Effectiveness Of Central Bank Of Nigeria In Monetary And Banking Policy Measures

Project and Seminar material for Banking and Finance

Project and Seminar material for Banking and Finance


The need for this study stems from several experience of the problem of price instability, deficit balance of payment, unbridled urban unemployment rate, and the general fall in economic growth and development in Nigeria.

The central bank of Nigeria is the centre of monetary authority and supervision and has been stable on this, using various tools, instruments with great optimism to the solving of these economic problems. This study “THE EFFCETIVENESS OF CBN IN MONETARY AND BANKING POLICY MEASURES IN NIGERIA” tests the relationships between money supply and price levels for essential goods on the other hand, and money supply and balance of payments on the other hand. The study covers the periods (2002-2007). Using simple statistical principles.

Generally speaking, the content of this study show there is an unsatisfactory state of affairs in the effectiveness of CBN in monetary policies.

There are possible reasons for the effectiveness of monetary policies in achieving these desired ends. The chief one is inconsistencies of the policy objectives and instruments.

To those problems, there are some useful recommendation that if well implemented will produce good results.

Table Of Content

Preliminary Page(s)

  • Title Page
  • Approval
  • Dedication
  • Acknowledgement
  • Abstract
  • Table of Contents

Chapter One

1.0 Introduction

  • 1.1 General Overview of the Study
  • 1.2 Statement of The Problem
  • 1.3 Objective of The Study
  • 1.4 Scope Of The Study
  • 1.5 Research Questions
  • 1.6 Significance of The Study
  • 1.7 Limitations of The Study
  • 1.8 Definition of Term

Chapter Two

2.0 Literature Review

  • 2.1 Historical Background to the Establishment of CBN
  • 2.2 Functions and Activities of CBN
  • 2.3 Monetary Policy – Nature and Scope
  • 2.4 Monetary Policy Guideline
  • 2.5 Effectiveness of Monetary Policy

Chapter Three

3.0 Research Methodology

  • 3.1 Research Design
  • 3.2 Observations
  • 3.3 Questionnaire Survey
  • 3.4 Oral Interview
  • 3.5 Method of Data Analysis

Chapter Four

4.0 Presentation and Analysis of Data

  • 4.1 Presentation of Data
  • 4.2 Analysis of Data

Chapter Five

5.0 Summary, Conclusion and Recommendation

  • 5.1 Summary
  • 5.2 Conclusion
  • 5.3 Recommendations
  • Bibliography
  • Appendix
  • Questionnaire

Chapter One

1.0 Introduction

1.1 General Over View Of The Study.

The use of monetary and banking policies in Nigeria has always been important and it has commended wide application. Since the CBN started operations the monetary and banking policies have also been under wide-ranging economic environments.

However, the first twenty years of the establishment CBN was characterized by relative stable economic environment that was very attractive to monetary control. But the civil war of (1966-1970) and that f post war boom and reconstruction brought some challenges to the monetary authorities.

The increase in capital formation and that of domestic output in the 1960’s and 1970’s put the monetary policy into a less pressure. In other words, the economy was relatively stable.

After this, the over dependence of the economy on external sector and ever increasing involvement of the policy sector in economic activities that were traditionally the role of the private enterprises in a mixed economy like Nigeria brought untold pressure on the management of monetary policy.

In the 1980’s, there was a change in the conduct of the monetary and banking policies. Also in the early part of 1980’s, there was a problem in the international oil market as regards oil prices and expert earnings. This had adverse impact on fiscal and monetary policies. This inevitably led to the introduction of economic adjustment which eventually affected the monetary policy.

Since then, it has become a thing of great importance to use monetary and banking policies to bring adjustments in the economy.

The act that established CBN in 1958 stipulated the use of both direct monetary controls. One is not surprise that the CBN and other monetary authorities have shifted from direct to indirect monetary policy. Indirect monetary policy is a strategy in a market based economy involving the use of certain instruments such as open market operation (OMO).

