The Role Of Commercial Bank In Achieving Stability In Foreign Exchange

Project and Seminar Topics with material for Banking and Finance

Abstract

This research project work was undertaken with a purpose of determining and evaluation of the effect of the Role of Commercial Bank in Achieving Stability in Foreign Exchange. The effect of the Role of Commercial Bank on the behavioral aspect of management information system are Aggression Avoidance and Projection on the other hand other operational pressures are maintaining the system. Personal problems in the book-keeping department maintaining book-keeping machines. Exparching volume of operation’s need to accommodate the increasing volume need to maintain or reduce cost-unsatisfactory output. Errors in terms of reports and statement delays in work processing needs or system change. This study empirically examined the impact of foreign exchange fluctuation on the intermediation of banks in Nigeria with a view to enabling the banking system work efficiently and effectively towards the proper valuation of the Naira. The study used data sourced mainly from Central Bank of Nigeria publications. In conducting this relationship study, sample sizes of 34 years (1970 – 2004) were collected and analyzed. The analysis empirically examined the relationship between exchange rate fluctuation and commercial banks intermediation index with using annual average exchange rate as independent variables while Commercial Banks Intermediation Index (CBII) represented the dependent variable. Using SPSS to conduct the regression and correlation analysis, the study found that there is a positive relationship between foreign exchange fluctuation and CBII, that only about 28% of the changes in CBII is accounted for by variations in foreign exchange(that is, after adjusting for sample size), since the adjusted R2 = 0.278. It also revealed that at 5% significance level, the critical T-value of 2.042 is less than the computed T-value of 3.754, hence, the rejection of Ho. The result led to the conclusion that exchange rate fluctuation has significant impact on banks’ intermediation. It was therefore, recommended that government should ensure a stable naira exchange rate through a right mix of policies and de-emphasis on cash-economy.

Chapter One

Introduction

1.1 Background of the Study

The goal of every government of any country is to achieve equilibrium in the economic system. It is therefore very important that the authorities concerned must regulate the system indirectly with the policies.

This necessitates that government of any country must adopt certain economic policies in order to achieve specific macro-economic goals or objectives; some of such major macroeconomic polices include: monetary policy fiscal policies, exchange rate policy. Most of these polices can only be administered through the agency of commercial banks, which is the pivot of the research work. In Nigeria, for instance, monetary policy has being conducted under wide ranging economic environment since the establishment of the Central Bank of Nigeria (CBN) over many years ago.

Basically, monetary and fiscal policies adopted by the government of a country is posturing economic development with a view to achieving certain growth, sustainable balance of payment, maintaining a stable exchange rate of international competitive levels, combating inflation, price stability and fall employment.

Monetary policy is defined according to CBN briefs (1994) as the combination of measures designed to regulate the values, supply and cost of money in an economy. In consonance with the level of economic activities.

Anyanwu (1993;140) refers to monetary policy as a major economic stabilization weapon which involves measures designed to regulate and control the volume, cost, availability and direction of money and credit in an economy to achieve some specified macro-economic policy objective.

Fiscal policy on the other hand, is an attempt by the government using its expenditure and tax policy to shit the aggregate demand and aggregate expenditure functions towards desired positions. According to Anwanwe (1997:241), fiscal policy is taken to refer to that part of government policies. Concerning the raising of revenue and deciding or the level and pattern of expenditure for the purchase of influencing economic activities or attaining some desirable macroeconomic good.

The intricacy in handling the monetary and fiscal policies to achieve the desired macro-economic objectives necessitates the need for an independent authority. So in Nigeria today, the Federal Government is the sole monetary authority, but it has delegated some aspect of the implementation t o bath the Ministry of Finance and Central Bank of Nigeria (CBN) to formulate, execute monetary policy; to promote financial system. To achieve a desired policy objectives, the CBN is empowered to use monetary policy technique or instruments, and the CBN does most of its functions through the commercial banks.

This technique can be classified into groups: the direct portfolio contrary and indirect portfolio approach. Indirect portfolio includes: Open Market Operations (OMO), Minimum Reserved requirements, discounts rate mechanism. While direct instruments includes: selective credit controls, credit ceiling and moral suasion.

Furthermore monetary policy presupposed that there is some relationship between the supply and the demand for money and economic aggregate such as output, income, savings, general price level and investment. The mix of monetary policy instruments to be used and its effectiveness depend on this relationship.

Monetary policies involves monetary management. Monetary management according to Ojo (1992:3) is defined as the art of controlling the movement of monetary and credit aggregate in the pursuance of stable price and sustainable economic growth.

Therefore, the Central Bank or the Central Monetary authority must attempt to keep the money supply growing at an appropriate rate to ensure sustainable economic growth, domestic and external stability.

