Impact Of Monetary Policy On Banks Profitability In Nigeria (A Case Study Of Guaranty Trust Bank)

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Impact Of Monetary Policy On Banks Profitability In Nigeria (A Case Study Of Guaranty Trust Bank)


Abstract


This study investigates how monetary policy affects banks profitability in Nigeria, its challenges and possible solutions the compliance with monetary policies using a case study of guaranty trust bank plc for the period. A critical analysis will be done on the data collected from all the sources and will be examined with a view to evaluating the profitability of a bank that complies with the policy or not. The impact of the policy on banks profitability is stated in two contrasting hypothesis, which are concretely measured in this study. This is done by wing inferential and discipline tools of economic analysis.


Table of Content


  • Title Page
  • Certification
  • Dedication
  • Acknowledgement
  • Table of Content

Chapter One

Introduction

  • 1.1 Background of the Study
  • 1.2 Statement of Problem
  • 1.3 Objectives of the Study
  • 1.4 Significance of the Study
  • 1.5 Scope of the Study and Limitations
  • 1.6 Hypothesis
  • 1.7 Statements of Research Question

Chapter Two

Literature Review

  • 2.1 Preamble Objectives of Monetary Policy
  • 2.2 Major Objectives of Monetary Policy
  • 2.3 Basic Techniques of Monetary Policy
  • 2.4 Nigeria’s Monetary Policy Experience Under Direct Control
  • 2.5. Limitation of Direct Monetary Control
  • 2.6. A Review of the Major Monetary Policy
  • 2.7 Transmission Mechanism of Monetary Policy
  • 2.8 Assessment of the Degree of the Effectives

Chapter Three

Methodology

  • 3.1 Research Methodology
  • 3.2 Sources of Data
  • 3.3 Types of Data Collected
  • 3.4 Data Analysis Technique
  • 3.5 Statement of Hypothesis

Chapter Four

Data Presentation, Analysis and Interpretation

  • 4.1 Introduction
  • 4.2 The Case Study
  • 4.3 Data Presentation
  • 4.4 Data Analysis and Presentation

Chapter Five

Summary, Conclusion and Recommendation

  • 5.1 Summary of Findings
  • 5.2. Conclusion
  • 5.3. Recommendation
  • Bibliography

Chapter One


Introduction

1.1 Background of the Study

A country’s financial sector is the major channel through which funds are mobilized for borrowing and lending transactions. A poorly regulated or managed financial sector or one with insufficient capital for the risks can increase a country’s vulnerability to financial crises.

Improved financial sector regulation and supervision ensures the financial institution take adequate steps to manage risks. Appropriate financial sector policies can stop help to establish deep and liquid domestics capital markets which will reduce the incentive for excessive borrowings. On general, improved financial sector regulation and supervision can help prevent crises by making national economics less vulnerable to adverse developments at home and abroad.

Financial sector crises have occurred in many countries in recent times; both in developed as well emerging market economics.

These crises have resulted in substantial macro-economic and fiscal costs.

Bank failures are widely perceived to have a greater adverse effect on the economy than the failure of the other types of businesses.

They are viewed to be more damaging than other failures because of the fear that they may spread in domino. Fashion through out the banking system, feeling solvent went as well as insolvent banks. Thus, the failure of an individual bank introduces the possibility of system. Wide failures or systematic risk. Bank failures have been and will continue to be a major public policy concern in all countries in the last two decades reflects primarily regulatory or government failure rather than market failures. One major element of regulation and supervision in the last of decade has been the issuance of a set of prudential measures aimed imparting strength to the banking and system and soundness through greater transparency and accountability.

The prevention of the re-occurrences of banking problems requires a better developed market assisted prudential regulations as well as appropriate incentives. For examples part of the strategy to strengthen the banking system in Nigeria include restructuring the system of inspection particularly the offsite surveillance, enhancing the role of external auditors and strengthening corporate governance, internal controls and audit procedures.

The financial system is described as the gamut of financial instruction, financial instruments and financial markets. The role of the financial system in the economy is appreciated the light of the important functions it performs in financial intermediation, capital formation management of payment systems and facilitating the effectiveness of monetary policy.

The most important functions of the financial intermediation, which facilitates the mobilization of resources from those who have (surplus units) and their transfer to those who do not have (deficit units) this influencing savings and investments and facilitating the achievements of the growth objectives of the economics of policy.

Banks constitute the payment systems, which consist of rules institutions and technical mechanism for the transfer of money for the settlement of personnel and business transactions.

The payment system represents on important nerve centre of the economy, providing the link between the real and financial sector the more efficient the payment system, the greater the confidence of the public and the faster the pace of economic activities.

The financial system also provides the institutional frame work through which monetary policy is conducted. In other words, thus system constitutes the channel through which monetary policy action are transmitted to the real sector to achieve price stability facilitate output growth and enhance employment opportunities. Monetary policy is one of the instruments of economic management employed by the monetary authorities especially the Central Bank, to keep the growth of money supply at a level that consistent with the absorptive capacity of the economy.

