Effect Of Open Market Operation As Tools Of Monetary Policy Of The Central Bank Of Nigeria In Controlling The Economy (A Case Study Of Cental Bank Of Nigeria)

Project and Seminar Topics with material for Banking and Finance

Effect Of Open Market Operation As Tools Of Monetary Policy Of The Central Bank Of Nigeria In Controlling The Economy (A Case Study Of Cental Bank Of Nigeria)

Chapter One


1.1 Background of the Study

In the past year, the Nigeria economy has witness serious micro economy problem, characterized by show in the economic activities, how capacity utilization growing unemployment level debt burden, accelerated inflation intensify exchange rate separation as well as higher perfect receiving of interest rate persistently high and government deficit financing has been identified as the major factors in the observed micro economy problems.
When we talk of micro economy policies, this deals with monetary and physical policies, but this concerned mainly on monetary policies.

Therefore, monetary policies comprises of those policies desired to influence the behaviors of micro economy preferably the basic aim of the monetary policy are not the monetary aggregate themselves, but the aggregate in the real sector of the economy such as level of output, stabilization and the economy development.

The policies are designed in an items to charge the trend of some monetary variable in particular direction so as to infuse the desire behavioral change in the monetary policies the bank role is to conduct appropriate monetary policies that is consistence with the main economy objective of achieving real growth in gross domestic product, low inflation rate and satiable balance of payment position. This irrespective of whether the direct or indirect approach is put in place to control money and crudity.

In this regard, the CBN clatter the amount of monetary supply that is consistent with the country micro economy objective and manipulated the monetary instrument at his disposal in order to achieve the state objectives.
Monetary policy is use to influence the macroeconomic objective because there is believe that this occur in relationship between the trace variable at the monetary variables.

From the above explanation monetary policy could therefore be define as a delicate action taken by monetary authorities to change the domestic stock of money supply while fiscal policy variable teaming constant.

Monetary policy influences the level of aggregate income and spending in the economy by influence money supply and the cost of borrowing money from the bank. It could also be defined as a policy employing the central bank. It could also be defined as an instrument for achieving the objective of a general economic policy or as a tool use by the monetary authority in other to achieve state economic objectives.

1.2 Statement of the Problem

Despite the impact which monetary policy has played in the Nigeria financial institution, a lot of problems still control the monetary policy and their client and this study therefore carried out to investigate such problem like:

  1. Expansion of more commercial bank and liquidation of most financial institution in Nigeria.
  2. Monetary supply is not controlled in line with the demand in the real sector which heads to a situation of disequilibrium.
  3. This is adverse effect on recent banking regulation of the liquidity and profitability objective of banking too low of money supply which leads to hinder of investment.
  4. There is a large non-monetized sector which hinders the success of monetary policy in such countries – people mostly live in rural areas where barter is practiced.
  5. Monetary policy is also not successful in such countries because bank money comprises a small proportion of the total money supply in the country.

1.3 Research Question

  1. Does your bank grants loan and advances to their customers?
  2. What is the type of loan given out mostly?
  3. Who is responsible for giving out of loan?
  4. Do you think that granting of loan and advances to customers have any positive effect on the economy?
  5. Do you think increasing the rate of granting credit facilities help in improving the economy?
  6. Does your bank have credit control and management?
  7. How efficient is the credit management and control department?

1.4 Objectives of the Study

The main objective of the study is to identify the source of monetary policy and its impact on Nigeria financial institution.

  1. To ensure domestic price stability
  2. To avoid unnecessary fluctuation in income and employment.
  3. To stimulate economy growth by avoiding miss-allocation of resources
  4. To maintain healthy balance of payment equilibrium.
  5. To maintain full employment
  6. To create a broad and continues for government securities
  7. To provide a credit at differential interest to economically weaker section of the community.
  8. To help in the establishment and development of tern financing institution

1.5 Research Hypothesis

It is hypothesis that the monetary policy ia a policy document designed to reputation and control the volume cost available and directions of money and credit in economic policy objectives the following hypothesis will be used.

  1. Ho: open market operation has no effect on monetary policy of CBN
  2. Hi: open market operation has effect on monetary policy of CBN

1.6 Significant of the Study

Presently, the business environment economy as well as banking industry as experience massive benefits from the introduction of monetary policy at an appropriate level to ensure sustainable economy growth and maintain internal and external stability.

