The Effect Of Monetary Policies Of The Central Bank Of Nigeria (CBN) On Deposit Money Bank
The role of Central Bank of Nigeria as the apex regulatory authority in the financial system cannot be over emphasized, most especially through the use of the monetary policy to regulate the supply of money in banking operations. The purpose of this research is to find the effect of the monetary policy on banking operations in its bid to regulate the supply of money in the Nigeria economy with special regards to deposit creation and credit allocation. secondary data were collected from journals, magazines, internet, textbooks for the literature review, primary data’s were also collected by the use of questionnaires and personal interviews response were analyzed using the chi-square method of analysis from which findings were made. It was discovered that the monetary policy has tremendous effect on banking operation, base on these findings some useful subjection and recommendations were made for effective management and growth on banking operations.
Table Of Contents
- Title Page
- Table of Content
- 1.1 Introduction
- 1.2 Background to the study
- 1.3 Statement of the problem
- 1.4 Objectives of the study
- 1.5 Research questions
- 1.6 Statement of hypothesis
- 1.7 Significance of the study
- 1.8 Justification of the study
- 1.9 Scope of the study
- 1.10 Definitions of terms
- 2.0 Introduction
- 2.1 Conceptual Framework
- 2.2 Theoretical Framework
- 2.3 Literature on Subject Matter
- 3.0 Area of Study
- 3.1 Research Design and Sources of Data
- 3.2 Study Population and Determination of Sample Size
- 3.3 Instrumentation
- 3.4 Procedure for Data Collection and Data Analysis
- 3.5 Limitation of the Study
Data Analysis, Findings and Discussion
- 4.0 Introduction
- 4.1 Data Analysis and Findings
- 4.2 Test of hypothesis
- 4.3 Discussion of findings
Summary, Conclusion and Recommendations
- 5.1 Summary
- 5.2 Conclusion
- 5.3 Recommendations
- 5.4 Suggestions for Further Research
Monetary policies refer to measures or contributions of measures designed by the monetary authorities to influence or regulate the volume and direction of money and credit, Hyman, (1989). Monetary Policy influences the volume and direction of purchasing power in the economy and it is an instrument of market intervention to achieve rationally stipulated objectives which would otherwise be impossible to attain in terms of volume, speeds and direction, Oyindo (1991).
The extent to which money and monetary policies influence finance and economic activities have been widely discussed over the years. While it is generally agreed that monetary. development affects economic and financial performance, there are of different views on the extent of effect and the channels through which this effect is achieved. Therefore, the effect are achieved directly as well as indirectly through feed-back effect from the economy thus, monetary management rely on two b; ad categories of tools or instrument usually when the quality of money supply changes relative to money demand because of policy measures, there are changes in relative price and wealth, Onyindo (1991).
Monetary and banking policies are usually the responsibility of the Central Bank of Nigeria and the Central Government. In Nigeria, the Central Bank exercise primary responsibilities for initiating, articulating, implementing and appraising such policies to the approval of the federal government, Odozi (1995).
The package of measures for monetary and banking management so far has had desirable effects like keeping the liquidity in the banking system from exploding further, but to an extent, the monetary authorities were unable to prevent growth in credit and money stock which was mainly as a result of undue fiscal expansion which has prosily greater challenges for the future.
1.2 Background Of The Study
Monetary policy is an important tool that an economy cannot do without, it any economy and one of the ways through which the Central Bank of Nigeria seek to do this, is through commercial banks via banking operations.
Managing an economy entails articulating well remaining strategies and devising various policies and measures that will ensure efficient utilization of nation’s resources with a view of promoting economic growth, employment and stability, Onyiclo (1991). Thus, to ensure efficiency, the Central Bank of Nigeria is of permanent importance.
In the past, Banks operate arm chair banking which they occupy prior to the banking industry, thus position brought about 1itte or no competition in the banking industry because bank were few at that time, thus made customers open account out of a free will. A change that occurs was the liberalization of license to bank an implementation of light monetary policy monetary authorities which necessitated an aggressive marketing of bank services. During this period, banks started coming out with different modes of operation and financial products to attract customers, which led to the completion in the banking industry.
