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THE IMPACT OF MONETARY POLICY ON BANKING INDUSTRY
ABSTRACT
Money is not neutral it is a contributing factor to the greatest economic problem any nation has to face the recurrent cycle of property and depression. It would be going to for to accuse money of being the cause of business cycles but without money business cycles as the know then would be inconceivable the simple exchange mechanism used in a barter economy could earthy get out of order an the way our highly complex financial machinery does just as business cycles (banks) could not exist without money so they could not exist without monetary policy to regulation its operations The aim of this work is to find out the impact of the monetary policy on the growth of banking industry on Nigeria the samples use in this work were colleted from 12bank in Nigeria covering a period of 20 years four hypothesis were stated to test the impact of the monetary policy on banks growth in Nigeria statistical tools used for the testing of the hypothesis ate data collection through questionnaire for hypothesis four and one Nevertheless the T test hypothesis was used for the second hypothesis and chi-square was used to test hypothesis one four analyzing the study it was found that the monetary policy has significance impact on the of banking industries in Nigeria. It was also noted that some of the policies are not practicable so respondents suggested that they should be abolished. In synopsis the study reveals that the lending rates of banks as determined by certify guidelines of the central banks of Nigeria have impact on the profitability of banks. This goes a long ways to from the regulatory authorities and the government to be on guard since there are advantages and disadvantages of the policy instrument.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO STUDY
It is a trite fact that the central bank of Nigeria (CBN) was established by the federal government of Nigeria to produce the Nigerian currency enact and execute monetary policy to promote monetary stability and a sound financial system in Nigeria. To regulate the banking sector through its monetary policies and laws which every banks must adhere to before its operations. The central banks of Nigeria carries out this role objective on behalf o the federal government through a process stipulated in the central bank of Nigeria decree No 24 1991 and the banks and other financial institution decree No 25 of 1991 Prior to the enactment of the monetary policy the governor of the central bank of Nigeria make proposals to the president of the federal republic of Nigeria who has the right and power to accept or amend where necessary such proposal. Thus once the proposal are authorized by the president it becomes a law, which the central bank of Nigeria is obligated to implement. The two enabling laws stated above empowers the central banks of Nigeria to direct the carry out other financial institutions to carry out certain duties in pursuit of the approval monetary policy. Usually the monetary policy to be pursued is detailed out in the from of guidelines to all banks. The guidelines are generally operated with in a fiscal years but the element could be amended in the cause of the year. Penalties are normally prescribed for non-compliance with specific provision in the guidelines.
The banking industrial plays a vital role in the development of the economy of any nation. Be that as it may among the industrial sectors in the country today one can say that the banking sector arouses the most visible and fastest growing sector in the Nigeria economy. Bank role in aiding the acceleration and expansion of the economic development of any nation particularly in serving, as an engendering in developing countries cannot be over emphasized. Articulating on the importance of its role (Fabanmi JO 1989) States “institutions which affects the body politic of a nation must be subjected to adequate and rational regulation and supervision otherwise a collapse of the entire system will be noticed due to unmanaged unattended and over regulated colossus”
The banking sector has become one of the critical sector and commanding heights of the economy use to effective participation in the direct of economic growth and transformation and such sensitive issues as the of unemployment inflation price stability or any other macroeconomic goal which directly affects the lives of our people. Gardner (1984p53) pointed out clearly that: In virtually all developed market economy the banking industry is more heavily regulated than other commercial and industrial sectors” banking is regulated from cradle to grave he conduced. Presently in virtually all-independent countries in both developed and undeveloped countries banks particularly commercial banks operate under constraints imposed on them by government through their central banks. In a developing country like Nigeria the position is not different.
The pressure for banking regulations and policies grew as people realized that the failure of a bank could mean the loss of a personal future or of a firms working capital. According to Nwankwo G.O (2010) “A run on one bank often generates uncertainly and panic among depositor of other banks in the community and the spill over of failure could in turn be transmitted to more remote part of the country. It therefore becomes situationally expedient that banks should be controlled because of the key role they plays with customers in saving and deposit investment process. Banks are regulated because their liabilities are “money” the quantity of which national authorities seek to control to achieve monetary stability.
In many countries inkling developing countries with undeveloped or competitive domestic banking system nationalism has dictated regulation of banking of nature and protect the domestic banking system and prevent it form take over or domination by foreign banks which may be inclined to give priority to commercial advantages or to another nation interest. It has been judicially notices that the banking industry is entrusted with a lot of responsibility and this is due to its direct and indirect influence in the overall performance of the whole economic system to thrive there must be regulations some legislation had been enacted to help in the process of economic and financial development banking laws on the other hand are in this country (Nigeria ) to regulate banking industry prevent bank failures and thus help to build strong confidence to he public in the banking sector.
The maximization of profit is the sole aim of those that invest in the banking business since banks are commercial business firms. Recently banks profit are increasing as a result of the more attention given to it by bank management supervisory authorities as well as stockholder with the resultant effect that the number of banks have multiplied in recent times. Top executives of banks in Nigeria are more concerned about profitability especially now that profit are no longer looking after themselves as they did in the 1970’s when the mobilization of crude oil exports created favorable economic conditions which benefited the Nigerian banking system very much. Moreover the recent deregulation of the banking industry under the structural adjustment programme (SAP) in July 1986 has added to pressure on bank management to work for satisfactory profit. Within this programme the economy has been up for bank to take advantage of the policy incentive to encourage of the policy incentive to encourage the efficient use of scare resources.
