Monetary Policy And The Banking Performance In Nigeria

Project and Seminar Material for Economics

Monetary Policy And The Banking Performance In Nigeria


The research study is directed towards a monetary policy and banking performance in Nigeria. The research investigates the effectiveness of monetary policy on the bank’s profitability by using first bank of Nigeria: as a case study. The structure of commercial bank’s general policies and principles.

The research composition was based on secondary data. The data collected from various sources was statistically analyzed with the’ multiple regression analysis.

The study found out that there is positive relationship among various economic variables including gross domestic product, interest rate, exchange rate and money supply.

The study recommends that government should pursue sound and more coordinated monetary policy. The growth rate of money supply should be kept at a level consistent with real gross domestic product (GDP) growth rate so that it will not affect the position of exchange rate adversely. The study also recommends that the government and the central bank of Nigeria should be cautious of their intervention in the Foreign Exchange Market to ensure non-violent fluctuation of the exchange rate as too much interference breeds uncertainty which’ may hamper the realization of the achievement of monetary of monetary targets.

Chapter One

1.0 Introduction

1.1 background to the Study

There are several factors that affect the performance of banks. In this research work profitability shall be used as the performance indicator of banks. The mostly direct factors that affect profitability are the· regulatory framework under which banks operate. This framework can be divided into two broad aspects: monetary and banking policies. In all economies, these policies are normally rooted through banking institutions because of the vital roles these institutions play in the intermediation process.

Through this process, banks play very important roles in determining the price of money and creation of high-powered money. This characterizes the main functions of banks – mobilizing funds from surplus income units and channeling this surplus to deficit spending units. However, such license to create many is controlled by the Central Bank in the overall public interest. For example, through the use of monetary policy instruments, banks are required to hold reserves in form of cash in their vaults or a deposit at the Central Bank, which is equal to certain fractions of their various types of deposits.

Monetary policy deals with the discretionary control of money supply by monetary authorities in order to achieve stated or desired economic goals. Governments attempt to control. the supply of money because they believe its rate of growth has a significant effecton’ the inflation rate. ·.Therefore, monetary policy comprises those government’s actions, which are designee; to influence the bebaviour of the monetary sector. The policies-are desired: ‘in an attempt. to change the trends of same monetary variables in particular directions so as to induce the desired behavioural change in the monetary sector.

The Central Bank’s role is to conduct appropriate monetary policy that is consistent with the main economic objectives of achieving real growth in Gross Domestic Product; low inflation rate and a stable balance of payment position. This is irrespective of whether direct or indirect approach is being used to control money supply and availability of credit. The main objective of monetary policy is to ensure that over time, the expansion of money and credit will be adequate for the long run needs of the _ growing economy at stable prices.

In order to optimize earnings for bank’s shareholders, there is tile need for banks to adjust their portfolio of assets and liabilities so as to meet the profitability objective under the solvency and liquidity constraints. This profitability objective – is greatly influenced- by the Central Bank’s stance on monetary and banking policies. Other factors such as managerial efficiency of bank, labour cost, size and capital investment in banking, do influence bank’s profitability. The extent to which a bank succeeds in collecting deposits and making a profitable use of such goes a long way in determining the level of profitability of such a bank.

However, the impact of monetary policy variables on .bank’s profitability and effectiveness ofmonetary policy will be’ considered in this study. Profitability Is regarded’ as art important measure of a bank’s performance: It is defined as the ability of banks-to make excess revenue over expenditure or excess returns made in, the course of carrying out their business activities while maintaining their liquidity and solvency requirement.

1.1 Statement of the Problem

Each year the monetary authorities formulate policy guidelines geared towards the enhancement and the effectiveness of policy variables designed to ensure’ optimal performance of Ute banking sector. But’ in the implementation of such policy variables, banks encounter certain problems. The problems that banks encounter include inability to comply with the various monetary policy guidelines. For instance, a change in the required reserve ratio alters the magnitude of money multiplier, credit expansion, money supply, and hence banks profitability. Similarly” the use of interest rate policy, credit ceilings and discount rate policy among other policy instruments are meant’ to alter the level of profitability of banks.

