ABSTRACT
This research examined the effect of Monetary Policy on the financial performance of Deposit
Money Banks in Nigeria. Specifically, the study establishes the effect of Central Bank Rate
(CBR) on the financial performance of Deposit Money Banks, it also establish the effect of
Reserve Ratio Requirement on the financial performance of Deposit Money Banks. The
methodology used for data collection was mainly from primary source which included
questionnaire and personal interview in order to have knowledge of Monetary Policy on the
financial performance in UNION BANK PLC. Information was also gathered from the
secondary source which includes literature review of previous research, consultation of textbooks
and internet. Simple percentage and Chi-square statistical method were used to analyse the data
collected before reaching conclusion. The findings of the research indicated that deposit money
bank policy affect banking operations in its bid to regulate money supply in the economy with
particular reference to deposit and credit creation. The recommendation is that while bank size
was found to lead to better financial performance, it is important that banks understand the
source of its funds and the costs associated with the funds.
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TABLE OF CONTENTS
Page
Title Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Abstract vi
Table of Contents vii
List of Tables ix
CHAPTER ONE: INTRODUCTION
1.1 Introduction 1
1.2 Background to the study 3
1.3 Statement of the problem 6
1.4 Objectives of the study 8
1.5 Research questions 8
1.6 Statement of hypothesis 9
1.7 Significance of the study 9
1.8 Justification of the study 9
1.9 Scope of the study 10
1.10 Definitions of terms 10
CHAPTER TWO: LITERATURE REVIEW
2.0 Introduction 13
viii
2.1 Conceptual Framework 13
2.2 Theoretical Framework 32
2.3 Literature on Subject Matter 37
CHAPTER THREE: RESEARCH METHODOLOGY
3.0 Area of Study 41
3.1 Research Design and Sources of Data 41
3.2 Study Population and Determination of Sample Size 43
3.3 Instrumentation 43
3.4 Procedure for Data Collection and Data Analysis 44
3.5 Limitation of the Study 45
CHAPTER FOUR: DATA ANALYSIS, FINDINGS AND DISCUSSION
4.0 Introduction 46
4.1 Data Analysis and Findings 46
4.2 Test of hypothesis 58
4.3 Discussion of findings 58
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary 60
5.2 Conclusion 60
5.3 Recommendations 62
5.4 Suggestions for Further Research 63
References 64
Appendix 71
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LIST OF TABLES
Table 4.1.1 Sex distribution of the respondent 46
Table 4.1.2 Age distribution of the respondents 47
Table 4.1.3 Marital Status of the respondents 47
Table 4.1.4 Academic qualification of the respondents 48
Table 4.1.5 Year of Experience of the respondents 48
Table 4.1.6 Is there any effect of monetary policy on the financial
performance of deposit money banks in Nigeria? 49
Table 4.1.7 Does your deposit money bank protect the helpless depositors? 50
Table 4.1.8 Does deposit money bank put inflation into check? 50
Table 4.1.9 Does Central Bank Rate has effect on the financial
performance of deposit money banks in Nigeria? 51
Table 4.1.10 Does Deposit Money Banks create sustainable friendly
banking environment in Nigeria? 51
Table 4.1.11 Does Deposit money bank imposes or prescribe penalty
on any defaulting financial institution? 52
Table 4.1.12 Does deposit money bank policy affect banking operations
in its bid to regulate money supply in the economy with
particular reference to deposit and credit creation? 53
Table 4.1.13 Does Reserve Ratio Requirement has effect on the financial
performance of Deposit Money Banks in Nigeria? 54
Table 4.1.14 Has Central Bank of Nigeria gone far in its achievement
of regulating money supply? 55
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Table 4.1.15 Do you think monetary policy has improve the industries in
Nigeria as a whole? 55
Table 4.1.16 Is there any impact of exchange rate on the performance of
deposit money bank in Nigeria? 56
Table 4.1.17 Are there importance of monetary tools in achieving the
desired control through bank operations? 57
Table 4.2.1: Testing of the 1st Hypothesis 58
1
CHAPTER ONE
1.1 Introduction
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
2
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
3
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.
1.2 Background of the Study
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; Kolapo, Ayeni
and Oke, 2017; Mohammed, 2017). In fact, the intermediation role of banks can be said to be a
catalyst for economic growth and development as investment funds are mobilized from the
surplus units in the economy and made available to the deficit units. In doing this, banks provide
and array of financial services to their customers. It can therefore be said that the effective and
efficient performance of the banking industry is an important foundation for the financial
stability of any nation. The extent to which banks extend credit to the public for productive
activities accelerates the pace of a nation’s economic growth as well as the long-term
sustainability of the banking industry (Kolapo, Ayeni, and Oke, 2017; Mohammed, 2017).
