The Impact Of Monetary And Fiscal Policies On The Commercial Banks Activities
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.
Every successful nation and its activities is a function of fine tuning the necessary policy measures geared towards the achievement of the stated objective. In this context monetary and fiscal policy measure shall be critically discussed as regards its impact on the activities of commercial banks. This impact is of two way traffic since it can lead to economic recession on economic boom, for instance when the policy measure is to withdraw the volume availability, direction of money and credit in the economy, this could negatively influence the credit advance to the profit making ability of the commercial banks and this could force liquidation on the bank.
Fiscal policy measure which as a matter of that is the use of government expenditure and taxation to influence the country’s economic activities. If not well fine tuned can still spell doom for the commercial banks. The aim of this research project is to review some of the key policy measures which could be expansionary or concretionary adopted over the focus. Their impact on commercial banks activities and suggestion of area where further policies should be focused to enhance commercial activities. The subject matter has been arranged in a way it will be readily understood and also provided some basis for useful lesson which will serve as a guide for future policy design.
1.1 Background of Central Bank of Nigeria
Historically prior to the establishment of Central Bank of Nigeria by the CBN Act of 1958 there existed a body known as the West African Currency Board (WACB). This Board which was Established by the then British Colonial Government was intended to serve as a central Bank for the Anglophone West African countries. Thus, the board was charged with the primary responsibility of issuing the West African pound which served as the legal tender currency in Ghana, Nigeria, Sierra-Leona and Gambia.
Another function performed by WACB was the management of the reserves held in trust for these colonies, such reserves were invested by the board on behalf of the West African Countries as instrument in the London money market. The weakness of the board for which it was critized is as follows:
- It carries on commercial banking activities along side other commercial banks.
- The board lack of basic apparatus to control the supply of money.
- The board got involved in physical distribution of currency from one point to another.
- It activities were considered discriminatory against indigenous West African industrialist.
- It was not on development colonies and most of it activities were based of commerce and trade.
These factors led to the widespread agitation for indigenous central bank in the area.
The Central Bank of Nigeria (CBN) is the apex regulatory authority of the financial system in the country. It was established by the CBN Act of 1958 and commenced operation on July 1st 1959. The promulgation of the CBN decree 24 and banks and other financial institutions (BOFI) decree 25, both in 1991 give the CBN more flexibility in regulation and supervision of the banking sector and licensing finance company which hitherto operated outside any regulatory framework.
The principal objectives of the bank as stipulated in the CBN Act of 1958 are as follows: –
- The issuance of legal tender currency in Nigeria
- To maintain the external reserve and value of the legal tender in order to safeguard the international value of the currency.
- To promote monetary stability and a sound financial system
- Bankers to other banks within Nigeria and abroad.
To achieve the above objectives, CBN undertakes the following function performed by CBN can be broadly categorized into two:
- Regulatory function
- Development function
The regulatory functions of the CBN are mainly directed at the objective of promoting and maintaining the monetary and price stability in the economy. To perform this regulatory function, CBN formulate policies to control the amount of money in circulation, control other banks and major players in the financial market, control rate of bank credit and therefore the supply of money in the economy.
The instrument used by CBN to achieve these function are:
- Open market operation (OMO)
- Bank rate
- Rediscount rate
- Direct control of banks liquidity
- Direct control of bank credit
- Special deposit
- Moral persuasion
- Minimum cash ratio
The establishment of CBN in 1959 was premised on the need to promote and accelerate the much needed economic growth and development in Nigeria, which would invariably promote the growth of the financial market. This financial market comprises the money and capital market, assistance to development banks and institutions and the formulating and execution of government economic policies. The money market is the market for mobilizing short term funds with instrument such as treasury bill, Treasury certificates, commercial paper, certificate of deposit (CDS), Eligible Development Stocks (EDS) and Bankers Acceptances.
The CBN plays a major role in the capital market which deal with long-term funds by fostering its growth through the annual subvention granted to them. The CBN also helps to promotes and assist the development banks and institution these includes the Nigeria industrial development Bank (NIDB). The Nigerian agriculture insurance company (NAIC) The Federal Mortgage bank of Nigeria (FMBN), Nigeria Export – Import Bank (NEXIM) and the security and exchange commission (SEC).
In addition, the CBN is involved in the formulation and executive of viable economic policies and measure for the government. Also since 1970 the bank has been instrumental in the promotion of wholly owned Nigeria enterprises.
The structural adjustment programme (SAP) brought about the emergency of more banks and other financial intermediary this necessitated the enactment of Decree 24 and 25 of 1991 in other to strengthen on and atten the power of CBN to cover the new institution in order to enhance the effectiveness of monetary policy regulation and supervision of banks as well as non banking financial institution.
The current legal frame work within which the CBN operate is the CBN (Amendment) Decree No 37 of 1998 which repeated the CBN (Amendment decree No 3 of 1997, the Decree provide a measure of operational autonomy for the CBN to carry out its traditional function and enhance it versatility.
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.
1.3 Objectives of the Study
- If monetary and fiscal policy have had any influence on the profit of Central Bank of 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.
1.4 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.
1.5 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.
1.6 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.
1.7 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.
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.
1.8 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.
1.9 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.
Conclusion and Recommendations
Banks in Nigeria are the principal depositories of the public’s financial savings, the nerve centre of the payment system, the vessel endowed with the ability of money creation and allocation of financial resources and conduit through which monetary and credit policies are implemented. Thus, as a result of the importance of credit in an economy, its availability and cost to the economy is influenced through monetary policy. It was observed that monetary policy instruments are used at various intervals in order to ensure that it does not hamper economic growth since excess credit leads to excess money in circulation and as such induces high inflation rate.
From the findings of this study, we conclude that monetary policy instruments influences bank credit perfomance when combined but less effective as single instrument of regulating credit to the Nigerian economy. While loans and advances is non-responsive to liquidity ratio, cash reserve ratio, and monetary policy rate, it is however responsive to money supply. The study showed that interest rate charged by the Central Bank whether low or high do not seriously deter commercial banks from lending.
Based on the major findings and conclusion drawn from this study, the following recommendations are made:
- Findings emanating from the empirical analysis of this study proffered that monetary authority, the Central Bank of Nigeria (CBN) should moderate the minimum policy rate and cash reserve ratio as tools for regulating credits; the money supply and liquidity ratio should be kept at an optimal level considering their correlating effect on commercial bank credit
- Since money supply influences credit availability in Nigeria, there is the need for inflation targeting as this will help in monitoring the effect of high base money supply on the growth of the economy.
- The problem of high liquidity in the banking industry has been considered to hamper the effective use of monetary policy instruments in regulating banking credits; thus, CBN must adopt more proactive measures at reducing liquidity in the banking sector. This involves raising cash reserve ratio and reintroduction of cash reserve requirements.
- While raising its cash reserve ratio and requirements, CBN needs to ensure that credits to the productive sector are delivered at lower cost, by so doing, economic output will increase, it becomes easy to check inflation and makes monetary instruments more effective.
- The regulatory bodies should sustain the current economic reforms and maintain sound fiscal and monetary policies so that as inflation tends to single digit on a sustained basis, interest rates will inevitably come down.
- As for credit, efforts should be made by the CBN towards ensuring a fair distribution of credit among different sectors so that some sectors do not reap all the benefit or incentives alone. This implies that CBN should ensure control of credit to such neglected sectors as agriculture sector where it is mostly need. This will enhance efficiency in the credit delivery by the banks to the economy.
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