are several factors that affect the performance of banks. In this research work
profitability shall be used as the performance indicator of banks. The mostly
direct factors that affect profitability are the· regulatory framework under
which banks operate. This framework can be divided into two broad aspects:
monetary and banking policies. In all economies, these policies are normally
rooted through banking institutions because of the vital roles these
institutions play in the intermediation process. Through this process, banks
play very important roles in determining the price of money and creation of high-powered money. This characterizes the
main functions of banks - mobilizing funds from surplus income units and
channeling this surplus to deficit spending units. However, such license to
create many is controlled by the Central Bank in the overall public interest.
For example, through the use of monetary policy instruments, banks are required
to hold reserves in form of cash in their vaults or a deposit at the Central
Bank, which is equal to certain fractions of their various types of deposits.
policy deals with the discretionary control of money supply by monetary
authorities in order to achieve stated or desired economic goals. Governments
attempt to control. the supply of money because they believe its rate of growth
has a significant effect on' the
inflation rate. ·.Therefore, monetary policy comprises those government's
actions, which are designee; to influence the bebaviour of the monetary sector. The policies-are desired: 'in an attempt. to change the trends of same monetary
variables in particular directions so as to induce the desired behavioural
change in the monetary sector. The Central Bank's role is to conduct
appropriate monetary policy that is consistent with the main economic
objectives of achieving real growth in Gross Domestic Product; low inflation
rate and a stable balance of payment position. This is irrespective of whether
direct or indirect approach is being used to control money supply and
availability of credit. The main objective of monetary policy is to ensure that
over time, the expansion of money and credit will be adequate for the long run
needs of the _ growing economy at stable prices.
order to optimize earnings for bank's shareholders, there is tile need for
banks to adjust their portfolio of assets and liabilities so as to meet the
profitability objective under the solvency and liquidity constraints. This
profitability objective - is greatly influenced- by the Central Bank's stance
on monetary and banking policies. Other factors such as managerial efficiency
of bank, labour cost, size and capital investment in banking, do influence
bank's profitability. The extent to which a bank succeeds in collecting
deposits and making a profitable use of such goes a long way in determining the
level of profitability of such a bank.
the impact of monetary policy variables on .bank's profitability and effectiveness
of monetary policy will be' considered in
this study. Profitability Is regarded' as art important
measure of a bank's performance: It is defined as the ability of banks-to make excess revenue over expenditure or excess
returns made in, the course of carrying out their business activities while
maintaining their liquidity and solvency requirement.
year the monetary authorities formulate policy guidelines geared towards the
enhancement and the effectiveness of policy variables designed to ensure'
optimal performance of Ute banking sector. But' in the implementation of such
policy variables, banks encounter certain problems. The problems that banks
encounter include inability to comply with the various monetary policy
guidelines. For instance, a change in the required reserve ratio alters the
magnitude of money multiplier, credit expansion, money supply, and hence banks
profitability. Similarly" the use of interest rate policy, credit ceilings
and discount rate policy among other policy instruments are meant' to alter the
level of profitability of banks.
problem is in the event of stringent policies faced by banks that are used in
regulating their levels of profitability. For instance, the use of
stabilization securities has met with bitter complaints from bankers.
are diverse groups in the society that have investment interest in the Nigeria
banking system and bank profitability. Therefore banks must be reasonably
profitable. Reasonable returns also reassure
the' depositors that the business is efficiently managed. It, has been agued
that' unprofitable banks are likely to be liquidated and distressed:
in Nigeria' the rising cases' of bank distress
have become a.' major source of concern. for Policy makers. Between 1994 and
2004, a total of 33 banks were closed (Adam 2004) and about five (5) banks was
summoned in 2009. Monetary authorities attempt at achieving broad economic
objectives through monetary control. To achieve these, Central Bank of Nigeria
employs various instruments such as Open Market Operation (OMO), Cash Research
Rate, Liquidity Ratio, and credit ceilings selective credit policies among
others. It should be noted that direct monetary control techniques were in
vogue, in the 1.960's, 1970;s and until June 1986.
resulted into inefficiency and misallocation of resources in the financial
system and at present the government has adopted the indirect tools and the use
of direct techniques has reduced and other problems confronting the monetary
policy there is the need to examine and analyse some fundamental issues and
prospects for monetary control in the nearest future in the Nigerian economic.