Another problem is in the event of stringent policies faced by banks that are used in regulating their levels of profitability. For instance, the use of stabilization securities has met with bitter complaints from bankers.

There are diverse groups in the society that have investment interest in the Nigeria banking system and bank profitability. Therefore banks must be reasonably profitable. Reasonable returns also re­assure the’ depositors that the business is efficiently managed. It, has been agued that’ unprofitable banks are likely to be liquidated and distressed: in Nigeria’ the rising cases’ of bank distress have become a.’ major source of concern. for Policy makers. Between 1994 and 2004, a total of 33 banks were closed (Adam 2004) and about five (5) banks was summoned in 2009. Monetary authorities attempt at achieving broad economic objectives through monetary control. To achieve these, Central Bank of Nigeria employs various instruments such as Open Market Operation (OMO), Cash Research Rate, Liquidity Ratio, and credit ceilings selective credit policies among others. It should be noted that direct monetary control techniques were in vogue, in the 1.960’s, 1970;s and until June 1986.

This resulted into inefficiency and misallocation of resources in the financial system and at present the government has adopted the indirect tools and the use of direct techniques has reduced and other problems confronting the monetary policy there is the need to examine and analyse some fundamental issues and prospects for monetary control in the nearest future in the Nigerian economic.

The main thrust of the study shall be to evaluate the effectiveness of the CBN’s monetary policy over the years. This will go a long way in assessing the extent to which the monetary policies have impacted on the economic growth process in Nigeria.

1.3 Aim and Objectives of the Study.

The aim of the study is to examine the relationship between monetary policy and banking performance in Nigeria. The objective is broken down into the following:

  1. To examine the influence of monetary- policy variable on bank’s. profitability.
  2. To highlight the various monetary policy measures that have been used for the years under review on commercial banks.
  3. To examine way$ by which government authorities regulate banking operations in Nigeria.
  4. To examine the effectiveness of monetary policy measures used for the years under various economic conditions.

1.4 Significance of the Study

Nowadays, most African scholars and policy makers increasingly subscribe to a conventional view of central banking. That view prioritizes the objective of monetary policy much more strongly than did either theoretical orthodoxy or the African central banks themselves in the 1960s and 70s. lt argues that central banks that fail to specialize in monetary stability making low inflation a clearly overriding priority as against output stabilization, fiscal support to government, or a competitive real exchange rate – end up with excessive inflation and with no offsetting gains in economic performance. Independent central banks statutorily charged either primarily or exclusively with the goal of price stability, have become the norm in theory and proposal if not yet often in practice. There is little room here for an active development role; rather, long-run growth is promoted through the maintenance of low inflation, which increases investment and growth by reducing macroeconomic uncertainty.

The modem ‘view also recognizes: that, in order to, achieve-price stability on a sustainable basis, however, the monetary authority may require some flexibility with respect to the evolving economic and political environment. Rigid or automatic policy rules may destabilize prices, for example, in the face of shifts in key behaviour relationships like the’ actions. If the pursuit of price stability is’ so single-minded as to induce recession, the political consensus within which the monetary authorities operate may be fractured.

Finally, the smooth functioning of the monetary system may itself be a necessary concomitant of price stability. If the liquidity of monetary assets is compromised by bank insolvency, or if the volatility of interest rates strongly discourages the ’emergence or survival of efficient financial market, then indirectly the objective of price stability has been impaired. It is evident from the aforementioned that it is crucial to evaluate the performance of the monetary policy in order to adopt appropriate measures that would ensure the achievement of both primary and secondary goals of monetary policy in Nigeria.

1.4 Research Methodology

The ordinary least square (OLS) technique shall be employed in obtaining the numerical estimates of the coefficients in different equations. The. multiple linear regression analysis will be used With Gross Domestic Product (GOP) as the. dependent, variable while money supply, exchange rate and interest’ rate as the explanatory variables. The method would be .applied with the use of statistical package for social sciences”(SPSS). ‘

1.4.1 Collection of Data

Secondary data shall be used in this research. This includes the use of relevant, text; journals, annual reports, publication from Federal Bureau of Statistics and Central Bank of Nigeria Statistical Bulletin etc.

