THE IMPACT OF MONETARY POLICY ON THE FINANCIAL PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA

ABSTRACT

This research examined the Impact of monetary Policy on the financial performance of Deposit Money Banks in Nigeria. Specifically, the study establishes the effect of Central Bank Rate (CBR) on the financial performance of Deposit Money Banks, it also establish the effect of Reserve Ratio Requirement on the financial performance of Deposit Money Banks. The methodology used for data collection was mainly from primary source which included questionnaire and personal interview in order to have knowledge of Monetary Policy on the financial performance in UNION BANK PLC. Information was also gathered from the secondary source which includes literature review of previous research, consultation of textbooks and internet. Simple percentage and Chi-square statistical method were used to analyse the data collected before reaching conclusion. The findings of the research indicated that deposit money bank policy affect banking operations in its bid to regulate money supply in the economy with particular reference to deposit and credit creation. The recommendation is that while bank size was found to lead to better financial performance, it is important that banks understand the source of its funds and the costs associated with the funds.

  TABLE OF CONTENTS

CHAPTER ONE: INTRODUCTION

1.1 Introduction

1.2 Background to the study

1.3 Statement of the problem

1.4 Objectives of the study

1.5 Research questions

1.6 Statement of hypothesis

1.7 Significance of the study

1.8 Justification of the study

1.9 Scope of the study

1.10 Definitions of terms

CHAPTER TWO: LITERATURE REVIEW

2.0 Introduction

2.1 Conceptual Framework

2.2 Theoretical Framework

2.3 Literature on Subject Matter

CHAPTER THREE: RESEARCH METHODOLOGY

3.0 Area of Study

3.1 Research Design and Sources of Data

3.2 Study Population and Determination of Sample Size

3.3 Instrumentation

3.4 Procedure for Data Collection and Data Analysis

3.5 Limitation of the Study

CHAPTER FOUR: DATA ANALYSIS, FINDINGS AND DISCUSSION

4.0 Introduction

4.1 Data Analysis and Findings

4.2 Test of hypothesis

4.3 Discussion of findings

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary

5.2 Conclusion

5.3 Recommendations

5.4 Suggestions for Further Research

References

Appendix

  LIST OF TABLES

Table 4.1.1 Sex distribution of the respondent

Table 4.1.2 Age distribution of the respondents

Table 4.1.3 Marital Status of the respondents

Table 4.1.4 Academic qualification of the respondents

Table 4.1.5 Year of Experience of the respondents

Table 4.1.6 Is there any Impact of monetary policy on the financial

performance of deposit money banks in Nigeria?

Table 4.1.7 Does your deposit money bank protect the helpless depositors?

Table 4.1.8 Does deposit money bank put inflation into check?

Table 4.1.9 Does Central Bank Rate has effect on the financial

performance of deposit money banks in Nigeria?

Table 4.1.10 Does Deposit Money Banks create sustainable friendly

banking environment in Nigeria?

Table 4.1.11 Does Deposit money bank imposes or prescribe penalty

on any defaulting financial institution?

Table 4.1.12 Does deposit money bank policy affect banking operations

in its bid to regulate money supply in the economy with

particular reference to deposit and credit creation?

Table 4.1.13 Does Reserve Ratio Requirement has effect on the financial

performance of Deposit Money Banks in Nigeria?

Table 4.1.14 Has Central Bank of Nigeria gone far in its achievement

of regulating money supply?

 Table 4.1.15   Do you think monetary policy has improve the industries in

Nigeria as a whole?

Table 4.1.16   Is there any impact of exchange rate on the performance of

deposit money bank in Nigeria?

Table 4.1.17   Are there importance of monetary tools in achieving the

desired control through bank operations?

Table 4.2.1: Testing of the 1st Hypothesis

CHAPTER ONE

1.1 Introduction

The financial sector is mainly significant to formal activities that are relevant to the economic activities in Nigeria. This has made it mandatory for monetary policy instruments to become crucial in driving the activities of the Nigeria economy. It has therefore been well observed in Nigeria as well as all other developing countries that prudent monetary policies are the key stone to effective regulations as well as supervision for the growth of any country’s banking Industry. By effective manipulation of monetary instruments, the growth rate in the supply of money can be influenced by the Central bank in many ways, namely, availability of credit interest rate level and availability of liquidity from the banking sector. All these can affect the investment, production, consumption of individual as well as government spending. Omankhanlen (2014).

Business cycle evenness, financial crisis prevention, rate of interest stabilization in the long run, the rate of exchange in real terms has recently been identified as objectives supplementary to monetary policies due to global financial crisis weaving which overwhelmed both emerging and developed economies of the world (Mishra and Pradhan, 2013). Nigerian banks generally believe that there is great risk in lending to the manufacturing and agricultural sectors of the economy, hence, their apathy in giving credit to these sectors of the economy, though these sectors hold the key to the development of the economy especially in employment and foreign exchange generation.