main thrust of the study shall be to evaluate the effectiveness of the CBN's
monetary policy over the years. This will go a long way in assessing the extent
to which the monetary policies have impacted on the economic growth process in
1.2 AIM AND OBJECTIVES OF THE STUDY.
aim of the study is to examine the relationship between monetary policy and
banking performance in Nigeria. The objective is broken down into the
examine the influence of monetary- policy variable on bank's. profitability.
highlight the various monetary policy measures that have been used for the
years under review on commercial banks.
examine way$ by which government authorities regulate banking operations in
examine the effectiveness of monetary policy measures used for the years under
various economic conditions.
1.3 SIGNIFICANCE OF THE STUDY
most African scholars and policy makers increasingly subscribe to a conventional
view of central banking. That view prioritizes the objective of monetary policy
much more strongly than did either theoretical orthodoxy or the African central
banks themselves in the 1960s and 70s. lt argues that central banks that fail
to specialize in monetary stability making low inflation a clearly overriding
priority as against output stabilization, fiscal support to government, or a competitive
real exchange rate - end up with excessive inflation and with no offsetting
gains in economic performance. Independent central banks statutorily charged
either primarily or exclusively with the goal of price stability, have become
the norm in theory and proposal if not
yet often in practice. There is little room here for an active development
role; rather, long-run growth is promoted through the maintenance of low
inflation, which increases investment and growth by reducing macroeconomic
modem 'view also recognizes: that, in order to, achieve-price stability on a
sustainable basis, however, the monetary authority may require some flexibility
with respect to the evolving economic and political environment. Rigid or
automatic policy rules may destabilize prices, for example, in the face of
shifts in key behaviour relationships like the' actions. If the pursuit of
price stability isso single-minded as to induce recession, the political
consensus within which the monetary authorities operate may be fractured.
the smooth functioning of the monetary system may itself be a necessary
concomitant of price stability. If the liquidity of monetary assets is
compromised by bank insolvency, or if the volatility of interest rates strongly
discourages the 'emergence or survival of efficient financial market, then
indirectly the objective of price stability has been impaired. It is evident
from the aforementioned that it is crucial to evaluate the performance of the
monetary policy in order to adopt appropriate measures that would ensure the
achievement of both primary and secondary goals of monetary policy in Nigeria.
1.4 RESEARCH METHODOLOGY
ordinary least square (OLS) technique shall be employed in obtaining the
numerical estimates of the coefficients in different equations. The. multiple
linear regression analysis will be used With Gross Domestic Product (GOP) as
the. dependent, variable while money supply, exchange rate and interest' rate
as the explanatory variables. The method would be .applied with the use of
statistical package for social sciences"(SPSS). '
1.4.1 Collection of Data
data shall be used in this research. This includes the use of relevant, text;
journals, annual reports, publication from Federal Bureau of Statistics and
Central Bank of Nigeria Statistical Bulletin etc.
1.4.2 Method of Data Analysis
study shall make use of econometric tools and basically regression analysis in
analysing the research problem.
+ ?1Exch + ?2Mst + ?3Int + µt)
= Gross Domestic Product
= Exchange Rate
Mst = Money Supply
µt = Error term
hypothesis to be tested given the above objectives is;
Monetary policy variables .such
as-exchange rate have no effect on bank's profitability.
Monetary policy variables such a
exchange rate have effect on bank's profitability. '
There is no significance relationship
between exchange rate and gross domestic product
Ha: There is a significance
relationship between exchange rate and gross domestic product (GDP).
There is no positive relationship
between the money supply (MS) and interest rate.
Ha: There is a positive
relationship between the money supply (MS) and interest rate.
1.6 SCOPE/LIMITATION OF THE STUDY
study will focus on the relationship between monetary, policy and banking
performance (probability). It is designed to cover 1986 to 2009. The years are
selected in order to capture the period of the deregulation while the study of
effectiveness of monetary policy will cover both before and after SAP's period.
'the major constraints on the study is the non-comprehension of official data.
Largely because of inadequate data, time, funds and resources limiting' the
research work to twenty three years.