1.4.2 Method of Data Analysis

The study shall make use of econometric tools and basically regression analysis in analysing the research problem.

Model Specification
  • GDP = f(Exch, Mst, Int)
  • GDP = βO + β1Exch + β2Mst + β3Int + µt)


  • GDP = Gross Domestic Product
  • EXCH = Exchange Rate
  • Mst = Money Supply
  • INT = Interest Rate
  • µt = Error term

1.5 Research Hypothesis

The hypothesis to be tested given the above objectives is;

  1. H0: There is no significant relationship between Monetary Policy Rate (MPR) and availability of loans and advances in Nigeria
  2. H0: There is no significant relationship between money supply and loans and advances in Nigeria
  3. H0: Liquidity ratio has no significant impact on credit availability (loans and advances)
  4. H0: Cash reserve ratio has no significant impact on credit availability (loans and advances)

1.6 Scope / Limitation of the Study

This study will focus on the relationship between monetary, policy and banking performance (probability). It is designed to cover 1986 to 2009. The years are selected in order to capture the period of the deregulation while the study of effectiveness of monetary policy will cover both before and after SAP’s period. ‘the major constraints on the study is the non-comprehension of official data. Largely because of inadequate data, time, funds and resources limiting’ the research work to twenty three years.

1.7 Plan of the Study

This study will be designed or arranged into five chapters, with each chapter focusing on different aspect of reasoning.

Chapter One:

It covers the introduction of the study under review, problem of the· study; objectives of the study, hypothesis, research methodology, significance, scope, limitation and plan of the study.

Chapter Two:

It provides the literature review and theoretical framework.

Chapter Three:

The research methodology.

Chapter Four:

Data analysis and interpretation of results.

Chapter Five:

It entails the summary of findings of the work, conclusion and recommendation drawn from the study.

Chapter Five

Summary, Conclusion, Recommendations

5.1 Summary of Findings

The study examined the impact of CBN monetary policy on commercial banks performance in Nigeria from 1986-2013. The study reviewed major monetary policy objectives, instruments used to carry out the objectives and their achievements especially in terms of credit delivery to the economy.

The study therefore analysed the impact of some of the monetary policy instruments frequently used by the CBN. Descriptive statistics was used in presentation of data collected from CBN statistical bulletin; while linear multiple regression analytical tools through the e-view software were used in analyzing the data. Findings revealed that liquidity ratio has positive relationship with loans and advances however, the influence of liquidity ratio on cost and availability of credit is insignificant as indicated by its standard error test while the t-cal at -0.202 implies that Liquidity ratio has no significant impact on credit availability (loans and advances.

Money supply was found to be a positive and significant relationship with bank credit with the standard error test showing that the two variables are statistically significant. The t-cal at 20.852 led to the acceptance that there is significant relationship between money supply and loans and advances in Nigeria.

The study also revealed that indicates that monetary policy rate has positive and insignificant influences on banks loans and advances. From the standard error test, the variables were found to be statistically insignificant. The t-cal was 1.153 which is insignificant at 5% confidence level of t-tab. Thus the null hypothesis was accepted that there is no significant relationship between monetary policy rate (MPR) and banks loans and advances in Nigeria.

Cash reserve ratio was found to have negative and insignificant relationship with bank credit in Nigeria. The standard error test shows that the variables are statistically insignificant and the t-cal at -0.055 which is insignificant at 5% confidence level of t-tab, implies that Cash reserve ratio has no significant impact on credit availability (loans and advances).

The findings of this study supports the study of Ajayi and Atanda (2012) who revealed in their study that liquidity ratio and cash reserves ratio exert negative effect on banks total credit. AlsoAkanbi and Ajagbe (2012) found that an increase in interest rate will leads to a decrease in the lending rate while liquidity ratio and cash ratio were statistically significant to the profit of the selected banks.

5.2 Conclusion

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.

5.3 Recommendations

Based on the major findings and conclusion drawn from this study, the following recommendations are made:

  1. 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
  2. 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.
  3. 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.
  4. 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.
  5. 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.

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