A solid and stable financial sector is essential to make a well-functioning national economy and ensure balance liquidity within the economy. Appropriate liquidity management is essential to foster economic growth. Though, to achieve economic stability proper uses of fiscal and monetary policies are required. Despite establishing regulatory agencies and monetary policy committees, Nigerian banks have actually been deterred in creating adequate liquidity and additional credit for the sustenance of the entire economy.

The Central Bank of Nigeria (CBN) over the years, have instituted various monetary policies to regulate and develop the financial system in order to achieve major macroeconomic objectives which often conflict and result to distortion in the economy. Although, some monetary policy tools like cash reserve and capital requirements have been used to buffer the liquidity creation process of deposit money banks through deposit base and credit facilities to the public.

Monetary policy remains a critical tool in stimulating the growth and stability of financial institution in most developing economics. In Nigeria, the objectives usually include promoting monetary stability. Strengthening the external sector performance and generating a sound financial system that will support increased output and employment. Monetary policy is 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 specific macro-economic policy objectives (Ndugbu and Okere, 2015).

Monetary policy according to Anyanwu (2009) involves a deliberate effort by the monetary authorities (the Central Bank of Nigeria) to control the money supply and credit conditions for the purpose of achieving certain broad economic objectives.

Central bank also determines certain targets on monetary variables. Although, some objectives are consistent with each other’s, others are not, for example, the objectives of price stability often conflicts with the objectives of interest rate stability and high short run employment. The role of the banking industry in development process cannot be over-emphasized as they play so many functions. The most important banking industry in Nigeria is the deposit money banks. In order to make profit, deposit money banks invest customer deposits in various short term and long term investment outlet, however core of such deposits are used for loans. Hence, the more loans and advances they extend to borrowers, the more the profit they make (Solomon, 2012). Prior to 1986 direct monetary instruments such as selective credit controls administered interest and exchange rates, credit ceilings, cash reserve requirements and special deposits to regulate the banking system were employed. The fixing of interest rates at relatively low levels was done mainly to promote investment and growth. Occasionally, special deposits were imposed to reduce the amount of excess reserves and credit creating capacity of the banks.

1.2 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, 2013; Kolapo, Ayeni and Oke, 2017; Mohammed, 2017). 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 nation’s economic growth as well as the long-term sustainability of the banking industry (Kolapo, Ayeni, and Oke, 2017; Mohammed, 2017). 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 2017). 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 (2010) 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 (2013), 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, 2013). 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.

Generally, the primary objectives of monetary policy are 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 them 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.

1.3 Statement of the Problem

Monetary policy is one of the principal economic management tools that governments use to shape economic performance. Measured against fiscal policy, monetary policy is said to be quicker at resolving economic shocks. Monetary policy objectives are concerned with the management of multiple monetary targets among them price stability, promotion of growth, achieving full employment, smoothing the business cycle, preventing financial crises, stabilizing long-term interest rates and the real exchange rate. Experience shows that emphasis is usually placed on maintaining price stability or ensuring low inflation rates.

The Central Bank of Nigeria is responsible for the recommendation and implementation of monetary policy tools in Nigeria. The CBN recommends the CRR, CBR and Treasury bill rates. Those tools are implemented through deposit money banks and they are aimed at stabilizing the price levels in the economy. The use of cash reserve ratio affects the level of liquidity in the deposit money banks. When commercial banks are faced with limited liquidity, they turn to other deposit money banks for inter-bank borrowing. Those funds are borrowed at the CBR and it is usually very high, which affects the interest expense for the borrowing bank and the interest income for the lending bank. The other way to increase liquidity in the bank will be to borrow by floating a debt instrument. The rate offered for the debt instrument is also tied to the treasury bills or treasury bonds issued by the government through the Central Bank. These effects of the monetary tools are expected to have an effect on the financial performance of deposit money banks.

Several research studies have been done in relation to Deposit Money Banks in Nigeria: Gitonga (2015) studied the relationship between interest rate risk management and profitability of deposit money banks in Nigeria; Kimoro (2015) did a survey of the foreign exchange reserves risk management strategies adopted by the Central Bank of Nigeria and Mbotu (2015) did a study on the impact of the Central Bank of Nigeria rate (CBR) on deposit money banks’ benchmark lending interest rates. Ongore and Kusa (2013) study examined the effects of bank specific factors and macroeconomic factors on the performance of deposit money banks in Nigeria during the period from 2001 to 2010. Kiganda (2014) carried out a study on effect of macroeconomic factors on the profitability of deposit money banks in Nigeria with a focus on Union Bank.

