Central Bank of Nigeria Monetary Policy and Nigerian Deposit Money Banks
Chapter One
Objective of the study
The study aims to achieve the following objectives:
- Assess the effectiveness of the Central Bank of Nigeria’s monetary policy in achieving price stability and promoting sustainable economic growth.
- Evaluate the role of Nigerian Deposit Money Banks in facilitating access to finance for individuals and small and medium-sized enterprises (SMEs), and identify the challenges they face in meeting the financial needs of these sectors.
- Examine the factors contributing to the high levels of non-performing loans (NPLs) in Nigerian banks and analyze the impact of NPLs on the stability and profitability of the banking sector.
CHAPTER TWO
REVIEWED OF RELATED LITERATURE
There are some research within the Nigerian content Okoye & Eze (2013) examined the impact of bank lending rate on the performance of Nigerian Deposit Money Banks between 2000 and 2010. It specifically determined the effects of lending rate and monetary policy rate on the performance of Nigerian deposit money Banks and analyzed how bank lending rate policy affects the performance of Nigerian deposit money banks. The result confirmed that the lending rate and monetary policy rate have significant and positive effects on the performance of Nigerian deposit money banks. The implication of this is that lending rate and monetary policy rate are true parameter of measuring bank performance. Akomolafe et al. (2015) found that there is a positive relationship between banks’ profits and monetary policies in Nigeria. The study covers a period from 2003 to 2013. Another study by (Ekpung et al. (2015) also examined the effect of monetary policy on banking sector performance from 1970 to 2006. However, the study uses banks’ deposit liabilities to represent banks’ performance and indicates that monetary policy has a significanteffect on banks’ deposit liabilities. In particular, deposit rate and minimum discount rate have a negative influence on banks’ deposit liabilities, whereas exchange rate has a positive and significant impact on this variable. More particularly Udeh (2015) investigated the impact of monetary policy instruments on profitability of commercial banks in Nigeria using the Zenith Bank Plc. experience from 2005 to 2012. The study discovered that cash reserve ratio, liquidity ratio and interest rate have an insignificant impact on the profit before tax of Zenith Bank Plc. However, minimum rediscount rate is found to have significant effect on this variable. The author then concluded that a number of monetary policy instruments have an insignificantly impact on profitability of commercial banks in Nigeria, and thus management of commercial banks should look beyond monetary policy instruments to enhance their profits. The research examines the effect of monetary policy on commercial banks used three generations of banks. The results show that an increase in interest rate will leads to a decrease in the lending rate while liquidity ratio and cash ratio were statistically significant to the profit of commercial banks (Akanbi & Ajagbe, 2012). The research discovered that their bi‐directional causality between monetary policy rate and bank savings rate also unidirectional causality from bank lending rate to bank savings rate and from monetary policy rate to bank lending rate (Joseph & Thaddeaus, 2013). Another results discovered that exchange rate and interest positively influence commercial banks lending, though money supply and liquidity ratio negatively influence the commercial banks in Nigeria (Charles, 2014). Similar results show that there is a positive relationship between banks’ profits and monetary policies (Akomolafe, Danladi, Babalola, & Abah, 2015) while another research reveals that monetary policy rate, interbank rate and savings deposit were all negatively and significantly affecting inflation rate (Maji, Waziri, Sulaiman, Tijani, & Bala, 2015). While AlAli (2019) studies Kuwait banks financial performance found that National bank of Kuwait and Ahli United bank of Kuwait are the base performing banks in Kuwait within the period of study. Other research Amidu & Wolfe (2008) examined the constrained implication of monetary policy on bank lending in Ghana between 1998 and 2004. Their study revealed that Ghanaian banks’ lending behavior is affected significantly by the country’s economic support and change in money supply. Their findings also support the finding of previous studies that the Central Bank prime rate and inflation rate negatively affect bank lending. Prime rate was found statistically significant while inflation was insignificant. Based on the firm level characteristics, the study reveals that bank size and liquidity significantly influence bank’s ability to extend credit when demanded. Younus & Akhtar(2009) examined the significance of Statutory Liquidity Requirement (SLR) as a monetary policy instrument in Bangladesh. Using descriptive analysis techniques, they found that statutory liquidity requirement has experienced infrequent changes and past evidence showed that reduction in SLR produced positive impact on bank credit and investment especially prior to the 1990s.SLR and Cash Reserve Requirement (CRR) were found to be significant tools of reducing inflation and both are used only in situation of Drastic imbalance resulting from major shocks. They posited that Bangladesh Bank has used open market operations (OMO) more frequently rather than changes in the Bank Rate and SLR as instruments of monetary policy in line with its market oriented approach. Ajayi & Atanda (2012) investigated the effect of monetary policy instruments on banks’ performance with a view to determining the existence of long‐run relation for the period 1980‐2008. The empirical estimates indicated that bank rate, inflation rate and interest rate are credit enhancing, while liquidity ratio and cash reserves ratio exerted negative effect on banks total credit. Although, it was only cash reserve system and interest rate that were found to be significant at 5% critical value, main conclusion drawn was that monetary policy instruments are not effective to stimulate credit in the long‐run, while banks total credit is more responsive to cash reserve system.
