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PROJECT TOPIC- A CRITICAL APPRAISAL OF THE EFFECTS OF MONETARY POLICY ON COMMERCIAL BANKS IN NIGERIA

PROJECT TOPIC- A CRITICAL APPRAISAL OF THE EFFECTS OF MONETARY POLICY ON COMMERCIAL BANKS IN NIGERIA

 

ABSTRACT

Governments the world over due to the failure of Adam Smith’s “invisible hand” to regulate economic activity in a manner that will achieve certain desired goals such as low inflation, full employment, balance of payment equilibrum and equitable income distribution have had cause to deliberately attempt to influence the course of economic activity through several policy options. a number of such options are categorised as Monetary Policy and are geared towards influencing the quantity, cost and direction of money supply in the economy.
This study is focused on the influence of various policy measures on commercial banlts. The importance of banking institutions to the realisation of Monetary Policy objectives is best appreciated when it is realised that they are in the main, channel through which policy measures are made to bear on the real sector of the economy.
-. An understanding of the evaluation of the Nigerian Banking System as a component of the Financial System is therefore imperative as background
knowledge on which this study is premised. This we attempted in Chapter One. The Nigerian Banking System is part of the country’s colonial heritage which over the years has undergone certain changes to suit indigenous purposes.
However, available literature still point to problems of inadequate financing of certain key sectors vital to econonlic development and self reliance. There are also problems resulting from the underdeveloped stage of the Financial System as a whole which has proved to be a hindrance to the achievement of both internal and external economic balance. The banks have not really lived up to expectations and so gaps exist in the network as can be recognised from the fact quite a large percentage of the country’s money supply is outside the banking system. This therefore, results in poor savings and in addition, the mechanism for channeling it into investment is faulty. Chapter Two examines the role of the Central Bank of Nigeria as the body
charged with Monetary Policy formulation and implementation and its effects on the business environment of banks. Here, the relationship between the
macroeconomic goals such as full employment, low inflation, economic growth and balance of payment equillibrum and the activities of the banks and the manner in which major instruments of Monetary Policy namely: Reserve Requirement, lnterest Rate Policy, Credit Ceiling and several quantitative credit control measures bear on banking institutions for the attainment of the goals, are all examined in detail.
In Chapter Three, the methodology to be adopted was designed to collect data that gives a wider knowledge of what is actually happening. ‘The Questionnaire and interview methods were used and the information gathered added up to the Findings, Recommendations and Conclusions.
In Chapter Four, relevant data were presented and analysed. Data was presented in a tabular form while percentage movement in variables was employed to aid analysis. Dependent variables such as deposit mobilization, bank loans and advances and their term structure, term structure of deposits, sectoral allocation of credit are analysed in relation to changes in poIicy variables such as discount rate, sectoral credit guidelines, credit ceiling, open market operations and variations in reserve requirements. Correlation coefficient was employed in testing the . strength of the relationship between credit ceiling and cominercial bank’s credit to the domestic economic. sectoral credit guidelines on preferred sectors and total credit to the preferred sectors, interest rate policy and commercial banking system’s savings and deposit composition and finally, credit ceiling and maturity
structure of commercial banlting system’s loans and advances. In Chapter Five, a summary of the findings from the study is highlighted and
recommendatioils and conclusions drawn up accordingly.

CHAPTER ONE

1.1 BACKGROUND OF THE STUDY

Monetary Policy is one of the important tools of economic policy governments apply in their aim of achieving general economic well being of the citizenry. It is geared towards controlling the quality, cost and direction of money in the economy. ‘Ihe economic system has over the years proved to be unstable and misdirected if left on its own. In order to avoid alterations between periods of boom and depression, the use of monetary policy becomes necessary. Monetary Policy could be aimed at stimulating or restraining the economy depending on what the authorities interpret changes in certain economic indices to be. The mechanism through which the impact of monetary policy is felt by the whole economy is the financial system.
The financial system has the all important of financial intermediation which in summary is that of channeling funds from surplus sectors to deficit sectors in the economy. It consists of a framework of laws, regulations and financial practices determining the flow * of financial resources.
l’he banking industry may be described as a subsystem of the financial system and so has an important role in execution of monetary policy measures. Monetary policy forms the major part of the environment within which bank operations are carried out, providing the banking industry with opportunities as well as constraints on the activities of the industry.
Furthermore, the frequency of changes in the monetary policy is a major contributor to the risk factor in the industry. The manner in which banlts react or respond to changes brought about by the monetary policy is of interest as the effectiveness of the industry.

PROJECT TOPIC- A CRITICAL APPRAISAL OF THE EFFECTS OF MONETARY POLICY ON COMMERCIAL BANKS IN NIGERIA

 

1.2 STATEMENT OF  PROBLEM

Banlting institutions like other private sector economic units have a tendency for having a narrow view of the objectives of their enterprise. The all important objectives is that of profit malting for shareholders and remaining in business.
The pursuit of this narrow objective often conflicts with overall objectives of government economic policy. Banlts for instance are ltnown to avoid the establishment of rural branches and have a preference for lending short because of the need to maintain liquidity. In addition, the banlts tend to favour commerce rather than manufacturing or agriculture in credit granting despite the fact that they make up the priority sectors. This inclinations of the system are not in sympathy with the aim of economic policy which is the development of a vibrant, self reliant and stable economy.
The question then is, to what extent has monetary policy measures affected the operations of banks and how far are the bank’s reactions to the increase in constraints occasioned by monetary policy been in sympathy with the aims and objectives of policy measures?

1.3 OBJECTIVES OF STUDY

This study is carefully carried out with the following objectives viz:
P To determine the effect of interest rate policy on banking system’s deposit mobilisation and coin binat ion.
i To ascertain the effect of open market operations on commercial banks investments.
P To ascertain the relationship between credit ceiling and maturity of the banking system’s loans and advances.
P To determine the relationship between credit ceiling and bank credit to the domestic economy.
Z To determine the effect of sectoral credit guidelines on bank financing of preferred sectors.
This study is significant to the extent that an understanding of the manner in which banks react to monetary policy measures is a starting point for the appraisal of the effectiveness of monetary policy. The findings may trigger off further research in this area of study that will better monetary policy formulation and application.

This study therefore is of importance to economic policy makers, bankers, the academic and students to mention bur a few.

1.5 HYPOTHESIS

PROJECT TOPIC- A CRITICAL APPRAISAL OF THE EFFECTS OF MONETARY POLICY ON COMMERCIAL BANKS IN NIGERIA

 

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