The Impact Of Monetary Policy On Banking Industry

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The Impact Of Monetary Policy On Banking Industry


Abstract


This study investigates the impact of monetary policy on Banking sector performance in Nigeria. This is to ascertain the factors that influence the banking sector performance using bank’s deposit liabilities as proxy for bank performance. The study period covers 36 years from 1970 to 2006, using selected indicator and employing the OLS regression technique. We tested the null hypothesis of no significant relationship between bank deposit liabilities and chosen indices of banking performance, namely Exchange Rate (EXR), Deposit Rate (DR) and Minimum Discount Rate (MDR). Results showed that overall; monetary policy has a significant effect on the banks deposit liabilities. Main while, on individual basis, we discovered that Deposit Rate (DR) and Minimum Discount Rate (MDR) had a negative influence on the banks deposit liabilities in Nigeria, whereas Exchange Rate (EXR) had a positive and significant influence on the banks deposit liabilities in Nigeria. We conclude therefore that monetary policy plays a vital role in determining the volume of bank’s deposit liabilities in Nigeria. We recommended that government and its monetary authorities should strive to create a conducive environment for banking sectors to grow in the country by packaging appropriate monetary policies that would guarantee and enhance growth and development of the banking sectors in Nigeria.


Chapter One


Introduction

1.1 Background of the Study

Monetary policy is one of the macroeconomic instruments with which nations (including Nigeria) do manage their economies (Ajie and Nenbe, 2010). According to Ubi, Lionel and Eyo (2012), monetary policy is an aspect of macroeconomics which deals with the use of monetary instruments designed to regulate the value, supply and cost of money in an economy, in line with the expected level of economic activity. It covers gamut of measures or combination of packages intended to influence or regulate the volume, prices as well as direction of money in the economy per unit of time. Specifically, it permeates all the debonair efforts by the monetary authorites to control the money supply and credits conditions for the purpose of achieving diverse macroeconomic objectives. In Nigeria, the responsibility for monetary policy formulation rests with the Central Bank of Nigeria (CBN) and the Federal Ministry of Finance (FMF) (Ajie and Nenbe, 2010; Ajayi and Atanda, 2012; Abata et al., 2012).

The existence of an effective banking sector is necessary for every economy because it creates the necessary environment of economic growth and development through its role in intermediating funds from surplus sector to deficit sector of the economic units. Banking sectors are financial intermediaries whose activities are for collection of savings and lending, thus standing in between the ultimate lender and the borrower and matching the investment requirement of the lender. This stimulates investment as well as international trade and balance of payments. In playing this important role of financial intermediation, the banking sector is seen as effective institution in the use of monetary policy, which relies on the control of money stock in order to influence financial and economic activities. The extent to which monetary policy influences financial and economic activities has been widely argued over the years, it is equally accepted that monetary policy affects economic and financial performance of any economy.

There are divergence views on the extent of the effects and the channels through which these effects are achieved. This is particularly relevant in the Nigeria setting where the money and capital market are under-developed and Nigerian government has over the years adopted various instruments of monetary policy to regulate and control the cost, volume, availability and direction of money credit and also the performance of commercial banks. On the other hand, most financial intermediaries are often apathetic towards channeling resources to productive investment even in the face of lower interest rates. All these factors have been cited as limiting the performance of monetary policy in Nigeria. Main while, severe structural supply constraints are deemed to inhibit expansion of output even when the demand for it increases. An expansionary monetary policy consequently often results in inflation rather than output growth.


1.2 Statement of the Study

In this report, the impact of monetary policy in Nigeria banking institution will be investigated. The investigation on the impact of this monetary policy in Nigeria banking institutions will enable its complete distribution even to the local communities. It will also enable its ascertainment on the likely problem that will occur on the process of implementing monetary policy. It will also go a long way. Way in making people know how to spend their money.


1.3 Objective of the Study

This study basically aims at examining the impact of monetary policy on banking industry. Therefore, it will:

  1. Examine the impact of banking sector performance on economic development in Nigeria.
  2. Identify the channel through which monetary policy influences the performance of banking sector in Nigeria.
  3. Examine what changes in profitability resulted from changes in monetary policy.
  4. Articulate tentative policies that promote the performance of the banking sector in Nigeria. .

1.4 Research Question

For the purpose of this study the following question will guide this work.

  1. How does C.B.N implement their monetary policy
  2. How does the C.B.N uses the monetary policy in controlling the price stability of the state.
  3. How does monetary policy increase the growth of the economic productivity.

1.5 Research Hypothesis

Based on the research objectives, the hypotheses to be tested include: Ho: There is no significant relationship between monetary policy and bank deposit liabilities in Nigeria.

HI: There is significant relationship between monetary policy and bank deposit liabilities in Nigeria.
Ho: There is no significant relationship between deposit liabilities of commercial banks and deposit rate in Nigeria.

HI: There is significant relationship between deposit liabilities of commercial banks and deposit rate in Nigeria.
HO: There is no significant relationship between deposit liabilities of commercial banks and minimum discount rate in Nigeria.

HI: There is significant relationship between deposit liabilities of commercial banks and minimum discount rate in Nigeria. .


1.6 Significance of the Study

This project proposal is significant in the following ways:

To prospective study who wants to know more on the impact of monetary policy in the banking sector.

The study will be relevant to those who work in the bank to help them know how impact monetary policy in banking sector.

To the Government on how to plan to improve the impact of monetary policy in banking institutions.


1.7 Delimitations and Limitation

This study will cover areas of academics, business, Government and banks


1.8 Limitation of the study

A study of this nature cannot be carried out without difficulties in the process. An important constraint is the time constraint. This research proposal work and examination and the research were complied with a very short period of one week.