The Scope of CBN Regulation
The goal of banking sector regulation is to sustain financial stability which is also one of the main objectives of Nigeria’s monetary policy. It is the main reason why the Central Bank of Nigeria was made the apex regulatory body of the Nigeria’s financial system. In collaboration with other regulatory agencies, the Central Bank of Nigeria ensures a stable financial system. The Central Bank of Nigeria in collaboration with the Nigerian Deposit Insurance Corporation (NDIC) regulates the banking sector and ensures its efficiency (Umar 2015). In 1991, the Banking Act of 1959 and the Banking Decree of 1969 were repealed and replaced with the Banks and other Financial Institutions (BOFI) Decrees 24 and 25 to strengthen CBN’s position in its oversight of enacting monetary policy, banking regulation and supervision of all financial institutions in the country. The new decree brought non-bank financial intermediaries under the supervision of CBN. In 1994, the CBN in a bid to ensure that there was some form of coordination in the activities of all the regulatory agencies for effective oversight of the financial sector established the Financial Services Regulation Coordinating Committee (FSRCC). In 1998, the 1997 Decrees were repealed by the CBN Amendment Decree No. 37 and Bank and other Financial Institutions Decree No. 38 of 1998. In 1999 a further amendment to the BOFI decree was made ¾ Bank and other Financial Institutions Decree No. 40 of 1999 allowing CBN to remove the officers of any financial institution and apply the rules applicable to failed banks to other non-bank financial institutions. A major change was the enactment of the CBN Act 2007 which repealed the CBN Act of 1991 and all its amendments. The consequence of the Act was that CBN became a fully autonomous body as regulator and its role was enlarged to include serving as economic advisor to the Federal Government (Balogun, 2011).
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
In this chapter, we described the research procedure for this study. A research methodology is a research process adopted or employed to systematically and scientifically present the results of a study to the research audience viz. a vis, the study beneficiaries.
RESEARCH DESIGN
Research designs are perceived to be an overall strategy adopted by the researcher whereby different components of the study are integrated in a logical manner to effectively address a research problem. In this study, the researcher employed the survey research design. This is due to the nature of the study whereby the opinion and views of people are sampled. According to Singleton & Straits, (2009), Survey research can use quantitative research strategies (e.g., using questionnaires with numerically rated items), qualitative research strategies (e.g., using open-ended questions), or both strategies (i.e., mixed methods). As it is often used to describe and explore human behaviour, surveys are therefore frequently used in social and psychological research.
POPULATION OF THE STUDY
According to Udoyen (2019), a study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitutes of individuals or elements that are homogeneous in description.
This study was carried to examine Central Bank of Nigeria Monetary Policy and Nigerian Deposit Money Banks. CBN in Lagos state form the population of the study.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
INTRODUCTION
This chapter presents the analysis of data derived through the questionnaire and key informant interview administered on the respondents in the study area. The analysis and interpretation were derived from the findings of the study. The data analysis depicts the simple frequency and percentage of the respondents as well as interpretation of the information gathered. A total of eighty (80) questionnaires were administered to respondents of which only seventy-seven (77) were returned and validated. This was due to irregular, incomplete and inappropriate responses to some questionnaire. For this study a total of 77 was validated for the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain Central Bank of Nigeria Monetary Policy and Nigerian Deposit Money Banks. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing Central Bank of Nigeria Monetary Policy and Nigerian Deposit Money Banks.
