ABSTRACT
The
purpose of this research work is to determine the effect of monetary policy on
the financial performance of Deposit Money Banks in Nigeria, (A case study of
Union Bank plc). The data used for this study was gathered from primary data
with the use of questionnaire distributed to the case study mentioned above.
The researcher adopted Economic model to analyse the data collected. The
findings showed that in the Hypothesis tested, respondents agreed that there is
a significant relationship between monetary policy and financial performance of
Deposit Money bank. The study concludes that monetary policy tools do not
influence the financial performance of Deposit Money Banks in Nigeria, T-Bill
rates have a positive but insignificant affect the financial performance of
deposit money banks in Nigeria, Central Bank Rate has no significant affect the
financial performance of Deposit Money Banks in Nigeria, Cash Reserve Ratio
does not affect the financial performance of Deposit Money Banks in Nigeria and
bank size affects the financial performance of firms in Nigeria.
TABLE OF CONTENTS
Title Page i
Certification i
Dedication ii
Acknowledgement iii
Abstract iv
Table of Contents v
Chapter
One 1
1.1 Introduction
1
1.2 Statement
of the Problems 2
1.3.0 Objective
of the study 3
1.3.1 Research
Question 3
1.3.2 Research
Hypothesis 3
1.4 Significance
of the Study 3
1.5 Scope
of the Study 4
1.6 Limitations
of the Study 4
1.7 Operational
definition of terms 5
Chapter
two 6
2.1 Conceptual
Review 6-12
2.2 Theoretical
Framework 12-14
2.3 Empirical
Review 15-19
2.4 Gap
of the Study 19
Chapter
three 20
3.1 Introduction
20
3.2 Research
Design 20
3.3 Data
specification 20
3.4 Data
collection 20
3.5 Diagnostic
text 21
3.6 Data
Analysis 21
3.6.1 A prior
expectation 22
Chapter
Four 23
4.1 Introduction
23
4.2 Diagnostic
text 23
4.3 Data
analysis 23
4.4 Correlation
analysis 24
4.5 Discussion
of findings 29
Chapter
five 30
5.1 Introduction
30
5.2 Summary
of Findings 30
5.3 Conclusion
33
5.4 Recommendation
34
5.5 Limitations
of the study 35
References 48
CHAPTER
ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The
financial sector is mainly significant to formal activities that are relevant
to the economic activities in Nigeria. This has made it mandatory for monetary
policy instruments to become crucial in driving the activities of the Nigeria
economy. It has therefore been well observed in Nigeria as well as all other
developing countries that prudent monetary policies are the key stone to
effective regulations as well as supervision for the growth of any country’s
banking Industry. By effective manipulation of monetary instruments, the growth
rate in the supply of money can be influenced by the Central bank in many ways,
namely, availability of credit interest rate level and availability of
liquidity from the banking sector. All these can affect the investment,
production, consumption of individual as well as government spending.
Omankhanlen (2014).
Business cycle
evenness, financial crisis prevention, rate of interest stabilization in the
long run, the rate of exchange in real terms has recently been identified as
objectives supplementary to monetary policies due to global financial crisis
weaving which overwhelmed both emerging and developed economies of the world
(Mishra and Pradhan, 2013). Nigerian banks generally believe that there is
great risk in lending to the manufacturing and agricultural sectors of the
economy, hence, their apathy in giving credit to these sectors of the economy,
though these sectors hold the key to the development of the economy especially
in employment and foreign exchange generation.
A solid and stable financial sector is
essential to make a well-functioning national economy and ensure balance
liquidity within the economy. Appropriate liquidity management is essential to
foster economic growth. Though, to achieve economic stability proper uses of
fiscal and monetary policies are required. Despite establishing regulatory
agencies and monetary policy committees, Nigerian banks have actually been
deterred in creating adequate liquidity and additional credit for the
sustenance of the entire economy.
The Central Bank of
Nigeria (CBN) over the years, have instituted various monetary policies to
regulate and develop the financial system in order to achieve major
macroeconomic objectives which often conflict and result to distortion in the economy.