The following people will be benefited from the significant of monetary policy in an economy.

To The Government:

It enables government to control monetary supply because it rate of growth has an effect on inflation.

  1. It helps government for dictating course of economy.
  2. It’s an action which aimed at achieving a certain set of economy objective also an attempt to control money
To The Public:

It brings sustainable economy growth and maintains both internal and external stability growth.

  1. It gives aggregate supply of money in calculation and census interest rate.
  2. Discouragement inflation with an increase in the along the bank policy guide line.
  3. It control the supply of money in circulation whereby too much money used to purchase few goods
To The Investors:

It an encouragement to the investors as the supply of money is been control core with increase in the volume of purchasing power.

1.7 Scope and Limitation of the Study

This study has chosen central bank of Nigeria being the case study to critically examine the effect of open market operation as tools of monetary policy of the central bank of Nigeria in controlling the economy. However, the research work has been constrained to the below statements:

i. Time Constraint:

The time has not always been a friends this is due to the part that time available is too short to combine this project work with my other academic programmers.

ii. Financial Constraint:

There has been weak financial capability faced by the research this problem of getting fraud in order to finance this project will affect this project.

iii. Lack of Adequate Material:

In the course of the study, the materials are not detailed enough and not satisfactory to meet with the policy of good lending.

1.8 Definition of Terms

Financial Institution:

Financial Institution can be defined as a cooperate financial bodies that provide financial assistant to all private and public sector for development and capitalization of the business also to embark on long term capital project.
Monetary policy is a policy document designed to reputation and controls the volume cost available and directors of money and credit in economics policy objectives.

Monetary Policy:

Monetary policy refers to the combination of measures designed to regulate the values, supply and cost of money in an economy.

Central Bank of Nigeria (CBN):

Central bank of Nigeria (CBN) may be defined as the only financial institution established and charged with the day to day management and control of national monetary affairs, the supervision and coordination of banking and financial activities of the country.

Central Banking:

Central banking refers to the role of central monetary authority or an apex financial institution with one entire financial structure in promoting monetary stability and financial system through the use of monetary instrument


This is the direct control which comprises of open market operation, reserve requirement and bank rate. These are meant to regulate the level of credit.


This is the indirect control which includes selective credit control and moral suasion. These also aimed at controlling specific types of credit and interest rate.

Open Market Open:

Open market operation means the purchase or sale government securities. It buys government securities in markets in order to increase the money supply on the other hand when it sells government securities to mop up excess liquidity in the banking system.

Reserve Requirement:

In Nigeria all banks are required to maintain two major reserve ratios, a cash and liquid assets reserves otherwise known as liquidity ratio.

Selective Credit Control:

The central bank of Nigeria instruct banks on a sectored allocation of credit and ….. Ability and bank are expected to comply.

Bank Rate:

Bank rate is the rate of interest charged by the control bank for discounting bill. It is a penal rate in the sense that it is always above the rate at which the bills are discounted.

Moral Suasion:

Refer to a whole series of action that the Central Bank may take to influence the lending practitioners of commercial bank and sometimes other lenders.

Interest Rate:

This is the rate which bank charge on loan or advance given to the customers, it determine by the bank rate.

1.9 Organization of the Study

This research work of this study will be divided into five chapters.

  • Chapter one, includes introd1uction, aim and objection, significant of the important, statement of the problem, scope and limitation, definition of term and finally plan of the study.
  • Chapter two is based on avoidance of literature relating to the topic question (monetary policy and its impact of Nigeria Financial Institution).
  • Chapter three clearly examines research methodology, source of date, method of data collection, analysis of data collection and finding of the study.
  • Chapter four, this vividly takes a look at the history of monetary policy and the objective of the policy also the instrument used in monetary policy and finally effect of monetary policy on financial institution.
  • Chapter five, this chapter contains summary, conclusion and recommendation

Chapter Five

5.0 Summary, Conclusion and Recommendation

5.1 Summary

The monetary policy which is one of the policy that can be used to achieve the micro-economic objectives of a nation is with the aims to maintain full employment to ensure domestic price stability to stimulate economic growth and development and to maintain healthy balance of payment equilibrium which is written to evaluate the adequate of its operation in the Nigeria economy. Some economic tools are put into operation in order to achieve the above objectives some of these are monetary policy and massive impact policy. These policy tool are not mutually exclusive, this is the more reason why government should make use of these policy tools simultaneously to ensure the achievement of the monetary policy.