1.2 STATEMENT OF PROBLEM
Banks play a pivotal role in the nations economy. This is because of the function carried out by banks and other financial institutions. Such roles include: saving the people money for investment purposes acting as an institution that carries out payment services that is checks. Granting of demand or transactional deposit and undertakes commercial lending. This centrality on economic system singled the banking sector out for a much heavier regulation than any other activities (Johnson and John 1987 p2). Such function performed by banks are other financial institutions if not check or properly administered will lead to chaso and economics breakdown hence the need for monetary policy. This work would seek to find out form-satisfied analysis the impact, which the monetary policies have on the following:
a. The effect of the monetary policy whether it enhances or retained bank growth.
b. The development and growth of banking industry in Nigeria
c. Whether the depositors had confidence on banking operation
1.3 OBJECTIVE OF STUDY
The rate at which most banks failed in recent years has been tremendous and a common phenomenon. The regulatory period created the problem of competition survival of the fillets in the banking industry. The objective a this work is to find out the following:
a. The effect of monetary policy on the operation of banks.
b. The effect of the central banks
c. How the regulated rate period has resulted in efficiency of the credit allocation
d. How monetary policy curbed inflation and unemployment.
And lastly whether in the formulation of these measures the objective of the authorities and that of the economic as a whole had been meet
1.4 STATEMENT OF HYPOTHESIS
The following hypothesis are tasted in other to analyze the problem identified they are as follows:
a. No relationship exists between monetary policy and banks growth.
b. No relationship exists between monetary policy and profitability.
c. Whether the central bank guidelines will assist banks develops a seconds asset base
d. Whether the confidence of the depositors on banks is as a result of the monetary policy.
e. In addendum the following research hypothesis merits our consideration.
i. To what extent are monetary policies implemented.
ii. Does such monetary policy enhance or retard bank growth.
iii.Does monetary policy inspire depositors confidence on the bank operations
iv.In the face of all these what is the future of the banking industry in Nigeria
1.5 SCOPE OF THE STUDY
This project work is based on commercial and merchant banks operation in Nigeria and will cover the period of 1984-2004 it will also give a careful consideration on the monetary policies enacted during the period and its effect on the growth of the banking industry. A brief highlight of some monetary policy will be considered. The conclusion and recommendation of this work is predicated on the finding made through the data or research conducted
1.6 SIGNIFICANCES OF THE STUDY
This project work is designed to educate inform and enlighten people of the essence of monetary policy through these avenue:
1. It will be an assistance to those who will like to make further research on
Monetary policy
2. It will assist those who which to know what happens to bank when there is a change in the policies and regulations
3. It will be useful to promoters of a bank that are planning to invest in banking business with the aim of maximizing profit.
4. Through this work banks will know its limits in tending.
5. Banks customers are informed of their right in the banking industry
1.7 LIMITATIONS IF STUDY
The research work was carried out a long side with other academic works in the school. Time was one of the constraints in this work. As the emphasis of the research work was on the recent policies on the banking industry some data were lacking from the banks. More so most banks visited could not release its annual reports, which they said is a classified paper. The annual report and statement of account which forms the sources of vital data to test the effects of these polices were not easy to come by. There are also financial constraints with lack of library facilitates In synopsis the time we live in is so critical and hard to deal with such that one is limited to the resources available.
1.8 ORGANIZATION OF THE STUDY
The presentation of this project divided into five chapters chapter on which is ht introduction deals with the genesis and the relevance of this project work. It addresses issues such as the reasons that stimulates the writers interest on the topic the impact of monetary policy on the growth of banking industry. In Nigeria (from 1984-2004) and cap it up with the significance or importance of the research work factors militating its research its organizational layout and statement of hypothesis.
Chapter two on its part for clear understanding and appreciation of the subject matter starts with a historical development of the banking industry. It goes further to discuss succinctly the theory of banking policies as well as monetary policy in Nigeria and the significant effect on the structural adjustment programme. Chapter three brings out he data collection methods used and the statistical tools applied to Asses the validity of our observation from the sample space. Chapter four deals with the data analysis and findings Chapter five finally concludes our discussion on the impact of monetary policy on the growth of banking industry in Nigeria (1984-2004) by giving a summary of the pervious chapter and summed it up with recommendation.
REFERENCE
Abdullahi Y.I (2014) Effect of Government Deregulation Polices on Banks
Business Times Monday Augusts 5th Page 5.11
Agbelsi T.O (2010) Banks and the Society in the AD Paper Presented at the
Nigeria Institution of Banks 19th Annual Banking Seminar at Enugu August 31 Page 1-24
Agu G.C (2011) Management and Management of Banks Project and
Profitability Nigeria Management Review of June Page 33
Central Bank of Nigeria (2011) Presidential Guidelines for Licensed Banks in
Nigeria C.B.N
Fanumi J O and Eremi A.O (2015) Government Regulation and Control of
Bank Nigeria Business Law and Practice Journal Vol. 2 No September Page 47
Walter W. Haines (2016) Monetary Pric and Policy Published by Mearali Hill
Book Company
