THE IMPACT OF MONETARY POLICY ON THE PROFITABILITY OF BANKS IN NIGERIA

CHAPTER ONE
INTRODUCTION

Banks are the most regulated of all business in Nigeria. This is because of the nature of banking itself and its centrality to the effective functioning of the economic system.

The importance and centrality of the banking system in the development of an economy is obvious and beyond dispute. It plays some roles which include financial intermediation provision of an efficient payment system and facilitating the implementation of monetary policy

On intermediation the banking system mobilizes savings form the surplus and channel them to investment in operating the payment mechanism the system serves as a medium for exchange and in execution of monetary policy, the system serves as agents through which the policies are disseminated

However without banks arrangement savings and investment will not only be inefficient but may lead to less than optimum resources allocation.

Accordingly an efficient and effective system is indispensable not only for the promotion of efficient intermediation but also for the protection of the depositors encouragement of a healthy competition and the stability of economy.

The degree of success of bank in performing the above functions however depends on the financial and regulatory environment which in itself is a function of the totality of the environment in which it operate.

1.1 BACKGROUND OF THE STUDY

In order to have a clear understanding of the subject matter ie. “ the impact of monetary policy on the profitability of commercial banks. It is important to highlight what monetary policy is all about. The term monetary policy according to Dr. Ojih (1996) can be defined as the credit control measures adopted by central bank to control the supply of money as an instrument for achieving the objectives of general economic policy. It involves expansion and contraction of money supply the manipulation of interest rates to make borrowing easier or more difficult depending on the pervading condition of economy expansionary measure is adopted when the central bank wants to increase money supply. On the other hand concretionary measure is adopted when the central bank wants to reduce money supply.
1.2 STATEMENT OF PROBLEM

Banks generally play important role in the development of any economy. Hence the industry is so sensitive that it is said to be the backbone of every economy. The failure of bank (commercial banks in particular) may therefore bring about failure of the entire economy hence the need to control the activities of commercial banks to ensure effective economic development.

Consequently the government had always tried to have effective control over commercial banks; but due to the banks quest for project maximization they have not always complied with guidelines used by the monetary authorities.

This problem of in compliance equally made it relatively impossible for the achievement of the objectives of monetary policy.

However, the problem which the research wants to point out is the handicap being faced by commercial banks in trying to strike a balance between liquidity and profitability as imposed by the governments monetary policy

1.3 OBJECTIVE OF THE STUDY

Generally the objectives of monetary policy includes.

– The control of inflation and maintenance of relative price stability.

– The promotion of a fast and desirable rate of economic growth and development

– The maintenance of a low level of unemployment

– The maintenance of a healthy balance of payment position for the country in order to safeguarded the external value of the natural currency.

– Increasing the flow of credit to the priority sector of economy especially the agricultural and manufacturing sector.

– The mobilization of increased domestic savings to facilitate domestic capital formation.

– Protecting local form unfavorable foreign competition and smugglers reducing indebtedness abroad and generating more revenue especially form the non-oil sector of the economy.

1.4 SIGNIFICANCE OF THE STUDY

The significance of monetary policy cannot be over emphasized. This if there is inflation or excess demand causing imports to rise monetary policy is used to reduce the demand. On the other hard if the rate interest rates are reduced through monetary policy borrowing is encouraged and the community will benefit.

As mentioned earlier the objectives of monetary policy are price stability employment and balance of payment equilibrium which are of paramount importance in economic development. The research neeks to present the main concept and operation of monetary policy measure is Nigeria to see if it has been effective in achieving those objective and how the policy effects the profitability of commercial bank.

1.5 DEFINITION OF TERMS

According to Onyido (1991) monetary policy could be defined as the combination of measures designed to regulate the supply of money to an economy. Specifically it is designed regulate the availability (or quantity) coast and direction of credit in order to attain stated national economic objective.

It ensure that the supply of money and cost of credit to an economy is adequate to support desirable and sustainable growth generating inflationary pressures that could lead to under depreciation in the value of the local currency. A country monetary policy is usually structured on the monetary system adopted in the economy.