy and minimum rediscount rate do not have any influence on the loans and advance on commercial banks in Nigeria.
Hi: Cash reserves ratio, interest rate policy and minimum rediscount rate have any influence on the loans and advance on commercial banks in Nigeria.
1.8 Scope of the Study
This research centre on the impact of monetary and fiscal policies on commercial banks. It is based on monetary and fiscal policy as it obtainable only in our Nigeria context the object of the study is the commercial banking system in Nigeria with special reference to examine critically the monetary and fiscal policies for a period of four year i.e. from 1994 – 1997.
As the say “There is no raise without thorn” this study is not without some problem.
Time constrains: This work not exhaustive as there was no time to travel to different branches to collect data.
Unfriendly attitude of respondent: Some employee of CBN to who question were asked declined interest shunned every attempt to persuade them.
1.9 Limitation of the Study
This research will face a lot of constraint in the course of the research. Firstly, the inadequate time is the most constraint encountered. Considering other academic work which the research have to attend to as well as other pressure.
1.10 Definition of Relevant Terms
Broadly defined as the use of government expenditure and taxation to influence the country’s economic activities.
According to Uzoaga, it is the expansion and contraction of the value of the money in emulation for the specific purpose of achieving therefore aims at influencing the cost and availability of credit or alternatively at controlling the supply of money with a view to counter act undesirable trend in the economy.
It is a compulsory level by the government (Federal, state or local) on the income, profit, wealth or consumption (through the trustee or execution) and corporate organizations. (registered under company and allied matters) Act 1990.
Open Market Operation (OMO):
This refer to the purchase or sale of securities in the stock exchange or money market by the central banks to expand or contract the volume of credit with the objective of increasing (reducing) the cost and availability of credit.
Federal Fund Rate:
This is the rate that commercial banks charge each other when the loan excess reserve usually on day basis.
This is defined as a case of where the interest rate fall so low that individual and business wish to hold any new money created in the banking system as speculative balances
Summary, Conclusions and Recommendations
The general objective of this study was to determine the effect of monetary policy on the financial performance of Commercial Banks in Nigeria. Other specific objectives were to; establish the effect of Central Bank Rate (CBR) on the financial performance of Deposit Money
Banks and establish the effect of Reserve Ratio Requirement on the financial performance of Commercial Banks.
A sample is a portion of the population selected for study. It is very important to select sample size that will give sufficient fair representation of the population. There are two basic way of making the sample size decision, one is by rule of thumb and the other one is by calculated method. In this research work, the rule of the thumb was used for this research where 50 workers of total population were selected as the sample size. The sample is also made up of senior and junior staff of the Union Bank Plc. This test will provide answers to the questions raised in the research problem. The questionnaires were administered based on the non-random selection of the persons as contained in the sample. This was done in such a way as to get the desired result. The questionnaire contains nineteen fifty (50) questions. . The formulated hypotheses were tested using chi-square (X2) test statistics which measures the significance of the difference between the observed set of frequencies.
The study examined the effect of monetary policy tools on the financial performance of Deposit
Money Banks in Nigeria. The study found that monetary policy tools have no significant effect on the financial performance of Commercial Banks in Nigeria. Thus, the study concludes that monetary policy tools do not influence the financial performance of Commercial Banks in Nigeria.
The study assessed the effect of Treasury Bill Rate (T-Bill Rate) on the financial performance of Commercial Banks in Nigeria. The results showed that T-Bill Rate had a positive effect on the financial performance of Commercial Banks. Thus, the study concluded that T-Bill rates have a positive but insignificant affect the financial performance of Commercial Banks in Nigeria.
The study examined the effect of Central Bank Rate on the financial performance of Commercial Banks in Nigeria. The results showed that Central Bank Rate had a negative effect on the financial performance of Commercial Banks.
The study therefore concluded that Central Bank Rate has no significant affect the financial performance of Commercial Banks in Nigeria.
The study also assessed the effect of Cash Reserve Ratio on the financial performance of Commercial Banks in Nigeria. The results showed that Cash Reserve Ratio had a negative effect on the financial performance of Union Bank. Thus, the study concluded that Cash Reserve Ratio does not affect the financial performance of Commercial Banks in Nigeria.
The study examined the effect of bank size on the financial performance of Union Bank of Nigeria. The results showed that bank size had a weak positive effect on the financial performance of Commercial Banks. Thus, the study concluded that bank size affects the financial performance of firms in Nigeria.
Based on the findings made in this study, the following recommendations have been made to address some of the problems discovered:
- The study recommends that Commercial Banks should put more emphasis on the
internal factors to financial performance.
- These internal factors include capital adequacy, asset quality, regulation efficiency, earnings ability and liquidity regulation.
- Monetary policy tools effect will be handled by the regulation through risk regulation policies for the bank.
- The study further recommends that while bank size was found to lead to better financial performance, it is important that banks understand the source of its funds and the costs associated with the funds.
- Findings emanating from the empirical analysis of this study proffered that monetary authority; the Central Bank of Nigeria (CBN) should adjust the monetary policy rate by reducing the cash reserve ratio which will increase liquidity to enable the Commercial Banks to discharge their lending and investment duties effectively to the public.
- It is important that monetary and fiscal policies be complimentary and not working at variance. The co-intergration tests which show a disquilibrium by 41% which suggest that the level of cohesion in harmonizing policies are not adequate. The CBN and the Ministry of finance should work more closely to objectively articulate policies in the same economic direction.
- The CRR should be complementing the Open Market Operations (OMO) in ensuring that excess liquidity or lack of it in the banking system is minimized, that way Money Supply (M2) will be more effective as a tool on measuring other performance indicators.
- From the findings, the Liquidity Reserve Ratio (LRR) tends to impact more on bank turnover ratio. Because monetary effects of CRR changes are hard to be isolated from those of other policy measures. It means that the constraint of higher reserve requirements on bank lending seems more binding when initial excess reserves shrink below some threshold, restraining the subsequent loan expansion while leading to higher, more volatile market interest rates. The CBN should carefully and thoroughly consider the turnover effect in deciding the LRR.
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