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BANKING FINANCE

IMPACT OF MONETARY POLICY ON THE PROFITABILITY OF BANKS IN NIGERIA

IMPACT OF MONETARY POLICY ON THE PROFITABILITY OF IN NIGERIA

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IMPACT OF MONETARY POLICY ON THE PROFITABILITY OF BANKS IN NIGERIA

INTRODUCTION TO CHAPTER ONE

Banks are the most heavily regulated industry in Nigeria. This is due to the nature of banking and its importance to the efficient operation of the economic system.

The significance and centrality of the banking sector in the growth of an economy is undeniable. It serves several functions, including financial intermediation, provision of an efficient payment system, and facilitation of monetary policy execution.

On intermediation, the banking system mobilises surplus savings and channels them to investment. In operating the payment mechanism, the system acts as a medium of exchange, and in monetary policy execution, the system serves as agents through which policies are disseminated.

However, without a arrangement, savings and investment will be inefficient and may result in less-than-optimal resource allocation.

As a result, an efficient and effective system is required not only for the promotion of efficient intermediation, but also for the protection of depositors, the stimulation of healthy competition, and the economic stability.

The degree of success of a bank in performing the aforementioned responsibilities, on the other hand, is dependent on the financial and regulatory environment, which is a function of the entirety of the environment in which it operates.

1.1 BACKGROUND OF THE STUDY

To have a thorough understanding of the subject topic, i.e. “the impact of monetary policy on bank profitability.” It is critical to emphasise the purpose of monetary policy. Dr. Ojih (1996) defines monetary policy as “credit control measures adopted by central banks to control the supply of money as an instrument for achieving the objectives of general economic policy.”

It entails the expansion and contraction of the money supply as well as the manipulation of interest rates to make borrowing easier or more difficult depending on the overall state of the economy.

When the central bank intends to raise the money supply, an expansionary measure is used. Concretionary measures, on the other hand, are used when the central bank wishes to reduce the money supply.

1.2 STATEMENT OF THE PROBLEM

Banks play a crucial part in the growth of every economy. As a result, the industry is so sensitive that it is referred to as the “backbone” of every economy. Failure of a bank (particularly a commercial bank) may thus result in the failure of the entire economy, highlighting the importance of controlling commercial bank activities to promote effective economic development.

As a result, the has always attempted to exert effective control over commercial banks; yet, because to the banks' goal for project maximisation, they have not always agreed with monetary authorities' requirements.

In addition, the problem of noncompliance made achieving monetary policy objectives nearly impossible.

However, the research seeks to highlight the difficulty that commercial banks have in attempting to achieve a balance between liquidity and profitability as enforced by the government's monetary policy.

1.3 OBJECTIVES OF THE STUDY

Monetary policy aims in general include.

– The management of inflation and the maintenance of relative price stability.

– The encouragement of a rapid and desirable rate of economic growth and development.

– The preservation of a low level of unemployment

– The country's ability to maintain a good balance of payment situation in order to protect the natural currency's external worth.

– Increasing the flow of credit to the priority sectors of the economy, including agriculture and .

– The mobilisation of higher domestic savings in order to enable domestic capital formation.

– Protecting local businesses against unfavourable competition and smugglers, lowering foreign debt, and increasing revenue, particularly from the non-oil sector of the economy.

1.4 THE SIGNIFICANCE OF THE STUDY

The importance of monetary policy cannot be overstated. Monetary policy is used to curb demand if there is inflation or excess demand, which causes imports to grow. On the other hand, lowering interest rates through monetary policy encourages borrowing, which benefits the society.

As previously stated, the objectives of monetary policy are price stability, employment, and balance of payment equilibrium, all of which are critical in economic development.

The research is to provide the primary concept and operation of monetary policy measures in Nigeria in order to determine if it has been effective in reaching those objectives and how the policy affects commercial bank profitability.

1.5. DEFINITION OF TERMS

According to Onyido (1991), monetary policy is a set of actions aimed to control the quantity of money in an economy. It is specifically intended to regulate the availability (or quantity) coast and direction of credit in order to achieve defined national economic goals.

It ensures that an economy's money supply and credit costs are adequate to enable desirable and sustainable growth, without generating inflationary pressures that could lead to a devaluation of the local currency. A country's monetary policy is often based on the monetary system used in the economy.

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