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PROJECT TOPIC- Effectiveness Of The Indirect Monetary Control Policies Of The Central Bank Of Nigeria On Cost And Availability Of Bank Credit

 Effectiveness Of The Indirect Monetary Control Policies Of The Central Bank Of Nigeria On Cost And Availability Of Bank



Monetary Policies are policies set up by the Central Bank of a nation to regulate the Monetary Supply Outstanding in the economy. Monetary policy seeks
to influence not only the availability but also the cost of credit. This research is aimed at identifying some if not all of the causes of the various changes in the volume of credit extended by banks to the government and private sectors as well as assessing the effectiveness of tlie Indirect Control tools
in controlling bank reserves and the cost of their credit. In conducting the research the use of oral interviews and secondary data was made to collect the necessary data. The First Bank of Nigeria Plc was used as a sample case study.

The collated data were statistically analyzed by the use of the students T-test, Upon the application of this test it was discovered that Indirect Monetary
Control has not sufficiently addressed the issue of availability and appropriate pricing of credit. ‘This was discovered to be a consequence of excessive public sector deficit spending, the narrowness of the Nigerian financial markets as well ,is the fact that the Nigerian Money and Capital markets are both inadequate and under developed among other factors. Based on these finding the following recommendations were made:

Government should ensure a much closer co-ordination of both fiscal and monetary policies;. the securities market has to be further developed,
government should check its extra budgetary spending as well as ensure a conducive political climate in order to encourage investment.
In conclusion the researcher observed that the apparent ineffectiveness of illicit monetary Policy in controlling the volume and pricing of banks
credit and ultimately enhancing economic growth was due to the impact of inflation on t l economy. In the absence of these policies the economy
would probably have been in chaos.


Effectiveness Of The Indirect Monetary Control Policies Of The Central Bank Of Nigeria On Cost And Availability Of Bank





1.2 Statement of the Problem:

Monetary policies in Nigeria have undergone several changes since the 19717, In consonance with the changes in the economic environments and the
objective of the monetary authorities at each particular time. In the 1970, the specific objectives of the Monetary Authorities were the maintenance of relative price stability and a healthy balance of payments position as well as the acceleration of pace of economic development. Monetary control
,at that period depended on direct instruments such as selective credit controls and credit ceilings, interest rate controls, prescription of cash reserve requirements, exchange rate control and composition of special deposits. The most popular instruments as the issuance of credit rationing guidelines via setting the rates of change for the aggregate and components of commercial bank loans and advances and specification of a sectoral distribution of credit.

The latter measure was aimed at stimulating the productive sectors and consequently to stem inflationary pressures. By 1976i77 cash ratios were imposed on banks but this unfortunately failed to act as restraint on banks’ credit operations because such ratios were generally lower than those voluntarily maintained by the banks. Between 1980 and 1985 the Authorities continued with the direct monetary control policies but compliance with the credit  guidelines was still unsatisfactory. The banks only complied with the guidelines on the ceiling on credit extension when there was inadequate demand for credit from the private sector. This was no st obviously observed between 1982 and 1985 when the country’s economy was in deep recession.

Investigations revealed that between 1980 and 1981 banks exceeded their permissible credit growth sate of 30% by 3.3 and 5.2 percentage point for Commercial and Merchant Banks respectively. However in 1982 – 1985 they kept within the target growth rates even when it was limited to 7% in 1985.
As regards credit extension the Commercial and Merchant Banks both extended more credit to the less preferred sectors than was stipulated. Commercial banks were known to have achieved an average of 69.1 % as against the 75 76 of their total credit prescribed by the authorities to be extended to the less preferred sectors. Merchant banks on their own achieved 62-8% out of the 79% prescribed for them I11 the Structural Adjustment era of 1986 – 1991 there was total deregulation of the economy.

The complex selective credit controls of the  previous era were relaxed and in 1987 Interest Rates were made free of controls. To reduce credit expansion by banks the credit ceilings were reduced and some liquidity mopping measures were put in place. These measures were ineffective in achieving their objectives owing to the increase in aggregate bank credit to the economy and thus banks’ performance with regards to credit Ceiling and Sectoral credit guidelines was very poor. Even after the re-introduction of Stabilization Securities in 1990 the desired stability in Money Stock Outstanding remained
elusive and banks (both Commercial and Merchant) were persistently extending more credit than prescribed to the less preferred sector. Although records would show a sustained growth in aggregate bank credit to the economy there is much empirical evidence to suggest that actual credit flow for productive ventures have declined in preference for investment in treasuries and trading activities.

This was because the banks were lending to the preferred sectors who in turn were not supporting them thus leading to distress in most banks whereas the investments in treasures and trading activities as well as dealing in foreign exchange were quick ways of making profit. The Monetary Authorities saw the danger of starving the preferred sectors (Agriculture, Small Scale Enterprises, etc) of the needed funds and decided to take measures to arrest the  situation. This prompted the CBN to introduce Indirect Control tools with a view to stabilizing the Money Supply as well as compelling the banks to
conform to the prescribed guidelines as regards credit expansion and extension to the various sectors of the economy.


 Effectiveness Of The Indirect Monetary Control Policies Of The Central Bank Of Nigeria On Cost And Availability Of Bank

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