The Role Of Monetary Policy And Its Impact On Nigerian Financial System (A Case Study Of Central Bank Of Nigeria)

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The Role Of Monetary Policy And Its Impact On Nigerian Financial System (A Case Study Of Central Bank Of Nigeria)


The purpose of this proposal is to enlarge important of the modern state of guarantee adequate provision for living and the need for economic growth in large part of the world have donated to the entrance of the prestige of monetary policy as an important instrument of economic policy and the essence would be laid on how the monetary authorities used these in controlling some major micro economic problems now rampart in our society monetary theories : various definition have been given to monetary policy by different economist.

Ginham (1980) define monetary policy as the credit control measure adopted by the central bank while I proposed the monetary policy has a final say who by the central bank of Nigeria because the money generated from there side and also monetary policy order to influence the supply of money, implemented via a wide range of institution both public and private to influence the level of economic activity. The positive role of monetary policy in the finance system having been recognized, the question arise about the objectives and roles of this policy economist have from time to time mentioned different roles of the monetary policy.

The central bank of Nigeria which is the apex financial institution and regulatory body of monetary credit, foreign trade and exchange policy in the country was established in 1958 under the act of parliamentary know as central banks Act for many years before the establishment of the bank a rudimentary monetary system had already begin the process of transforming.

Review of monetary policy in Nigeria: since independence monetary policy regimes in Nigeria can be divided broadly into two: 1960 to 1986 and 1987 to date pre-1986 period.

The economic environment that guided monetary policy before 1986 when the structural adjustment programme (SAP) introduced was characterized by the growing importance of the oil sector, the expanding role of the public sector in economic and over-dependence on the external sector.

During the period, the major objectives of monetary policy were the maintenance of relative price stability and healthy balance of payment position as well as the acceleration of the pace of economic development.

The focus on sectoral distribution of bank credit through the period was stimulate the productive sectors and therefore stem inflationary pressures.

The monetary policy which is one of the policy tool that can be used to achieve the macro-economic objective of a nation is aimed at maintenance of full employment, ensuring domestic price stability stimulation economic growth and development and maintenance healthy balance of payment equilibrium in order to evaluate the adequate of its operation in Nigeria.

Chapter One


1.1 Background of the Study

The growing importance of the modern state at ensuring adequate provision for’ living and the need for economic growth in large part of the world have contributed to the entrance of the prestige of monetary policy as an important instrument of economic policy.

This write up will examine and explain various monetary policy instruments that have been used in Nigeria since the. inception of the Central Bank of Nigeria (C.B.N) which is the regulator^ body u6ecl by the Federal Government to regulate and control the money in circulation. The policies are designed in an attempt to change the trends of some monetary.

Variables in particular and directions so as to induce the desired behavioral change in the monetary sector. Emphasis would be laid on how the monetary authorities used these polices in controlling some mayor macro-economic problems now rampant in our society.

One of the primary responsibilities of any government is to ensure that citizens attain” a high standard of living, the monetary policies consist of action taken by government to help in achieving economic objectives.

Some of these objectives are as follows

  1. Full employment
  2. Rapid economic growth and development
  3. Price stability
  4. Equality in distribution of income
  5. Stable foreign exchange rates
  6. Attainment of self reliance in the economy
  7. Correction of balance of payment deficit.

Any government whether a developed or a developing country economic objectives which might be economic growth so as to increase the wealth per head of the population or the prevention of loss or real output and the cost that result from the failure to maintain the economy at its full potential output level, the improvement of the functioning of the economy by restraining excess demand and inflationary price increase from imposing real cost on society and the restraint off any tendency of the economy towards a chronic balance of payments Disequilibrium.

Therefore, in an effort to achieve these objectives government have put in place a number of different policy tools such as monetary policy that is topic under discussion other policy tools are fiscal policy, credit policy, foreign trade policy and exchange rate policy.

The research work will also look into the instruments or weapons of monetary policies such as open market operations, interest rate, special deposit, reserve requirement, request and directives and finally given suggestions and recommendations on how these policies could be effectively used.

1.2 Statement of the Problem

Monetary policy has a major role to play in the Nigeria finance system and the economy in general.

To ensure efficient and effective growth in the economy. Monetary policy must be allowed to stay for a period of three to four year -to ensure stable economy growth and enhance the control of monetary in the money and capital market.

The monetary policy when not in good planning and control will contribute to the inflationary trend of the nation economic. Although the performance sheet of the economy shows that economy is on good track but inflation rate continues to gallop for instance during 1999 fiscal year the rate of inflation stood at 15 percent, in year 2000 its reduced again to 0.9 percent at present it as shoot up to 5.5 percent.

These have contributed to the poor economic growth, in stabilization in the market system, inequitable distribution of income. The above discussions shows that not allowing the monetary policy to last for longer period before introducing another current measure is a problem facing the economy of the country and also the regulatory body of the policy ought to take caution and exercise adequate economic skills aim at achieving the best for the country.

1.3 Objective of the Study

The main objective of this study is to indemnify the importance and impact or to evaluate the role of monetary policy and its impact on the financial system.