Similarly put, the banking institution occupies a vital position in the stability of the nation’s
economy, it plays essential roles on fund mobilization, credit allocation, payment and settlement
system as well as monetary policy implementation (Mohammed 2017). In performing these
functions, it must be emphasized that banks in turn promote their own performance. In other
4
words, deposit money banks usually mobilize savings and extend loans and advances to their
numerous customers bearing in mind, the three principles guiding their operations, which are
profitability, liquidity and safety (Okoye and Eze, 2013). In Nigeria, Imala (2010) stated that the
main objective of the banking system are to ensure price stability and facilitate rapid economic
development through their intermediation role of mobilization savings and inculcating banking
habit at the household and micro enterprise levels.
The commercial banks do add to or subtract from the stock of money available to the economy
and they are also used as instrument through which the Central bank of Nigeria (CBN) perform
one of its principal function of formulating and executive system and a stable economic growth.
The Central Bank of Nigeria (CBN) carries out this responsibility on behalf of the government of
Nigeria through a process outlined in the Central Bank of Nigeria Decree 24 1991. In
formulating and executing monetary policy, the Central Bank of Nigeria governor is required to
make proposals of the president of the Federal Republic of Nigeria who has the power to accept
or amend such proposals, this implementing the approval monetary policy. The Central Bank of
Nigeria directs to banks and other financial institutions to carry out certain duties in pursuit of
approval monetary policy guidelines and circular, operational within a fiscal year but could be
amended in the course of the year. Penalties are normally prescribed for non-compliance with
specific provision of the guideline (CBN Briefs, Series no 95/03).
As a monitory device, the Central Bank of Nigeria conducts periodic and special examinations of
the books of specified licensed financial institutional which is also required to submit regular
returns on their operations to the Central Bank of Nigeria. In the Nigeria socio economic setting,
several monetary policy measures led emerged for arresting the dynamic economic system of the
country. The Central Bank of Nigeria at period attempts to keep the money supply growing at an
5
appropriate to ensure sustainable growth as well as domestic and eternal stability and using the
discretionary control of money stock by expansion or contraction of money, influencing interest
rate to make money cheaper or more expensive depending on the prevailing economic conditions
and trust of policy.
Oloyede (2013), the monetary authorities usually rely on the manipulation of monetary policy for
the purpose of credit control budgeting discipline, price stability, economic growth, full
employment and balance of payment equilibrium. The techniques by which the monetary
authority tries to achieve then aims through the implementation of monetary policy measures
must have certainly impacted positively or otherwise on the performance of commercial banks in
Nigeria, amongst other financial institution. The level and structure of interest rate, money
supply and growth of the banking sector competitiveness and liquidity management are some of
the elements that fall under the impact analysis in this research study. This research work intends
to identify the monetary policy measures used by the Central Bank of Nigeria, their efficacies
and impact on the performance of banks in Nigeria.
In the past decade, significant changes in the design and conduct of monetary policy have
occurred around the world. Many developing countries include: Nigeria have adopted various
policy measures to achieve targeted objectives. The monetary policy is essential to achieve
desired objectives which traditionally includes promoting economic growth, achieving full
employment level, reduction in the level of inflation, maintenance of healthy balance of
payment, sustenance of growth in the economy, increase in industrialize and economic stability.
The smoothing of the business cycle, preventing financial crisis and stabilizing long term interest
rate and the real exchange late have been identified recently as other supplementary objectives of
monetary policy because of the weaving global financial crisis which engulfed major
6
development and emerging economic in the world (Mishra and Pradhan, 2013). For most
economies the objectives of monetary policy includes price stability, maintenance of balance of
payments equilibrium, promotion of employment and output growth sustainable development.
These objectives are necessary for the attainment of internal and external balance, and the
pranstion of long run economic growth. The importance of price stability derived from the
harmful effect of price volatility which undermines the objectives. This is indeed a general
consensus that domestic price fluctuation undermines the role of monetary values as a store value
and frustrates investment and growth.
Generally, the primary objectives of monetary policy are concerned with the application of
expansionary monetary policy measures during economic recession and contractionary.
Monetary policy controls money supply because it is believed that its rate of growth has an effect
of inflation. The basic aim of monetary policies is not to aggregate them but to aggregate the real
sectors of the economy such as level of capital price stabilization and economic development.
Policies are designed in order to change the trend of some monetary variable in particular
direction so as to include the desired behavioral change in the monetary policy. The Central
Bank’s role is to conduct appropriate monetary policy that is consistent with the main economic
objective that will help the growth of gross domestic product (GDP) sustainable inflation and
stable balance of payment position. This is done by putting in place the direct or indirect
monetary approach so as to control monetary trends.
1.3 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
7
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.
Several research studies have been done in relation to Deposit Money Banks in Nigeria: Gitonga
(2015) studied the relationship between interest rate risk management and profitability of deposit
money banks in Nigeria; Kimoro (2015) did a survey of the foreign exchange reserves risk
management strategies adopted by the Central Bank of Nigeria and Mbotu (2015) did a study on
the impact of the Central Bank of Nigeria rate (CBR) on deposit money banks’ benchmark
lending interest rates. Ongore and Kusa (2013) study examined the effects of bank specific
factors and macroeconomic factors on the performance of deposit money banks in Nigeria during
8
the period from 2001 to 2010. Kiganda (2014) carried out a study on effect of macroeconomic
factors on the profitability of deposit money banks in Nigeria with a focus on Union Bank.
