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Abstract
This
study investigated the effects of Monetary Policy and control of money supply
on the profitability of Deposit Money Banks (DMBs) in Nigeria from 1999 to
2013. The specific objectives of the study were to: determine the relationship
between money supply, the level of credit in the economy, macroeconomic
variables (inflationary rate, exchange rate movement, and Real Gross domestic
Product and the profitability of DMBs in Nigeria. Three research questions and
three hypotheses were raised. Ordinary Least Linear Regression Analysis method
was adopted for the study which employed SPSS statistical tool to run the
correlation and regression analysis.Data gathered included Quasi Money (QM),
Real Gross Domestic Product (RGDP), Exchange Rate (ER), Inflation (INF),
Lending Interest Rate (LIR) Real Interest Rate (RIR) Domestic Credit to Private
sectors (DCP), Currency in Circulation (CC) and Return on Assets (ROA). The
findings revealed among others that; quasi money has insignificant positive
relationship with profitability of DMBs, while currency in circulation has
insignificant positive relationship with profitability of DMBs in Nigeria. The
level of credit in the economy has significant negative relationship with
profitability of DMBs. More so, inflation, exchange rate, and real GDP have
insignificant relationship with the profitability of the banks. Hence, monetary
policy influences the DMBs directly, as well as indirectly through through
feed-back effects from the economy It is recommended among others that,
monetary policy must work in random to create the right macroeconomic
framework, create a favourable investment climate by facilitating the emergence
of market based interest rate and exchange rate regimes that would attract both
domestic and foreign investments, create jobs, promote non-oil export and
revive industries that are currently operating far below installed capacity.
The government should also endeavor to make the financial sector less volatile
and more viable as it is in developed market economies. Finally, given the
limitations of monetary policy in Nigeria, it should be used along with
government fiscal policy.
CHAPTER
ONE
INTRODUCTION
Nigeria’s potential for growth and
poverty reduction is yet to be realised. A key constraint has been the conduct
of macroeconomic policies - particularly fiscal and monetary policies. This has
led to rising inflation and decline in real incomes. There has been little
transparency and accountability in the management of public resources. An
objective indicator of the traumatic experience of the Nigerian economy which
at the inception of the present administration was the persistent weak GDP
growth and declining productivity. This was a manifestation of a demoralized
workforce coupled with corruption that characterized government businesses.
Lack of transparency and accountability in the execution of public sector
activities was very pronounced in all tiers of government. Equally glaring is
the poor socio-economic condition of the people. Poverty rate remained very
high, with about 70percent of the population estimated to be living below the
$1 per day consumption bar (Odewunmi,
2013).
National economic management became a
Herculean task, as the economy has to contend with volatility of revenue and
expenditure. The widespread lack of fiscal discipline was further exacerbated
by poor co-ordination of fiscal policy among the three tiers of government.
Also, there is a weak revenue base arising from high marginal tax rate with
very narrow tax base, resulting in low tax compliance. These have been curbed
with the introduction of a new integrated tax system. In the past two decades
macroeconomic policies has been said to have improved enormously in developing
countries, but the expected growth benefit failed to materialize, instead a
series of financial crisis, severely depressed growth and macroeconomic
instability has been the case. Conceptually, macroeconomic instability refers
to phenomena that make the domestic macroeconomic environment less predictable
and this is of concern because unpredictability can hamper resource, allocation
decisions, investment and growth. Although, macroeconomic instability can take
diverse forms; such as the volatility of the key macroeconomic variables or of
unsustainability in their behavior such as the one that predict future
volatility. How then can a country like Nigeria experience macroeconomic
stability? This problem is widely perceived to have worsened in the developing
countries like Nigeria.
Monetary policy refers to combination
of measured designed to regulate the cost, value and supply of money in
consonance with the level of economic activities in a country (Okaro, 2014).
Its broad objective in Nigeria is to ‘ensure monetary and price stability’ (CBN
ACT, 2007).
Chang and Grabel (2004) defined
monetary policy as government actions that influence the money supply and
market interest rates. Governments control money supply and market interest
rates through a number of instruments such as open market operations, discount
rates and reserve requirements. Money supply is basically made up of domestic
credit and net foreign assets and domestic credit is composed of central bank
credit to government and commercial bank credit to the public (Hossain and
Chowdhury, 1998).