And to examine critically the adequate of monetary policy in Nigeria and then relate the general theoretic–background and establish specific monetary policy indicated by the structure and character of Nigeria economy.

In addition, it will also examine the historical potency of contemporary monetary policy in the changing economic circumstances of Nigeria growing effort and possible prefer suggestions.

1.4 Significance of the Study

This research work is important to every sector and everyone within the nation. Economists agree that money plays an important role in the economic development and growth process of a nation, ever since the days of an ancient Greek writer – Philosopher – Plato Aristotle and Xylophone write dealing with., money have dwelt on the issue of monetary policy. Monetary policy involves some process which will bring about the growth of the economic; these are the objective of monetary policy (the goals of the policy), policy formulation, and choice of policy instrument, policy implementation and policy evaluation / adjustment.

All these process will bring about great impact on the activities of the financial institutions that helps in the successful execution of the policies through their dealing^” with-general public, the introduction of these policy have increase the level of activities in the economy.

1.5 Scope of the Study

The research work is designed to cover almost all the areas of the goals of monetary policy and its instrument. It will deals with the impact, trend and indicator of various monetary tools been used in Nigeria finance system to the supply of money and cost of money-is .Nigeria banking system.

1.6 Organization and Plan of the Study

In line -with the above discussion, these stages briefly states the outline of the various’ chapters in the project work. In the light of the above, the project shall be divided into five chapters in order to achieve the aims of the project; each chapter shall deals with all the important aspect of the topic.

  • Chapter one of the report will contain the introduction of the theme of the project work by giving the background of the study, statement of problem of study, objective of the study; significance of the study, scope and limitation of the study and the organization of the study.
  • Chapter two will focus and deals with review of various literature materials on monetary policy.
  • Chapter three will focus on the brief history of the regulatory body of monetary policy in Nigeria which is the Central Bank of Nigeria (CBN) and the research methodology used.
  • Chapter four will analysis stating the information received so far on the on the monetary policy that is the review of monetary policy in Nigeria, comparison of current year monetary policy with previous year and the impact of monetary policy and Nigeria finance system.
  • Lastly, chapter five would cover or will be devoted to summary, conclusion and recommendation.

Through its influences on aggregate demand and hence on output. This school of thought even argues that a modest rate of growth because it is only in such circumstances that the rate of profit would rise and the motivation to invest would increase.

It is further argued that the use of monetary policy to achieve growth can aid the achievement of some other objectives such as full employment,

The other view on monetary policy is the classical view as redefine by Milton Friedman. According to this view, monetary policy cannot-be used, to achieve a legal unemployment which is lower than the natural rate of unemployment. However in an attempt to correct the new unemployment problem with an increase in money supply will simply lead to a repetition of the business cycle and this would destabilized the economy, the monetary policy which have been discussed above can further be illustrate with the use of business cycle which clearly show the rate of stabilization in the economy.

Business Cycle

Keynesian view is that monetary policy should be directed at interest rates rather than money supply and that monetary policy should at all times be directed at interest rates rather than money supply and that monetary policy should at all times be subsidiary to fiscal policy, the monetarists recommend that control of money supply should the major concern of the monetary authorities.

The Keynesian view says since inflation is a sign of Economic over heating and rise in interest rate will tend to cool it down by checking investment and thence overall demand conversely during the period of recession economic activities could be stimulated by lowering the interest rates.

However, Keynesian argue that monetary policy will be more effective if the authorities aim’-to- control interest rate directly rather than indirectly through the money supply.

Therefore, the Keynesian versus monetarist’s debate given the conflicting advice to government on the role and effectiveness of monetary policy. According to Paul Einzigg, monetary policy is the altitude of the political authority towards the monetary system of the communicate under the control. Declaring this definition tool vague to be of sufficient practical use, the same writer defined an idea monetary policy “as the effort to reduce to a minimum the disadvantage and increase the advantages, resulting from the existence and operation of monetary system”.

M.C Vaish (1981) gave his own definition of monetary policy this is meant/ the Central Banks control over the supply and cost of money as an instrument for achieving the objectives of economic policy of the government.

Chapter Five

Summary, Conclusion and Recommendation

5.1 Summary

The monetary policy which is one of the policy tool that can be used to achieve the.- macro-economic objectives of a nation is aimed at maintaining full employment, ensuring domestic price stability stimulating economic growth and development and” maintains healthy balance of payments equilibrium in order to evaluate the adequacy of its operation in the Nigeria economy, some economic tools are put into operation in order to achieve the above objectives some of these monetary policy, fiscal policy, price and income policy tools are not mutually exclusive this is the more reason why government should make use of these policy tools simultaneously to ensure the achievement of the stated objectives.

The instrument of monetary policy can be classified into two categories, firstly quantitative (general or direct) controls which comprise of open market operation, reserve requirement and Bank rate.