Discount rate, Required Reserved Ratio etc by the CBN in a financial market to control/regulate cost of fund and the availability of bank’s credit. The use of this indirect monetary policy directly effects the reserves of the banks (commercial, merchants, micro-finance, blanks, etc.)

When the structural adjustment programme (SAP), was introduced in 1986; banks’ deposit and its lending rates were completely deregulated.

Generally speaking, the main aim of this study stems from the several experiences of problems of price instability, deficit in balance to payment (BOP), unbridled urban unemployment rate, general full in economic growth and development in Nigeria, The CBN as the centre of monetary authority is much responsible of dealing with these economic woes.

However, the monetary policy objectives remain the same such as

  • The moderation of inflationary pressure
  • The promotion of an accelerated rate of economic growth through savings and investments.
  • We also, have the achievement of low level of unemployment; and
  • Lastly, the maintenance of a healthy balance of payment position.

Therefore, this work “THE EFFCTIVENESS OF CBN IN MONETARY AND BANKING POLICY MEASURES” is to examine, assess and analyze the effectiveness instruments that are designed by CBN for economic stability in Nigeria.

1.2 Statement Of The Problem

The statement of the problem will be looked into (3) three areas:

  1. To what extent has CBN stabilized price or moderated inflationary rate?
  2. To what extent has deficit in balance of payment been reduced by CBN?
  3. To what extent has CBN achieved economic growth rate?

A positive answer to these research questions shows the effectives of CBN and other monetary authorities is Nigeria over the periods.

1.3 Objectives Of The Study

This study shall examine the extent CBN as of apex of monetary authority passes the test of regulating the cost, value and supply on money using the instruments of monetary policies to achieve price stability and adjustments is deficit balance of payment (BOP). These factors will show us how for CBN is doing.

1.4 Scope Of The Study

Due to time constraint, and financial problem, the researcher covers only the banking sector specifically central Bank of Nigeria. The central bank as the apex monetary authority has the duty of insuring that policies are set in motion to regulates the financial sector so as to operate in the same direction with the real sector in order to realized national economic objective.

1.5 Research Question

  1. Has the central Bank of Nigeria as the apex monetary achieved the test of regulating the instruments of monetary policies to achieved price stability and adjustments in deficit balance of payment.
  2. Has central Bank of Nigeria assisted in the reduction of inflation in Nigeria economy?
  3. Does central Bank of Nigeria Contribute to the development of the economy?
  4. Has the central bank of Nigeria become more efficient in their monetary and banking policy?

1.6 Significance Of The Study

This study will make valuable exposition and contributions in the monetary and banking systems and even to the existing economic problems.

1.7 Limitations Of The Study

The researcher encountered a lot of constraints for instance, instance, inability to visit central bank of Nigeria (CBN) regularly due to far distance.
Another problem being that of poor response to the questionnaire and that of harch weather like raining season, which prevented movement in most cases.

1.8 Definition Of Terms

Open Market Operation (OMO):

Refers to the central bank’s purchases and sales of government securities (generally short-term securities called Treasury bills) through transactions in the open market. It is one of the ways used by the monetary of country to direct central credit creation in an economy.

Bank Discount Rate:

This is the rate that the central Bank allows the commercial Banks to borrow short-term in order to meet liquidity position, reserve requirement or loan demand.

Moral Suasion:

This is a gentle measure employed by the Central Bank against member Banks, it is seen as informal technique of monetary centrol. It has no force of law. However, its disregard could result in new legislation on the subject matter.

Credit Control Or Guidelines:

This comes in the form of administrative order where by the central Bank using guidelines, instructs Banks on the cost and volume of credit to specified sectors depending on the degree of priority of each sector.

Fiscal Policy:

Fiscal policy is the government’s effort to control the economy through taxation, spending and management, of the public debt. (Government here refers to that of any country in the world.

Liquidity Ratio:

Each year the central Bank of Nigeria prescribes the percentage ratio which the commercial banks must hold against their deposit liabilities. Whenever it is desired, the percentage of specified liquid assets (cash inclusive) that commercial banks must hold against their deposits.