This study has identified a gap in the current literature and research with respect to monetary policy and its effect on financial performance of deposit money banks. The literature reveals that while there is much effort by the government to influence the money supply by instituting various policy tools, an analysis on the effects of those tools on deposit money banks’ financial performance, which are the most used channel of transmission of the policies, is inconclusive. This study will therefore be motivated to fill the knowledge gap on effects of the various monetary policy tools on financial performance of deposit money banks in Nigeria with firm size as the control variable.

1.4 Objectives of the study

The general objective of the study is to determine the Impact of monetary policy on the financial performance of Deposit Money Banks in Nigeria. The specific objectives are as follows:

i. To establish the effect of Central Bank Rate (CBR) on the financial performance of Deposit Money Banks.

ii. To establish the effect of Reserve Ratio Requirement on the financial performance of Deposit Money Banks.

1.5 Research Question

i. Does Central Bank Rate (CBR) has effect on the financial performance of Deposit Money Banks?

ii. Does Reserve Ratio Requirement has effect on the financial performance of Deposit Money Banks?

 1.6 Statement of Hypothesis

H0: There is no significant relationship between monetary policy and financial performance of Deposit Money Banks in Nigeria.

H1: There is significant relationship between monetary policy and financial performance of Deposit Money Banks in Nigeria.

1.7 Significance of the Study

The study helps us understand the impact of an effective monetary policy regime on the performance of the Deposit Money Banks. It would aid the regulators to carefully plan and forecast the effects of its policies to meet its objectives of economic growth and full employment. To bankers, it would expose the relationship existing between our relevant variables, which will be of interest to them in their respective banks. This would also benefit the academic community which would avail them the opportunity of conducting further research in the topic of similar areas.

The study is expected to contribute to the existing literature in the field of monetary policies. Future scholars can use this research as a basis for further research in the area of monetary policy theories.

The study will also enlighten management teams of commercial bank on the short-term and long-term effects of the monetary policy implementations by the Central Bank. This will greatly help them in designing the risk management measures to employ given anticipated changes in monetary policies.

1.8 Justification of the Study

The outcome of this study will be a little guide for the deposit money banks on how to overcome the Impact of monetary policy on their financial performance in Nigeria.

The research will also serve as a source base to other scholars and researchers interested in carrying out further research in this field in future. The study therefore will extend the frontiers of the existing literature by emphasizing the Impact of monetary policy on the financial performance of deposit money bank in Nigeria.

1.9 Scope of the Study

The scope of this research work is to examine the effects of monetary policy on the financial performance of deposit money bank in Nigeria. In which Union Bank Plc. was use as a case study. However, the research was limited to Union Bank Plc in Ibadan metropolis due to the schedule of researcher

1.10 Definition of Terms

1.10.1 Financial Performance

Financial Performance analysis refers to analytical tools to measure the strength and weakness of a firm in relation to its balance sheet and profit and loss statement. Examples of bank financial performance tools and ratios include operating income, earnings before interest and taxes, Total Asset value. Financial performance analysis is carried out to ascertain the profitability position and performance of a firm. It can be conducted by management, owners, creditors, investors as demonstrated by Chenn (2011).

1.10.2 Monetary Policy Rate (MPR)

Minimum Rediscount Rate (MRR) now known as Monetary Policy Rate (MPR) was used to signal the desired direction of interest rate movement (Nwude, 2013).

 1.10.3 Deposit Mobilization

Deposit Mobilization measures the aggregate mobilization of deposits in the economy. Deposits are bank accounts that allow the owner of the account (creditor) to make demand on banks. They include demand, time and savings and money market deposit account.

1.10.4 Credit to the Private Sector

Domestic credit to private sector by banks refers to financial resources provided to the private sector by other depository corporations (deposit taking corporations except central banks), such as through loans, purchases of non-equity securities, and trade credits and other accounts receivable, that establish a claim for repayment. For some countries these claims include credit to public enterprises (IMF, 2016).

1.10.5 Loans and Advances

Loans refers to a debt provided by a financial institution for a certain period while Advances are the funds provided by the banks, which needs to be payable within one year

1.10.6 Liquidity

The ability of a bank to meet its current obligations when they are due, and is normally a short term debt measures.

1.10.7 Reserve Requirement

This refers to the proportion of total deposit liabilities which the commercial and merchant banks are expected to keep as cash in vaults and deposits with the Central Bank of Nigeria.

1.10.8 Quantitative Directives

These are directives from the Central Bank of Nigeria to the banks and other financial institutions under its control as to the total amount of money which they may lend.

  1.10.9 Financial System

The channel or conduct through which the sayings of surplus sectors (the household) flow to the deficit sectors (business organizations).

1.10.10 Monetary System

A system whose main function is the provision of adequate stock of money or currencies i.e.