This study has identified a gap in the current literature and research with respect to monetary
policy and its effect on financial performance of deposit money banks. The literature reveals that
while there is much effort by the government to influence the money supply by instituting
various policy tools, an analysis on the effects of those tools on deposit money banks’ financial
performance, which are the most used channel of transmission of the policies, is inconclusive.
This study will therefore be motivated to fill the knowledge gap on effects of the various
monetary policy tools on financial performance of deposit money banks in Nigeria with firm size
as the control variable.
1.4 Objectives of the study
The general 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.
1.5 Research Question
i. Does Central Bank Rate (CBR) has effect on the financial performance of Deposit Money
Banks?
ii. Does Reserve Ratio Requirement has effect on the financial performance of Deposit
Money Banks?
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1.6 Statement of Hypothesis
H0: There is no significant relationship between monetary policy and financial performance
of Deposit Money Banks in Nigeria.
H1: There is significant relationship between monetary policy and financial performance of
Deposit Money Banks in Nigeria.
1.7 Significance of the Study
The study helps us understand the impact of an effective monetary policy regime on the
performance of the Deposit Money Banks. It would aid the regulators to carefully plan and
forecast the effects of its policies to meet its objectives of economic growth and full
employment. To bankers, it would expose the relationship existing between our relevant
variables, which will be of interest to them in their respective banks. This would also benefit the
academic community which would avail them the opportunity of conducting further research in
the topic of similar areas.
The study is expected to contribute to the existing literature in the field of monetary policies.
Future scholars can use this research as a basis for further research in the area of monetary policy
theories.
The study will also enlighten management teams of commercial bank on the short-term and longterm effects of the monetary policy implementations by the Central Bank. This will greatly help
them in designing the risk management measures to employ given anticipated changes in
monetary policies.
1.8 Justification of the Study
The outcome of this study will be a little guide for the deposit money banks on how to overcome
the effect of monetary policy on their financial performance in Nigeria.
10
The research will also serve as a source base to other scholars and researchers interested in
carrying out further research in this field in future. The study therefore will extend the frontiers
of the existing literature by emphasizing the effect of monetary policy on the financial
performance of deposit money bank in Nigeria.
1.9 Scope of the Study
The scope of this research work is to examine the effects of monetary policy on the financial
performance of deposit money bank in Nigeria. In which Union Bank Plc. was use as a case
study. However, the research was limited to Union Bank Plc in Ibadan metropolis due to the
schedule of researcher
1.10 Definition of Terms
1.10.1 Financial Performance
Financial Performance analysis refers to analytical tools to measure the strength and weakness of
a firm in relation to its balance sheet and profit and loss statement. Examples of bank financial
performance tools and ratios include operating income, earnings before interest and taxes, Total
Asset value. Financial performance analysis is carried out to ascertain the profitability position
and performance of a firm. It can be conducted by management, owners, creditors, investors as
demonstrated by Chenn (2011).
1.10.2 Monetary Policy Rate (MPR)
Minimum Rediscount Rate (MRR) now known as Monetary Policy Rate (MPR) was used to
signal the desired direction of interest rate movement (Nwude, 2013).
11
1.10.3 Deposit Mobilization
Deposit Mobilization measures the aggregate mobilization of deposits in the economy. Deposits
are bank accounts that allow the owner of the account (creditor) to make demand on banks. They
include demand, time and savings and money market deposit account.
1.10.4 Credit to the Private Sector
Domestic credit to private sector by banks refers to financial resources provided to the private
sector by other depository corporations (deposit taking corporations except central banks), such
as through loans, purchases of non-equity securities, and trade credits and other accounts
receivable, that establish a claim for repayment. For some countries these claims include credit to
public enterprises (IMF, 2016).
1.10.5 Loans and Advances
Loans refers to a debt provided by a financial institution for a certain period while Advances are
the funds provided by the banks, which needs to be payable within one year
1.10.6 Liquidity
The ability of a bank to meet its current obligations when they are due, and is normally a short
term debt measures.
1.10.7 Reserve Requirement
This refers to the proportion of total deposit liabilities which the commercial and merchant banks
are expected to keep as cash in vaults and deposits with the Central Bank of Nigeria.
1.10.8 Quantitative Directives
These are directives from the Central Bank of Nigeria to the banks and other financial
institutions under its control as to the total amount of money which they may lend.
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1.10.9 Financial System
The channel or conduct through which the sayings of surplus sectors (the household) flow to the
deficit sectors (business organizations).
1.10.10 Monetary System
A system whose main function is the provision of adequate stock of money or currencies i.e.
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