Another constraint is finance, a research of this nature involves adequate search ( raw materials)

Lastly, difficulty in securing relevant data for the study


1.9 Definition of Terms

Harry (1962) defines monetary policy as a “policy employing central banks control of the supply money as an instrument of achieving the objectives of general economic policy”.

According to C.B.N brief (1999) monetary policy refers to the combination of measure designed to regulate the value, supply and cost of money in an economy in consonance with the level of economic activity.

Barbara (2006) defined monetary policy as one of the main policy tools used to influence interest rate, inflation and credit availability through changes in supply of money or variable in economy

Falepan (1978) maintain that monetary policy deals with the discretionary control of money supply by the monetary authorities in order to achieve stated or desired economic goals.


1.10 Organizations of the study

The chapter one consist of the introductory part of the study which includes the study background, the statement of the research problem, the study objective and scope of the study.

The second chapter is a critical review of other literatures relevant to the study and its objectives including the theoretical framework for the study. While the third chapter is methods of data collection, sampling and data analysis used in conducting the study.

The fourth chapter centres around the research findings including an analysis of how it relates to previous findings.

The fifth chapter consists of the summary of findings, conclusion and recommendations base on the study objectives.


Chapter Five


Summary, Conclusion and Recommendation

5.1 Summary

The research work tries to investigate the effect of monetary policy on commercial banks in Nigeria. Theories relating to the subject matter were vigorously analysized and examined. From these theories, we developed our model which was used to sought and investigate the impact of such variables as Exchange Rate (EXR), Deposit Rate (DR) and Minimum Discount Rate (MDR) on Deposit Liabilities of Commercial Banks (DL) vis-à-vis the performance of banks in Nigeria.

The estimated result shows that Exchange Rate (EXR) is positively related to the Deposit Liability of Commercial Banks (DL). In fact, Exchange Rate (EXR) alone explain and account about 78% of the changes in Deposit Liability of Commercial Banks (DL) in Nigeria. This means that theoretical prediction that there exist a positive relationship between Exchange Rate (EXR) and Deposit Liability of Commercial Banks (DL) is true and indicates that Exchange Rate (EXR) is a strong explanatory variable of Banks Deposit Liabilities of Commercial Banks (DL) in the Nigerian economy.

However, the result also shows that Deposit Rate (DR) and Minimum Discount Rate (MDR) have a negative relationship with Deposit Liability of Commercial Banks (DL). This is inconsistent with economic apriori expectation given the negative co-efficient. This means that Deposit Rate (DR) and Minimum Discount Rate (MDR) have not really influenced Banks Deposit Liabilities during the period under study. This may be attributed to poor administration of monetary policies in the country which have lead to low savings and investments to stimulate growth and development of the banking sectors in the Nigerian economy.


5.2 Recommendations

Based on the findings of this study for efficient and sustainable improvement in the performance of banking sectors in the Nigerian economy, we recommend the Effective and sustainable monetary policy capable of ensuring growth and development in the banking sectors should be adopted; In addition to effective deposit rate, incentives should be given to the public in form of higher interest on deposit in order to encourage and mobilize more funds from the public; Banking sectors should strengthen and improve on its awareness mechanism to educate the public on the need, benefit and essence of imbibing the banking culture; Administration of monetary policy should be such that is flexible to enable the commercial banks to discharge their duties effectively to the public; A monetary policy adopted should aim at stabilizing and stimulating a realistic exchange rate for the banking sectors in the Nigerian economy; and Stipulation of Minimum Discount Rate by the Central Bank of Nigeria (CBN) should be such that would promote growth and development of the banking sectors in the Nigerian economy.


5.3 Conclusion

In compliance with the objectives of this study, we have been able to examine, determine and analyze the impact of banking sector performance and economic development in Nigeria. Also identify the channels through which monetary policy influences the performance of banking sector in the Nigerian economy by examining the changes in banks deposit liabilities and its results in the changes of monetary policy and also articulate policies that will enhance the effectiveness of monetary policy on commercial banks performance in the banking sectors in the Nigerian economy.

After a thorough empirical investigation of the problem of the study, it was discovered that monetary policies affect performance of the banking sectors in the Nigerian economy.

The negative coefficients of Deposit Rate (DR) and Minimum Discount Rate (MDR) shows that appropriate and effective economic and monetary policies have not been put in place to promote growth and development in the banking sectors in the Nigerian economy. From the findings in the study, it was revealed that Exchange Rate (EXR) significantly influences the performance of Commercial Banks Deposit Liabilities through the mechanism of interest rate.

Following the scope of this present study from 1970-2006; there is need for further research in this area to be extended from 2006 to 2014 for a more better result on this sector of the Nigerian economy. Since this study could not cover up to 2014.


The Impact Of Monetary Policy On Banking Industry


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The Impact Of Monetary Policy On Banking Industry


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Frequently Asked Questions


Does monetary policy affect the growth of the banks?

The effect of the monetary policy whether it enhances or retained bank growth. The rate at which most banks failed in recent years has been tremendous and a common phenomenon. The regulatory period created the problem of competition survival of the fillets in the banking industry. 

Does monetary policy affect competition survival of fillets in banking industry?

The regulatory period created the problem of competition survival of the fillets in the banking industry. The objective a this work is to find out the following: The effect of monetary policy on the operation of banks.

What are monetary policy guidelines for banks?

Usually the monetary policy to be pursued is detailed out in the from of guidelines to all banks. The guidelines are generally operated with in a fiscal years but the element could be amended in the cause of the year. Penalties are normally prescribed for non-compliance with specific provision in the guidelines.

What is the role of banking sector in the economy?

The banking sector has become one of the critical sector and commanding heights of the economy use to effective participation in the direct of economic growth and transformation and such sensitive issues as the of unemployment inflation price stability or any other macroeconomic goal which directly affects the lives of our people. 

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