Summary
This study was on Central Bank of Nigeria Monetary Policy and Nigerian Deposit Money Banks. Three objectives were raised which included: Assess the effectiveness of the Central Bank of Nigeria’s monetary policy in achieving price stability and promoting sustainable economic growth, evaluate the role of Nigerian Deposit Money Banks in facilitating access to finance for individuals and small and medium-sized enterprises (SMEs), and identify the challenges they face in meeting the financial needs of these sectors and examine the factors contributing to the high levels of non-performing loans (NPLs) in Nigerian banks and analyze the impact of NPLs on the stability and profitability of the banking sector. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from selected staff of CBN, Lagos state. Hypothesis was tested using Chi-Square statistical tool (SPSS).
Conclusion
In conclusion, the study sheds light on the Central Bank of Nigeria’s monetary policy and the role of Nigerian Deposit Money Banks (DMBs) within the Nigerian financial system. The study has highlighted several key aspects and challenges that need to be addressed to ensure stability, sustainable economic growth, and the efficient functioning of the banking sector.
The study emphasizes the importance of the Central Bank of Nigeria’s monetary policy in achieving price stability and promoting economic growth. It recognizes the significance of interest rate management, open market operations, reserve requirements, and other monetary policy instruments in influencing inflation and overall economic conditions.
Furthermore, the study underscores the critical role played by Nigerian DMBs in mobilizing savings, providing credit to individuals and businesses, and facilitating economic activities. It emphasizes the need for DMBs to enhance access to finance, particularly for underserved segments such as individuals and small and medium-sized enterprises.
The study also highlights challenges that need to be addressed, including the management of non-performing loans (NPLs), enhancing financial inclusion, mitigating cybersecurity and fraud risks, and ensuring regulatory compliance. These challenges require concerted efforts from the Central Bank of Nigeria, DMBs, government agencies, and other stakeholders to formulate and implement effective policies, regulations, and risk management frameworks.
It is important to acknowledge the limitations of the study, including data availability, time constraints, and subjectivity, which may have influenced the depth and breadth of the research. Additionally, the study recognizes that its findings and recommendations are specific to the Nigerian financial system and may not be directly applicable to other countries or contexts.
In conclusion, the study contributes to the body of knowledge on the Central Bank of Nigeria’s monetary policy and Nigerian Deposit Money Banks, providing insights and recommendations that can guide policymakers, researchers, and stakeholders in fostering a stable, inclusive, and resilient financial system in Nigeria. Continued research and collaborative efforts are essential to address the identified challenges, promote economic stability, and achieve sustainable economic growth in the country.
Recommendation
- Enhance Effectiveness of Monetary Policy: a. Continuously monitor and assess the impact of monetary policy measures on inflation and economic growth to ensure alignment with the desired objectives. b. Improve communication and transparency regarding monetary policy decisions, objectives, and expectations to enhance market predictability and understanding.
- Promote Financial Inclusion and Access to Finance: a. Implement targeted initiatives to enhance access to finance for underserved segments, such as individuals and small and medium-sized enterprises (SMEs). b. Encourage collaboration between the Central Bank of Nigeria (CBN) and Nigerian Deposit Money Banks (DMBs) to develop innovative financial products and services that meet the specific needs of different customer segments. c. Enhance financial literacy programs to educate individuals and businesses about financial services and empower them to make informed financial decisions.
- Address Non-Performing Loans (NPLs): a. Strengthen risk management practices in DMBs, including robust credit assessment and monitoring systems, to minimize the incidence of NPLs. b. Facilitate the establishment of effective debt recovery mechanisms to expedite the resolution of NPLs and improve asset quality in the banking sector. c. Provide guidance and support to DMBs in implementing loan restructuring and recovery measures, ensuring transparency and adherence to best practices.
- Strengthen Cybersecurity and Fraud Prevention: a. Develop and enforce robust cybersecurity frameworks and standards for DMBs to mitigate cyber threats and protect customer data. b. Enhance collaboration and information sharing between the CBN, DMBs, and relevant stakeholders to combat emerging fraud risks and adopt advanced fraud detection and prevention measures. c. Invest in employee training and awareness programs to enhance cybersecurity practices and foster a culture of security within DMBs.
- Enhance Regulatory Compliance: a. Strengthen regulatory oversight and enforcement mechanisms to ensure DMBs’ compliance with prudential guidelines, capital adequacy requirements, and anti-money laundering regulations. b. Promote effective risk-based supervision and continuous assessment of DMBs’ operations to identify and address potential compliance gaps. c. Foster greater collaboration and communication between the CBN and DMBs to facilitate the implementation of regulatory requirements and enhance understanding of compliance obligations.
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