Although, some monetary policy tools like cash reserve and capital requirements
have been used to buffer the liquidity creation process of deposit money banks
through deposit base and credit facilities to the public.
Monetary policy remains
a critical tool in stimulating the growth and stability of financial
institution in most developing economics. In Nigeria, the objectives usually
include promoting monetary stability. Strengthening the external sector
performance and generating a sound financial system that will support increased
output and employment. Monetary policy is a major economic stabilization weapon
which involves measures designed to regulate and control the volume, cost,
availability and direction of money and credit in an economy to achieve some
specific macro-economic policy objectives (Ndugbu and Okere, 2015).
Monetary policy
according to Anyanwu (2009) involves a deliberate effort by the monetary
authorities (the Central Bank of Nigeria) to control the money supply and
credit conditions for the purpose of achieving certain broad economic
objectives.
Central bank also determines certain
targets on monetary variables. Although, some objectives are consistent with
each other’s, others are not, for example, the objectives of price stability
often conflicts with the objectives of interest rate stability and high short
run employment. The role of the banking industry in development process cannot
be over-emphasized as they play so many functions. The most important banking
industry in Nigeria is the deposit money banks. In order to make profit,
deposit money banks invest customer deposits in various short term and long
term investment outlet, however core of such deposits are used for loans.
Hence, the more loans and advances they extend to borrowers, the more the
profit they make (Solomon, 2012). Prior to 1986 direct monetary instruments
such as selective credit controls administered interest and exchange rates,
credit ceilings, cash reserve requirements and special deposits to regulate the
banking system were employed. The fixing of interest rates at relatively low
levels was done mainly to promote investment and growth. Occasionally, special
deposits were imposed to reduce the amount of excess reserves and credit
creating capacity of the banks.
The banking sector is
largely dominated by commercial banks and by far the most important in any
developing countries like Nigeria. Globally, the unique role of banks as the
engine of growth in any economy has been widely acknowledged (Adegbaju and
Olokojo, 2013)
1.2 Statement
of the Problem
Monetary policy is one
of the principal economic management tools that governments use to shape
economic performance. Measured against fiscal policy, monetary policy is said
to be quicker at resolving economic shocks. Monetary policy objectives are
concerned with the management of multiple monetary targets among them price
stability, promotion of growth, achieving full employment, smoothing the
business cycle, preventing financial crises, stabilizing long-term interest
rates and the real exchange rate. Experience shows that emphasis is usually
placed on maintaining price stability or ensuring low inflation rates.
The Central Bank of
Nigeria is responsible for the recommendation and implementation of monetary
policy tools in Nigeria. The CBN recommends the CRR, CBR and Treasury bill
rates. Those tools are implemented through deposit money banks and they are
aimed at stabilizing the price levels in the economy. The use of cash reserve
ratio affects the level of liquidity in the deposit money banks. When
commercial banks are faced with limited liquidity, they turn to other deposit
money banks for inter-bank borrowing. Those funds are borrowed at the CBR and
it is usually very high, which affects the interest expense for the borrowing
bank and the interest income for the lending bank. The other way to increase
liquidity in the bank will be to borrow by floating a debt instrument. The rate
offered for the debt instrument is also tied to the treasury bills or treasury bonds
issued by the government through the Central Bank. These effects of the
monetary tools are expected to have an effect on the financial performance of
deposit money banks.
1.3 Objectives
of the study
The main objective of
the study is to determine the effect of monetary policy on the financial
performance of Deposit Money Banks in Nigeria.
The specific objectives are as follows:
i. To establish the effect of Central
Bank Rate (CBR) on the financial performance of Deposit Money Banks.
ii. To establish the effect of Reserve
Ratio Requirement on the financial performance of Deposit Money Banks.
1.4 Research
Question
i. Will Central Bank Rate (CBR) has
effect on the financial performance of Deposit Money Banks?
ii. Can Reserve Ratio Requirement has
effect on the financial performance of Deposit Money Banks?
1.5 Statement
of Hypothesis
H0: There is no
significant effect between monetary policy and financial performance of Deposit
Money Banks in Nigeria.
H1: There is
significant effect between monetary policy and financial performance of Deposit
Money Banks in Nigeria.
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