It is known to be a vital instrument
that a country can deploy for the maintenance of domestic price and exchange
rate stability as a critical condition for the achievement of a sustainable
economic growth and external viability. Its role in ensuring an overall
macroeconomic stability cannot be overemphasized. Although in Nigeria
appreciable progress has been made in this regard since the introduction of
various financial sector reform programs from 1986. Despite the foregoing, the
Nigerian monetary policy has continued to face several challenges. No wonder,
the CBN is increasingly focusing more on the aspect of price stability,
recognizing the relevance of macroeconomic stability for economic sustainable
output and employment growth.
The Nigerian people aspire and desire
to move out of poverty within the framework of a stable and rapidly growing
economy. This is certainly feasible if adequate policies are put in place and
sustained. Partially and poorly implemented reforms will not serve to reserve
current trend. Thus, the government is at crossroads.
The purpose of monetary policy
includes macro-economic goals of full employment, economic growth, price
stability, wealth distribution, efficient resource allocation, favourable
balance of payment and industrial development (Ojo, 2002; Jhingan, 2013). Two
key functions of Central Bank of Nigeria are to ensure monetary and price
stability and to promote sound financial system (CBN Act, 2007). These
functions have facilitated long term planning, aid infrastructural development,
attract foreign investments, and engender economic growth (Adekunle, 2002). In
Nigeria the Central Bank is responsible for the formulation and implementation
of sound monetary policies in order to aid the attainment of the set
objectives.
The existence of an effective banking
industry is necessary for every economy because it create the necessary
environment for economic growth and development through its role in
intermediating funds from surplus to deficit economic units. This stimulates
investment, economic growth, and employment as well as international trade and
payment and explains why every economy takes interest in creating and nurturing
it. One of the ways taken by all economies to make the banking sector effective
is the use of monetary policy which relies on the control of money stock in
order to influence financial and economic activities.
The extent to which money and monetary
policy influence financial and economic activities has been widely discussed
over the years. While it is generally agreed that monetary developments affect
economic and financial performance, there are differing views on the extent of
the effect and the channels through which this effect is achieved. In order to
appreciate the effects of money and monetary policy on the banking industry, it
would be instructive to review the varied and changing views on monetary
influence. These effects are achieved directly as well as indirectly through
feed-back effects from the economy. Usually when the quantity of money supplied
changes relative to money demand either because of monetary policy measures or
other measures, there are changes in relative price and wealth. While these
changes are seen as major channels of monetary influence, there are several
variants, over the years, on how these changes influence total spending in the
economy.
Monetary policy aims at controlling
the activities of banks and other financial sectors in the economy, but in
spite of the key position this control occupies in the economy, care had not
been taken to really exploit the trend of events in the economy so as to come
up with the appropriate regulation and deregulation policy that will promote
the economy (Olowe, 2010).
It is either that these polices are
not right or that they are poorly implemented as the much expected result is
yet to be found. For now, there is instability in the economy and the
inflationary rate is very high, and the performances of deposit money banks are
still beyond international standard.
A strong and healthy bank undoubtable
mean a strong and healthy economy In view of this, there is a need to evaluate
the effect of monetary policies of Central Bank of Nigeria on performance of
Deposit money banks in Nigeria.
Specifically, this study intends to:
determine the relationship between money supply, the level of credit in the
economy, interest rates and the profitability of DMBs in Nigeria from 1999 to
2013.
This study addressed issues relating
to the following relevant questions emerging within the domain of study
problems thus: What is the relationship between money supply; the level of
credit in the economy, interests rates and the profitability of DMBs in
Nigeria?
To proffer useful answers to the
research questions and realize the study objectives, the following hypotheses
stated in their null forms are tested;
H01: There
is no significant relationship between money supply and the profitability of
Deposit Money Banks.
H02: There is no significant
relationship between the level of credit in
the economy and the profitability of
Deposit Money Banks.
H03: There is no significant
relationship between interest rates and the profitability of Deposit Money
Banks.
Format: MS Word
Chapters: 1 - 5
Delivery: Email
Delivery: Email
Number of Pages: 65
Price: 3000 NGN
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