The impact of monetary policy on the performance of deposit money banks in Nigeria

CHAPTER ONE

1.0   INTRODUCTION

1.1   BACKGROUND OF THE STUDY

The banking sector is largely dominated by commercial banks and by far the most important in any developing countries like Nigeria. Globally, the unique role of banks as the engine of growth in any economy has been widely acknowledged (Adegbaju and Olokojo, 2008; Kolapo, Ayeni and Oke, 2012; Mohammed, 2012). In fact, the intermediation role of banks can be said to be a catalyst for economic growth and development as investment funds are mobilized from the surplus units in the economy and made available to the deficit units. In doing this, banks provide and array of financial services to their customers. It can therefore be said that the effective and efficient performance of the banking industry is an important foundation for the financial stability of any nation. The extent to which banks extend credit to the public for productive activities accelerates the pace of a nations economic growth as well as the long-term sustainability of the banking industry (Kolapo Ayeni, and Oke, 2012; Mohammed, 2012). Similarly put, the banking institution occupies a vital position in the stability of the nation’s economy, it plays essential roles on fund mobilization, credit allocation, payment and settlement system as well as monetary policy implementation (Mohammed 2012).  In performing these functions, it must be emphasized that banks in turn promote their own performance. In other words, deposit money banks usually mobilize savings and extend loans and advances to their numerous customers bearing in mind, the three principles guiding their operations, which are profitability, liquidity and safety (Okoye and Eze, 2013). In Nigeria, Imala (2005) stated that the main objective of the banking system are to ensure price stability and facilitate rapid economic development through their intermediation role of mobilization savings and inculcating banking habit at the household and micro enterprise levels.

The commercial banks do add to or subtract from the stock of money available to the economy and they are also used as instrument through which the Central bank of Nigeria (CBN) perform one of its principal function of formulating and executive system and a stable economic growth. The Central Bank of Nigeria (CBN) carries out this responsibility on behalf of the government of Nigeria through a process outlined in the Central Bank of Nigeria Decree 24 1991. In formulating and executing monetary policy, the Central Bank of Nigeria governor is required to make proposals of the president of the Federal Republic of Nigeria who has the power to accept or amend such proposals, this implementing the approval monetary policy. The Central Bank of Nigeria directs to banks and other financial institutions to carry out certain duties in pursuit of approval monetary policy guidelines and circular, operational within a fiscal year but could be amended in the course of the year. Penalties are normally prescribed for non-compliance with specific provision of the guideline (CBN Briefs, Series no 95/03).

As a monitory device, the Central Bank of Nigeria conducts periodic and special examinations of the books of specified licensed financial institutional which is also required to submit regular returns on their operations to the Central Bank of Nigeria. In the Nigeria socio economic setting, several monetary policy measures led emerged for arresting the dynamic economic system of the country. The Central Bank of Nigeria at period attempts to keep the money supply growing at an appropriate to ensure sustainable growth as well as domestic and eternal stability and using the discretionary control of money stock by expansion or contraction of money, influencing interest rate to make money cheaper or more expensive depending on the prevailing economic conditions and trust of policy.

Oloyede (2008), the monetary authorities usually rely on the manipulation of monetary policy for the purpose of credit control budgeting discipline, price stability, economic growth, full employment and balance of payment equilibrium. The techniques by which the monetary authority tries to achieve then aims through the implementation of monetary policy measures must have certainly impacted positively or otherwise on the performance of commercial banks in Nigeria, amongst other financial institution. The level and structure of interest rate, money supply and growth of the banking sector competitiveness and liquidity management are some of the elements that fall under the impact analysis in this research study. This research work intends to identify the monetary policy measures used by the Central Bank of Nigeria, their efficacies and impact on the performance of banks in Nigeria.

In the past decade, significant changes in the design and conduct of monetary policy have occurred around the world. Many developing countries include: Nigeria have adopted various policy measures to achieve targeted objectives. The monetary policy is essential to achieve desired objectives which traditionally includes promoting economic growth, achieving full employment level, reduction in the level of inflation, maintenance of healthy balance of payment, sustenance of growth in the economy, increase in industrialize and economic stability.

The smoothing of the business cycle, preventing financial crisis and stabilizing long term interest rate and the real exchange late have been identified recently as other supplementary objectives of monetary policy because of the weaving global financial crisis which engulfed major development and emerging economic in the world (Mishra and Pradhan, 2008). For most economies the objectives of monetary policy includes price stability, maintenance of balance of payments equilibrium, promotion of employment and output growth sustainable development. These objectives are necessary for the attainment of internal and external balance, and the pranstion of long run economic growth. The importance of price stability derived from the harmful effect of price volatility which undermines the objectives. This is indeed a general consensus that domestic price fluctuation undermines the role of monetary values as a store value and frustrates investment and growth.

The success of monetary policy, depends on the operating economic environment, the institutional framework adopted and the implementation of monetary policy is the responsibility of the Central Bank of Nigeria (CBN). The mandate of the Central Bank of Nigeria as specified by the CBN Act of 1958 includes:

v Insurance of legal tender currency

v Maintaining external reserves to safeguard the international value of the currency.

v Promoting monetary stability and a sound financial system.

v Acting as banker and financial adviser to the government

However, the current monetary policy framework focuses on the maintenance of price stability which the promotion of growth and employment are the secondary goals of monetary policy. The performance of monetary policy depends on some legal framework upon which it operates. The legal framework and quantitative, general or indirect and secondly, qualitative selective or direct the effect on the level of aggregate demand through the supply of money cost of money and availability of credit. Out of the two types of instruments, the first category that includes banks are variations, open market operation and required reserve ratio. They are meant to regulate the overall level of credit in the economy through commercial banks. The selective credit control aims at controlling specific types of credit. This includes changing margin requirement and regulation of consumer’s credit (Jhingan 2003).

Monetary policy is important in its own right from the past view of monetary economists and policy maker’s interns of its impacts on the economy, of all tools available to government for directing the cause of the economy, monetary policies have proven to be stabilization objectives (CBN guideline 2002). Indeed monetary policy formulation and implementation emerged as a critical government responsibility so that the economy does not go stray. Policies are made not only for their own sake rather for achieving some desired goals over a given period of time.

Generally, the primary objectives of monetary policy is concerned with the application of expansionary monetary policy measures during economic recession and contractionary. Monetary policy controls money supply because it is believed that its rate of growth has an effect of inflation. The basic aim of monetary policies is not to aggregate themselves but to aggregate the real sectors of the economy such as level of capital price stabilization and economic development. Policies are designed in order to change the trend of some monetary variable in particular direction so as to include the desired behavioral change in the monetary policy. The Central Bank’s role is to conduct appropriate monetary policy that is consistent with the main economic objective that will help the growth of gross domestic product (GDP) sustainable inflation and stable balance of payment position. This is done by putting in place the direct or indirect monetary approach so as to control monetary trends.