Chapter Five

5.0 Summary, Conclusion And Recommendation

5.1 Summary

A review of the Nigerian experience in monetary management shows that the interventionist policy stance dominated an era of liberalization and deregulation o the financial sector hollowed.

Among the instruments employed during the period were direct controls on aggregate credit, sectoral allocation and interest rates regulation, open market operations, variable rediscount rate, moral suasion, reserve Requirement (cash, liquid assets, and supplementary reserve ratios).

The short comings of direct instruments of money policy were highlighted and can not be repeated here. However, despite the considerable progress made in building the financial infrastructure for the conduct of monetary policy, a more robust policy outcome was largely constrained by the number of factors including the absence of fiscal discipline for a greater part of the period, lack of Central Bank Independence. Until recently, frequency in policy charges and wide-spread fraud in the financial sector. Moreover, there is need to enhance the efficiency of the payments and settlement system as well as establish a credible data base on which effective conduct of monetary policy depends.

Economic growth, which legs behind the population growth rate in Nigeria, is presently inadequate to meet the needs of the country, particularly in order to reduce the pervasive poverty. The poor growth performance had been largely due to the interplay of economic, political, social and institutional factors that have impaired the effectiveness of monetary policy. The necessary condition for the resumption of sustainable growth is decreation of macro-economic stability through the implementation of sound monetary and prudent fiscal policies with the current emphasis on transparency and good governance after years of distortions and financial repression, the Nigeria economy is adapting to the new economic environment where economic decisions are guided by market forces in a global competitive environment.

Finally, investment is essential for growth and production while domestic saving provide thee needed resources for investment. Only sound and effective monetary policy can guarantee price stability which is a necessary condition for sustainable growth; government policies and institution maker are therefore right in placing growth at the top of the economic agenda.

5.2 Conclusion

In approach of Taigen (1965) to the measurement of the interest rate electricity of money supply, divides monetary authority, and the other by the banks. Even if we do not accept a strict dichotomy between the components on the grounds of interaction through the public reference for currency, which can be influenced by monetary authority’s open market operation (OMO), this approach draws attention to the fact the control of money supply usually involves much more than a mechanical “fixing” of the level of high powered money by the Central Bank. It is reasonable to argue further that because high powered money in many countries usually is made up of the monetary liabilities of the central bank, currency in circulation and bank deposits, it would appear that control of the stock of money through adjustment in the central Banks portfolio should be easy, especially as the currency or deposit ratios are known to be relatively stable. Cagan (1965), and by accounting identify, change in the money stock can be expressed as changed in high-powered money.

At this juncture, it is pertinent to ask the question:

What can Nigerian economy set up? Monetary policy will continue to target reduction in inflation which is one of the greatest enemies of the poor.

However, its effectiveness in this role will continue to be hampered in domestic productivity. And fiscal prudence management is impaired by massive leakage outside the country. Through excessive dependence of the economy on importation is not sustainable and does not augur well in the welfare of all members of the citizen.

In conclusion, it is important to note that isolating the impact of monetary policy on economic growth and development is usually difficult. However there is no doubt that the pursuit of monetary stability as an aspect of macro-economic stabilization is a pre-requisite for the achievement of long term growth objective. At this juncture as regards to all findings to this project topic: THE EFFECTIVENESS OF CENTRAL BANK OF NIGERIA IN MONETARY AND BANKING POLICY MEASURES FOR THE PERIOD OF FOUR (4) YEARS has proved that CBN is still in control of the economy, and Banking industry.

5.3 Recommendation

On the effectiveness of central Bank in monetary and banking policy measure the following are Recommended. That there should be adequate credit that goes to the productive sector which will expand production because increase production will reduce inflation thereby dampening the pressure on price increases.

Also, through the general credit guidelines, the central bank of Nigeria should impose a ceiling on the rate of bank advances over specific period.

Generally, agricultural and industrial should remain the preferred sectors in credit policy.

Lastly, the central bank of Nigeria should embark on direct controls to carry out its statutory and non-statutory responsibilities of contributing to the economic growth and development through the development of the financial sector.

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