These are meant to regulate the level of credit, secondly qualitative (selective or indirect) controls which includes direction banking supervision, moral suasion etc are aimed at controlling specific type of credit and interest rate. However, not all these policies have been employed in Nigeria and even some of those employed could not property achieve its aim, this is because of under developed nature of our • financial system inadequate supply of necessary securities and the fact that interest rate in Nigeria depends on government directives and the forces of the market do not determine it.

It is so more when severe balance of payment pressure characterized the economy growth in 1997 and
1998 as a result of increase debt serve burden and accumulated trade arrears. The problem of unemployment worsened as fresh graduates and more retrenched workers swelled the already saturated labor market.

Furthermore, there was acute shortage of inputs necessary to sustain industrial production to a satisfactory level.

The important of raw materials, finished goods and food stuffs became the order of the day. However, the target to follow a particular action or sectors by the Federal Government are not always achieved through the financial institutions because of those institutions are to maintain a balance between liquidity and profitability so as to have higher dividends for their share holders. No wonder therefore that vital areas (production sector) needed for development of the country were neglected.

5.2 Conclusion

It has been discovered at this present stage of economic development in Nigeria that not such effort had been concentrated on monetary theories and policy. As a result not many people can say with any measure of certainty that monetary policy has actually brought about the desired goals and objectives in Nigeria economy. As a reason that seems for’ this is the wider developed nature of our financial systems couple with inadequate statistical data or virtually all economic objectives and the constant change on monetary policies necessitated by different desired goals and objectives of different government in Nigeria since independence.

Therefore, in the face of these, it was found necessary that research work should be carried out on these issues of monetary policy. It was also discovered that most of the propounded monetary theories cantered mainly on demand for money. It was identified that interest rate and monetary aggregate were the major indicator of monetary policy and discovered that both the quantitative and qualitative control instrument of monetary that were used in Nigeria were aimed at bridging the gap between the different goals and Objectives in the economy.

Examining the trends of monetary policy under the reviewed period, it was realized that each phase of light monetary policy was follow by another phase of easy monetary policy and each phase lasted or a period of two and a half years. The aim of the policies during the observed period were to ensure price stability, maintain pull employment, stimulate economic growth, maintain a healthy balance of payment position, encouraging local and infant industries in areas of production level and so 011. These policies were embodied in the monetary circular issued annual by the Central Bank of Nigeria to all banks in the country. The guideline enables the CBN to control the volume of-credit to the economy.

In the light of these, it was observed that there were conflicting interest between the aims and objectives of the different monetary policy. For, instance, the monetary policy growth would have opposite effect because while reducing inflation economic growth will be retarded.

Deduction from these finding show that rnajority of the policy instruments have not been, effective due to the underdeveloped nature of our financial system. The banks do not comply with CBN set guidelines. There is usually positive deviation iron? the prescribed target. The low and inflexible interest rate structure had inhibited the development of aviable money and capital market and this had made it impossible to use some conventional technique of monetary policy i.e open market operation. The problem of information lay persisted and the effected of a policy adopted is not felt before another one is formulated.

Coupled with the above is the government reliance on the banking system to finance a huge amount of its budget deficit. This has also hindered the effectiveness of monetary policy in Nigeria. Moreover the problem of inflation, unemployment, deficit balance of payment position, devaluation of the Naira value (foreign exchange rate of Dollar to Naira) is still in the economy.

Finally, it could be said however that the economy has experienced rapid development in the industrial sector building construction, agricultural sector and banking sector, as a result of the policies pursued during the observed period.

5.3 Recommendation

Base in the about findings, the following recommendations are made:

The government should try to make a review of its monetary policy and should avoid change in the policy due to change in government.

A policy should be allowed to last for a period of four years before another one is formulated so that the impact of the policy on the economy could be felt.

The low and inflexible interest rate structure should be restricted. Alternatively, interest rate determination should be left to the forces of demand and supply in order to have a well developed financial system, this as well enable our banking sector to perform up to expectation’s inflow and out flow of capital will be monitored. It would also allow the -uses of powerful monetary policy tools which are not redundant (i.e open market operation)due to the under developed nature of our financial system.

Money policy is only one of. the policy tools that can be used to achieve the macro-economics objective of a nation. Others are it price and income policy as well as the fiscal policy. It is therefore suggested that these policy tools should used simultaneously to ensure the achievement of the stated • objectives. Authorities responsible for formulation and execution of these policies should be directly related in order to avoid contradiction on any policy taken. The aims of these bodies should be centered on how to resolve the macro-economic problems are in the economy.

5.4 Limitation of the Study

However, some limitations shall be encountered in the process of this research work. The researcher will face the problem of time constraint for carrying out the research work the most of all in the limitation is that of data collection which will be treated confidentially, because of how utmost it is to the banks which the data are soured, In spite of all these problems, the researcher hope to obtain the required data and Other necessary information that will be of importance to making the project study a meaningful one.

The Role Of Monetary Policy And Its Impact On Nigerian Financial System (A Case Study Of Central Bank Of Nigeria)

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The Role Of Monetary Policy And Its Impact On Nigerian Financial System (A Case Study Of Central Bank Of Nigeria)


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