IMPACT OF MONETARY POLICY ON THE PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA
1.1 BACKGROUND OF THE STUDY
Commercial banks are generally in charge of the banking industry, which is by far the most significant in emerging nations like Nigeria. Worldwide, it is commonly known that banks have a special role in driving economic growth (Adegbaju and Olokojo, 2008; Kolapo, Ayeni, and Oke, 2012; Mohammed, 2012).
In fact, it may be claimed that banks' intermediation role acts as an accelerator for economic growth and development by bringing investment funds from the economy's surplus units and making them available to its deficit ones. As a result, banks offer a wide range of financial services to their clients.
Therefore, it can be claimed that the banking sector's effective and efficient performance is a crucial pillar of any country's financial stability.
The pace of a country's economic growth and the long-term viability of the banking sector are both accelerated by banks' credit-extension policies to the general people for productive purposes (Kolapo Ayeni, and Oke, 2012; Mohammed, 2012).
In a similar vein, the banking sector is crucial to the stability of the country's economy because it plays crucial roles in the allocation of credit, the payment and settlement system, and the implementation of monetary policy (Mohammed 2012).
It must be emphasised that banks further their own performance by carrying out these duties. To put it another way, deposit money banks typically mobilise savings and make loans and advances to their numerous consumers while keeping in mind the profitability, liquidity, and safety of their operations (Okoye and Eze, 2013).
According to Imala (2005), the primary goals of the banking system in Nigeria are to maintain price stability and promote quick economic growth through their function as an intermediary in mobilising savings and fostering banking habits at the household and microbusiness levels.
The commercial banks do increase or decrease the amount of money that is available to the economy, and they are also employed as a tool by the Central Bank of Nigeria (CBN) to carry out one of its main responsibilities of creating an executive system and a steady economic expansion.
Through a procedure specified in the Central Bank of Nigeria Decree 24 1991, the Central Bank of Nigeria (CBN) handles this duty on behalf of the Nigerian government.
In order to implement the approved monetary policy, the governor of the Central Bank of Nigeria must submit ideas to the president of the Federal Republic of Nigeria, who has the authority to accept or change such proposals.
The Monetary Policy Guidelines and Circular, active within a fiscal year but subject to change throughout the year, are directed by the Central Bank of Nigeria to banks and other financial institutions. If a specific provision of the guideline is not followed, penalties are typically stipulated (CBN Briefs, Series number 95/03).
The Central Bank of Nigeria periodically and specially examines the books of specific licenced financial institutions as a monitoring tool. These institutions are also required to give frequent reports on their operations to the Central Bank of Nigeria.
Several monetary policy measures have arisen in the socioeconomic context of Nigeria to slow down the nation's dynamic economic system. The Central Bank of Nigeria makes ongoing efforts to maintain an appropriate level of money supply growth to ensure domestic and long-term stability as well as sustainable growth.
It does this by exercising discretionary control over the money supply through expansion or contraction of the money supply as well as by adjusting interest rates to make money more expensive or less expensive depending on the environment and the policy being followed.
According to Oloyede (2008), the manipulation of monetary policy is what the monetary authorities often do to achieve their goals of credit control, budgetary restraint, price stability, economic growth, full employment, and balance of payments equilibrium.
The methods used by the monetary authority to implement monetary policy measures must have had an effect, either favourably or negatively, on the performance of Nigerian commercial banks among other financial institutions.
The level and structure of interest rates, the money supply, the expansion of the banking industry's competitiveness, and liquidity management are some of the factors included in this research study's effect analysis.
The goal of this research project is to discover the monetary policy tools the Central Bank of Nigeria uses, their effectiveness, and how they affect the performance of Nigerian banks.
Globally, there have been major shifts in the formulation and execution of monetary policy over the last ten years. Several developing nations include: Nigeria has implemented a number of policy initiatives to meet specific goals.
To achieve desired goals, such as fostering economic growth, achieving full employment, lowering the level of inflation, maintaining a healthy balance of payments, sustaining economic growth, increasing industrialization, and ensuring economic stability, monetary policy is crucial.
Because of the ongoing global financial crisis, which has affected many developing and emerging economies around the world, other supplementary goals of monetary policy have recently been identified as smoothing the business cycle, preventing financial crises, stabilising long-term interest rates, and stabilising real exchange rates (Mishra and Pradhan, 2008).
For the majority of economies, monetary policy goals include maintaining equilibrium in the balance of payments, promoting employment and output growth, and fostering sustainable development. In order to achieve internal and external balance and to promote long-term economic growth, these goals must be met.
The detrimental impact of price fluctuation, which undercuts the goals, led to the need of price stability. There is widespread agreement that domestic price volatility hinders investment and growth and weakens the usefulness of money as a store of wealth.
The Central Bank of Nigeria (CBN) is in charge of implementing monetary policy, which is dependent on the institutional framework chosen, the operational economic environment, and other factors. According to the CBN act of 1958, the Central Bank of Nigeria's mandate is as follows:
Legal tender currency insurance
Keeping external reserves to protect the currency's value on a global scale.
Supporting a sound financial system and monetary stability.
Serving as the government's banker and financial adviser.
The promotion of growth and employment are the monetary policy's secondary objectives, while the maintenance of price stability is the primary focus of the current framework. The legal framework within which monetary policy is implemented determines how well it performs.
The legal framework's effects on the level of aggregate demand through the supply of money, the cost of money, and the accessibility of credit are quantitative, broad or indirect, and qualitative, selective or direct, respectively. The first category of the two types of instruments, variants, open market operations, and required reserve ratio, comprises banks.
Through commercial banks, they are intended to control the general level of credit in the economy. Specific credit kinds are the focus of the selective credit regulation. This involves controlling consumer credit and altering the margin requirement (Jhingan 2003).
From the perspective of past monetary economists and policy maker interns of its effects on the economy, monetary policies have proven to be stabilisation goals among all the tools available to the government for directing the cause of the economy (CBN guideline 2002).
Indeed, developing and implementing monetary policy has become a crucial government duty to keep the economy on track. Policies are created to achieve specific objectives over a predetermined time period rather than just for their own sake.
In general, the main goals of monetary policy are to implement expansionary monetary policy measures during periods of economic downturn. The money supply is regulated by monetary policy since it is thought that how quickly it grows affects inflation.
The fundamental goal of monetary policies is to aggregate actual economic sectors, such as the degree of capital price stabilisation and economic progress, rather than to aggregate the policies themselves.
In order to incorporate the desired behavioural change in the monetary policy, policies are designed to modify the trend of some monetary variables in a specific way.
The Central Bank's responsibility is to implement appropriate monetary policy that supports the primary economic goal and contributes to stable balance of payments, sustained inflation, and GDP growth. This is accomplished by implementing either a direct or indirect monetary technique to manage monetary trends.