However, in Nigeria, the role of monetary and fiscal policy has in creases tremendously since after independence. Both civilian and military governments have adopted there polices to achieve micro-macro objectives. But despite there measures, to suite the constant changes in the economic situation of Nigeria still a lot of problems deviled the economy, ranging from high unemployment, inflation and balance of payments. This prompted me to research on the topic: “the role of commercial banks in foreign exchange.

1.2 Statement of Problem

The application of the monetary and fiscal policies by the monetary authorities using the monetary instruments such as Open Market Operation (OMO), Bank reserve ration, etc. In consonance with the prevailing economic situation is aimed at achieving the macro-economic goals of the country such as full employment, low level of inflation, favourable balance of payments. But in Nigeria, inspite of these numerous monetary policy measures adopted, the economy still suffers the problem of higher rate of unemployment, inflationary pressure, balance of payment deficit and unstable foreign exchange.

The questions that follows are: how effective are monetary and fiscal policies are in controlling some of these variables, inflation in particular? Why have monetary and fiscal policies failed in our economy despite that they have worked in other countries?

What may be the reason militating against the effectiveness of the monetary policies? As the commercial banks are the enzymes used by the CBN in administering economic measures; what can they do to aid in achieving foreign exchange stability? In view of the above outlined question, this research work will try as much as possible to proffer some answers.

1.3 Objectives of the Study

This study aims at finding the following:

To re-examine the instruments of monetary and fiscal policies and their performance.
To examine the major policy objectives and their achievement in the country.
To appraise some monetary and fiscal policies measures in Nigerian and see how commercial banks respond to their instruction.
To make recommendation to policymakers.

1.4 Research Questions

Against the background of this study, the following research questions were drafted by the researcher in order to execute the study:

What are the instruments of monetary and fiscal policies and their performance?
What are the major policy objectives and their achievement in the country?
How do commercial banks respond to the instructions of monetary and fiscal policies measures in Nigeria?

1.5 Significance of the Study

This research work is significant because it strives to establish the relationship of monetary and fiscal policies and the role commercial bank play in economic stabilization. It is hoped that this work will enhance and improve the use of monetary and fiscal policies in the realization of macro-micro economic goals associated with economic growth and development.

1.6 Scope of the Study

The study was carried out on the role of commercial banks in achieving stability in foreign exchange. The study was conducted for a periodof 34 years (1970 – 2004).

1.7 Definition of Terms

1. Commercial Banks:

Any institution approved by the central government (usually through CBN) to engage in acceptance of deposits, charging of bills of payments, and performance of retail banking operations.

2. Foreign Exchange:

Refers to transactions in international currencies emanating from exchange of goods and services between nations not using common currency.

3. Balance Of Payments:

This shows the estimates in transaction of a country’s visible and invisible export and import from foreign countries.

4. Macro Economic Goal:

This refers to the aggregation of all resources within a given country in achieving a stated goal or objective for the economy.

5. Monetary Instruments:

They are governmental policies/instruments used in the stabilization of the prevailing economic situation.

1.8 Organization of the Study

The study is divided into five chapters. Chapter one deals with the study’s introduction and gives a background to the study. Chapter two reviews related and relevant literature. The chapter three gives the research methodology while the chapter four gives the study’s analysis and interpretation of data. The study concludes with chapter five which deals on the summary, conclusion and recommendation.

Chapter Five

Conclusion and Recommendation

5.1 Conclusions

This study was carried out on the role of commercial banks in achieving stability in foreign exchange in Nigeria. Given the analysis and findings earlier discussed, the study concludes that a vital positive and significant relationship exists between foreign exchange rate movement and commercial banks’ intermediation activities in Nigeria.

5.2 Recommendations

Based on these findings and conclusion, the following recommendations for policy are made. Firstly, having been revealed that exchange rate significantly and positively affects banks’ intermediation operations, government should through the instrumentality of right policy mix ensure that the value of the naira remains stable. In fact there should be a policy of gradual but steady revaluation of the naira. Thus, a proper blend of variables in the policy mix aimed at achieving effective exchange rate policy devoid of disruptive reverberations in the banking sector, such as high cost of borrowing, depletion of external reserve and excess liquidity should be adopted to enable the banking sector function optimally. To ensure success in this direction it is necessary that the suggested mix of policies be consistent with existing measures of regulating the economy in order to have harmony in goal attainment. This can be achieved through appropriate intervention by the monetary authorities in all the market windows such as money market, discount market, and foreign exchange market within the Nigeria financial system.

In addition, the study recommends that efforts should be taken to deemphasize the cash economy with the aid of electronic monetary tools. It also recommend that the parallel market premium should not exceed 5% whatsoever, so as to discourage sharp practices like round-tripping and the continued prevalence of dual or multiple exchange rates.

Finally, there is also need for the government to provide enabling political and social environment that would be conducive for economic activities. There is an urgent need to alleviate or mitigate poverty in the land and empower the masses to increase the dismal levels of purchasing power which is critical to jump-starting the economy.