Banking operation is very important because it plays a crucial role in the national payment system and saving investment processes by the mobilization of deposits into available to investors by channeling their ingestible funds from the surplus to the deficit sector, therefore, helping in the development of the economy by contributing to the flow of goods and services, employment, income and consumption, Onyido (1993). The existence of an effect bank industry is important to every economy because it creates the necessary environment for economic and development through its role in supplying funds to economic units, thus stimulate investments as well as international trade and payment hence it explains why every economy takes interest in creating and nurturing its banking industry.
The use of monetary policy on the banking sector to bring about effectiveness rely on the control of money stock in order to influence financial and economic activities thus the Central Bank of Nigeria act as an accelerator of economic development. It also acts as an institutional catalyst, propels the economy towards the country’s desired economic goods continuous of active monetary policy to regulate and manage the currency and credit system.
Moreover, monetary policy is a tool that is used in achieving meaningful dialogue and understanding between the financial institution and the monetary authorities in any economic system as a result of the unique position that the banking industry hold in all economics creator of money, as major allocator and credit and managers and credit and the manager of the country’s payment mechanism, thus, the federal government deems it necessary to formulate policy to guide the banking industry. In varying degree, these policies are aimed at achieving macroeconomic objectives such as economic growth, price stability, employment and a viable external payment position.
In like manner, the price policies also achieve micro-economic objectives of stability, efficiency and soundness of financial system. These policies are in general affected through the regulation of banking system thus banks are channels through which the monetary policy can pass through in order to influence economic development.
1.3 Statement Of Problem
In the Nigeria economy, there is a problem of excess liquidity especially outside the banking industry. This has been a source of concern to all and sundry particularly to the monetary authorities thus if allowed to escalate out of proportion, it will lead to excess inflation in the economy. This is a situation where too much money chases too little goods, which is not a healthy situation for any country.
The major problems centered on the impact of the monetary policy on banking operation in a bid to curb the problem of regulatory money supply in the economy and to what extent should the monetary authorities go, in regulating excess liquidity in the Nigeria economy without distortion in the industry.
1.4 Objective Of The Study
The study is embarked upon to see;
- How many policy affect banking operations in its bid to regulate money supply in the economy with particular reference to deposit and credit creation.
- How far the Central Bank of Nigeria has gone in its achievement of regulating money supply.
- If the monetary policy has improved the industry as a whole.
- The importance of monetary tools in achieving the desired control through bank operations.
- The impact of monetary policy on banking operation both positively and negatively.
1.5 Research Question
- Does Central Bank Rate (CBR) has effect on the financial performance of Deposit Money Banks?
- Does Reserve Ratio Requirement has effect on the financial performance of Deposit Money Banks?
1.6 Statement of Hypothesis
- H0: There is no significant relationship between monetary policy and financial performance of Deposit Money Banks in Nigeria.
- H1: There is significant relationship between monetary policy and financial performance of
Deposit Money Banks in Nigeria.
1.7 Significance of the Study
The study helps us understand the impact of an effective monetary policy regime on the performance of the Deposit Money Banks. It would aid the regulators to carefully plan and forecast the effects of its policies to meet its objectives of economic growth and full employment. To bankers, it would expose the relationship existing between our relevant variables, which will be of interest to them in their respective banks. This would also benefit the academic community which would avail them the opportunity of conducting further research in the topic of similar areas.
The study is expected to contribute to the existing literature in the field of monetary policies. Future scholars can use this research as a basis for further research in the area of monetary policy theories.
The study will also enlighten management teams of commercial bank on the short-term and longterm effects of the monetary policy implementations by the Central Bank. This will greatly help them in designing the risk management measures to employ given anticipated changes in monetary policies.
1.8 Justification of the Study
The outcome of this study will be a little guide for the deposit money banks on how to overcome the effect of monetary policy on their financial performance in Nigeria.
The research will also serve as a source base to other scholars and researchers interested in carrying out further research in this field in future. The study therefore will extend the frontiers of the existing literature by emphasizing the effect of monetary policy on the financial performance of deposit money bank in Nigeria.