Monetary policy can be defined as the management of the expansion and the contraction of the volume of money circulation direction through various techniques/policy instruments.


1.2 Statements of Problem

The CBN’s attempt to regulate and implement policies in the banking sector has being faced with some challenges.

The present oligopolistic structure of our banking system. The poor management and settlement systems do not foster adequate and timely response to monetary authorities to quake the pulse of the financial system for the purpose.

Another major challenge for the regulations is ensuring transparency in information discloses though timely and accurate reconciliation of financial returns to the CBN by the financial system, transparency reporting of financial data promotes the ethics good corporate governance and enhances the prospects for effective contingency plan for managing system distress.


1.3 Objectives of the Study

The impact of monetary policy will be looked at with references to banks profitability. Therefore, the objectives of the study will be to:

  1. Examine ways by which government authorities banking operations in Nigeria.
  2. To create awareness of the fact that monetary policy helps to stern distress in banks.
  3. To further inform the CBN and government on ways to ensure banks’ compliance with monetary policy.

1.4. Significance of the Study

The study will be relevant, as it would seek to:

  1. Educate and inform banks on the importance of monetary policy on their profitability, which is their main goal.
  2. To create awareness of the fact that monetary policy helps to stern distress in banks.
  3. To further inform the CBN and government on ways to ensure banks’ compliance with monetary policy.

1.5. Scope of the Study and Limitations

This study will investigate how monetary policy affects banks profitability in Nigeria, its challenges and possible solutions the compliance with monetary policy using a case study of guaranty trust bank plc for the period.
In this research, some factors might pose problems for the researcher to carry out a very comprehensive research.

  • Financial constraint
  • Time constraint

1.6 Hypothesis

The impact of monetary policy on the profitability of banks in Nigeria is stated in two contrasting hypothesis, which are concretely measured in this study.

The null (HO) or alternative (Hi) hypothesis.

Hypothesis 1
  • HO: That monetary policy by the CBN will not lead to increase in profit margin of banks.
  • HI: That monetary policy by the CBN will lead to increase in profit margin of banks.
Hypothesis 2
  • HO: That there is no significant impact of monetary policy on guaranty trust bank’s profitability.
  • HI: That there is a significant impact of monetary policy on guaranty trust bank’s profitability.

1.7 Statement Of Research Question

Hypothesis 1
  • HO: That monetary policy by CBN will not lead to increase in profit margin of banks.
  • HO: That monetary policy by CBN will lead to increase in profit margin of banks.
Hypothesis 2
  • HO: That there is no significant impact of monetary policy on guaranty trust bank’s profitability.
  • HO: That there is a significant impact policy on guaranty trust bank’s profitability.

Chapter Five


Summary of Findings, Conclusion and Recommendation

5.1. Summary of Findings

As seen in the study, monetary policy has a positive impact on bank profitability activities and the economy at large but the implementation of the policy had encountered certain obstacles amongst which are:

  1. Fiscal obstacles characterized with huge extra budgetary fiscal defects and treasury looting.
  2. Excessive credit to government frustrates monetary policy.
  3. As more resource and supervision efforts of the Central Bank are directed to the important issues of solvency and general health of the financial system with serious long—term consequences.
  4. Banks adopt various strategies to circumvent direct controls by window dressing falsification of returns, use of off-balance sheet itenis etc.
  5. In adequate self regulation.
  6. Excessive expenditure by government this leading to high liquidity in the system which result in policies to mop the up and causes high lending rate, thus no knowledge of how to target such.

5.2. Conclusion

This study has examined the various monetary policy instruments issued in the CBN to banks ensuring stability and growth. This also in turn has a positive impact on bank’s profitability as seen in this research work. We also have looked at various problems encountered by the implementation of these policies and some proffered recommendations.

However, the need for operators to imbibe high ethical standards and work towards enriching a regime of self regulation in the financial system cannot be over emphasized.

It is only with ethics and self regulation from the bed rock of the financial sector that sustainable growth will be ensured in the sector and by implication in the economy.


5.3. Recommendation

It orders to overcome the constraints to monetary policy effectiveness identified earlier in this chapter, I wish to recommend as follows:-

  1. There is need for a better and effective coordination of monetary and fiscal policy implementation. The government must start to take seriously advises of the monetary authorities in the conduct of government finances.
  2. Close policy implementation monitoring by the CBN through regular surveillance of the financial system should continue and even, upgraded. The bank examination and supervision department of the CBN should be strengthened. Sanctioning of banks that breach monetary policy guidelines.
  3. Liquidity problems should be tackled before distress is spread.
  4. The federal government should encourage all banks in the industry. Practice of preferential treatment of big banks should be reviewed immediately.
  5. A policy of patronizing all banks will automatically bring down the inter – bank and other interest in the system.
  6. The banking industry should urgently address the issue of self regulation and the chartered institute of banks should take up this challenge.
  7. However, the government should empower the institute to effectively handle.

The issue of managing the financial sector transcends the monetary authorities. Individual operators in the sector have critical roles of play to ensure a sound financial system. It will be impossible for the regulatory authorities to police every operation in the financial sectors as this will require an army of regulators to do that.


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