Monetary policy can be classified into two categories. Firstly, the quantitative (direct) controls, instrument place restriction on a particular group of institutions (especially deposit banks) by limiting their freedom to acquire assets and liabilities. This method is employed mainly in developing economies in which the financial infrastructure necessary for operating indirect monetary control are qualitative ceiling on bank credit, selective credit control and administered interest and exchange rates.

Secondly, qualitative controls, used mainly developed systems, relies on the power of the monetary authority as a dealer in the financial markets to influence the availability and the rate of return on financial assets, thus affecting both the desire of the public to hold money balances and the willingness of financial agents to accept deposits and tend them to users. Example of such instruments are reserve requirements, discount rate and open market operation (OMO).

5.2 Conclusion

It has been discovered at this present stage of economic development in Nigeria that is not much effort had been concentrated on monetary, theories and policy. As a result not many people can say with any measure of certainty that monetary policy had actually brought about the desired goal and objectives in Nigeria economy. A reason that seems to be responsible for this in the under developed nature of our financial system coupled with inadequate statistic data on virtually all economy objectives and the constant change monetary policies necessitated by different classical goal and objective of different government in Nigeria since independence.

Therefore in the face of these, it was found necessary that research work should be carried out on these issued of monetary policy. It was also discovered that most of the propounded monetary theories centered mainly on demand for money. It was identified that interest rate and monetary aggregate policy discovered, that is both the quantitative and qualitative control instrument of monetary policy that were used in Nigeria were aimed at bridging the gap between the different goals and objectives in the economy.

Examining the treads of monetary policy under the receiver period is realized that that each phases of light monetary policy was followed by another phase of each monetary policy and phase lasted for a period of two and half years. The aim of the policies during the observed period were to ensure price stability, maintain full employment stimulate economic growth and maintain a healthy balance of payment position. These policies were embodied in the monetary circular issue annually by the CBN to all banks in the Country. The guide line enables the CBN to control the volume of credit to economy.

In the light of these, it was observed that these were conflicting interest between the aim and objective of the different monetary policy that tendered to control inflation and general full economy growth would have opposite affect because while reducing inflation economic growth will be retarded.

Deduction from these findings show that majority of the policy instrument have not been effective due to the under developed nature of the financial system.

This bank do not comply with CBN set guided lines, these is usually positive deduction from the present bed target. The low and inflexible interest rate structure and inhibited the development of a value to use some conventional techniques of monetary policy open market operation, the problem of information lag persistent and effect of a policy adopted is not feet before another once is formulated. This also hindered the effectiveness of monetary policy in Nigeria.

Finally, it could be said however that the economy has experience rapid development in the agricultural sector, industrial sector, building construction and banking sector as a result often policies pursued during observed period.

5.3 Recommendation

From the findings of the study, the following recommendations are made.

As the banking sector is regarded as the engine of the growth often economy of a nation, such constant interference is necessary so as to achieve of moderating the level of inflation.

The bank should be encouraged to channel a greater proportion of their balance that could be given out as loan to the more productive sector of the economy. This will ensure that sufficient liquidity is made available to the priority sectors of the economy to stimulate growth.

Government should try to make a review of its money policy one should avoid change in policy due to change in government.

A policy should be allow to last for a period of four years before another one is formulated so that the, effect of the policy on the economy could be felt.

The low and inflexible interest rate structure is restructured. Alternatively, interest rate determine should be left to forecast of demand and supply in order to have a well development financial system, this will enables our banking sector perform up to the expectation as the inflow and outflow of capital will be monetized. It would also allow the use of some powerful monetary policy tools which are now reluctant (i.e. open market operation) due to the under developed nature of our financial system.

Monetary policy is only the policy tool that can be used to achieve the macro-economic objectives of a nation. Others are the price and income policy as well as the fiscal policy. It is therefore suggested that these policy tools should be used simultaneously to ensure the achievement of the stated objectives.

Authorities responsible for the formulation and execution of these policies should be directly related to avoid contradiction and policy taken, the aim of these bodies should be central on how to resolve the macro-economic problem existing in the economy.

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