1.9 Scope of the Study
The scope of this research work is to examine the effects of monetary policy on the financial performance of deposit money bank in Nigeria. In which Union Bank Plc. was use as a case study. However, the research was limited to Union Bank Plc in Ibadan metropolis due to the schedule of researcher
1.10 Definition of Terms
1.10.1 Financial Performance
Financial Performance analysis refers to analytical tools to measure the strength and weakness of a firm in relation to its balance sheet and profit and loss statement. Examples of bank financial performance tools and ratios include operating income, earnings before interest and taxes, Total Asset value. Financial performance analysis is carried out to ascertain the profitability position and performance of a firm. It can be conducted by management, owners, creditors, investors as demonstrated by Chenn (2011).
1.10.2 Monetary Policy Rate (MPR)
Minimum Rediscount Rate (MRR) now known as Monetary Policy Rate (MPR) was used to signal the desired direction of interest rate movement (Nwude, 2013).
1.10.3 Deposit Mobilization
Deposit Mobilization measures the aggregate mobilization of deposits in the economy. Deposits are bank accounts that allow the owner of the account (creditor) to make demand on banks. They include demand, time and savings and money market deposit account.
1.10.4 Credit to the Private Sector
Domestic credit to private sector by banks refers to financial resources provided to the private sector by other depository corporations (deposit taking corporations except central banks), such as through loans, purchases of non-equity securities, and trade credits and other accounts receivable, that establish a claim for repayment. For some countries these claims include credit to public enterprises (IMF, 2016).
1.10.5 Loans and Advances
Loans refers to a debt provided by a financial institution for a certain period while Advances are the funds provided by the banks, which needs to be payable within one year
The ability of a bank to meet its current obligations when they are due, and is normally a short term debt measures.
1.10.7 Reserve Requirement
This refers to the proportion of total deposit liabilities which the commercial and merchant banks are expected to keep as cash in vaults and deposits with the Central Bank of Nigeria.
1.10.8 Quantitative Directives
These are directives from the Central Bank of Nigeria to the banks and other financial institutions under its control as to the total amount of money which they may lend.
1.10.9 Financial System
The channel or conduct through which the sayings of surplus sectors (the household) flow to the deficit sectors (business organizations).
1.10.10 Monetary System
A system whose main function is the provision of adequate stock of money or currencies i.e.
Summary, Conclusions and Recommendations
The general objective of this study was to determine the effect of monetary policy on the financial performance of Deposit Money 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 Deposit Money 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 result of the analysis indicates that
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 Deposit Money Banks in Nigeria. Thus, the study concludes that monetary policy tools do not influence the financial performance of Deposit Money Banks in Nigeria.
The study assessed the effect of Treasury Bill Rate (T-Bill Rate) on the financial performance of Deposit Money Banks in Nigeria. The results showed that T-Bill Rate had a positive effect on the financial performance of Deposit Money Banks. Thus, the study concluded that T-Bill rates have a positive but insignificant affect the financial performance of deposit money banks in Nigeria.
The study examined the effect of Central Bank Rate on the financial performance of Deposit Money Banks in Nigeria. The results showed that Central Bank Rate had a negative effect on the financial performance of Deposit Money Banks. The study therefore concluded that Central
Bank Rate has no significant affect the financial performance of Deposit Money Banks in Nigeria.
The study also assessed the effect of Cash Reserve Ratio on the financial performance of Deposit Money 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 Deposit Money 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 Deposit Money 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 Deposit Money Banks should put more emphasis on the internal factors to financial performance.
- These internal factors include capital adequacy, asset quality, management efficiency, earnings ability and liquidity management.
- Monetary policy tools effect will be handled by the management through risk management 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 Deposit Money 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-integration 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.
5.4 Suggestions for Further Research
The study suggests that more studies be done in this area focusing on all banks in Nigeria as well as other financial institutions such as microfinance that also give loans. This can be done by focusing on all Deposit Money Banks in Nigeria and microfinance institutions. Studies should also be conducted on the topic using fairly longer time periods (more than 5 years) and smaller time intervals (say quarterly) of data collection as such studies may be useful in showing the trends as well as the long terms relationship between monetary policy and financial performance of Deposit Money Banks in Nigeria.
The study also recommends that further studies explore the relationship between monetary policy and financial performance of Deposit Money Banks with categories of small, medium and big banks. As has been noticed from the research data, bigger banks exhibited larger Net Interest Margins as compared to smaller banks.
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