ABSTRACT
This
study investigated the impact of monetary policy on commercial bank lending in
the Nigerian context. The study aimed to test the effectiveness of some
monetary policy component and instruments and how it affects commercial bank
loans and advances in Nigeria. The model used is estimated using Nigeria
commercial banks loans and advances(CBLA) and other variables such as broad
money supply(M2), minimum rediscount rate(MMR), Liquidity ratio of commercial
bank(LR), Exchange rate(EXR), and cash reserve ratio of commercial banks for
the period of; 1975 – 2009. The study hypothesizes that the specified
independent variables mentioned above, have no significant positive impact on
the dependent variable (CBLA). From the regression analysis which was done
using SPSS tool, the model was found to be significant though the magnitude is
not much. This work has the following findings – i. There is non-significant
positive impact of broad money on commercial bank lending in Nigeria as Broad
money coefficient is 0.903, and a t–value of .958. ii. There is non-significant
positive impact of exchange rate on commercial bank lending in Nigeria as
exchange rate coefficient is 0.340, and a t–value of 1.372. iii. there was
positive correlation between minimum rediscount rate and commercial bank
lending as the there is non-significant positive impact of minimum rediscount
rate on commercial bank lending in Nigeria as minimum rediscount rate
coefficient is 1.408, and a t–value of 0.504. iv. There is non-significant
positive impact of liquidity ratio of commercial banks on commercial bank
lending in Nigeria as liquidity ratio coefficient is 1.074, and a t–value of
0.964. v. There is non-significant positive impact of cash reserve ratio of
commercial banks on commercial bank lending in Nigeria as cash reserve ratio
coefficient is 1.300, and a t–value of 0.590. The study then suggests that
there should be closer consultation and cooperation between commercial banks
and the regulatory authorities so that the effect of regulatory measure on
commercial banks will be taken into account at the stage of policy formation
and policy makers and others should consider other variables, whether monetary
policy variables or others like infrastructural variables, standard of living,
entrepreneurship development and others as a determinant of the volume of
commercial banks loans and advances in Nigeria.
CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND
OF THE STUDY
The importance of monetary policy in the
economic development of developing countries has attracted a lot of attention
in recent years. The perverse effect of interest rate controls, overvalued
exchange rates, controlled lending and other control variables have led to a
large volume of research relating to monetary policy. An open and well
unregulated monetary policy promotes economic growth and stability. In the
current setting with a rapidly globalizing world economy, efficient monetary
policy are essential for productive gains from the world market and to protect
the domestic economy against foreign shocks.
In attempt to create and provide better
living conditions for the populace, various government have embarked in the use
of policies (fiscal and monetary) to control economic variables that facilitate
growth and development. The focus of this study shall be to examine the impact
of monetary policy on commercial bank lending in Nigeria.
Monetary policy in the art of controlling
the direction and movement of money and credit facilities in pursuance of
stable price and economic growth in an economy (CBN 1998). It is the major
economic stabilization weapon, which involve measures designed to regulate and
control the volume, cost, availability and direction of money and credit in an
economy to achieve some specified macro-economic policy objective. That is, it
is a deliberate effort by the monetary authorities (the Central Bank) to
control the money supply and credit condition for the purpose of achieving
certain broad economic objective. The Central Bank of Nigeria has an important
role to play by regulating the stock of money in such a way as to promote the
social welfare (Ajayi 1999).
Monetary policy in Nigeria over years has
been the combination of measures taken by this monetary authority to influence
directly or indirectly or both, the supply of money and credit to the economy
and the structure of interest rates with a view to achieving a sustainable rate
of economic growth, price stability and balance of payment equilibrium.
Although Monetary Policy has been conducted under wide ranging economic
environments, the strategy has remained the same. However, the relevant target
monetary policy has changed following rapid institution changes in the
financial environment. Until the late 1980’s, narrow money stock was the focus
of Central Bank of Nigeria Monetary Policy.
In the light of this, the assessment of
the banks system (particularly in the area of loans and advances) can be
evaluated through the performance of Monetary Policy tools, which can be
broadly classified into two categories; the portfolio control approach and
market intervention. Under the system of direct monetary control, the monetary
authorities use some criteria to determine monetary and credit targets and
interest rates which are the intermediate targets to attempt to achieve the
ultimate objectives of the policy. In the regime of indirect monetary control,
because the intermediate variables are not under the control of Central Bank of
Nigeria, only the operating variables (Open Market Operation, Reserve
Requirement and Discount Rate), which are related are to the path of
intermediate variables in a predictable way are controlled and are the major
techniques of influencing the monetary base.
By and large, the main purpose of this
research work is to examine the impact of monetary policy on commercial bank
lending in Nigeria.
1.2 STATEMENT
OF THE PROBLEM
Despite the use of
several monetary policy tools, the volume of loans granted by the commercial
banks to the Nigerian economy appears not to have improved as to accelerating
investment, economic growth as well as economic development.
Central bank as the apex bank controls
the activities of commercial banks through the formulation and issuance of
monetary policy. Being CBN, the aim is to control and regulate the volume of
money in circulation, which are therefore designed to achieve specific, desired
social and economic goals. Despite the adoption of these measures, the
achievement of the stated social economic goals has us so far.
Therefore, the good implementation,
compliance, enforcement and achievement of the monetary policy instrument of
the Central Bank of Nigeria pose a problem to this research work. Thus, the
impact of monetary policy on commercial bank lending in Nigeria as the study.
1.3 RESEARCH
QUESTIONS
Our
research questions for this study are as follows:
i)
What is the effect of Minimum Rediscount Rate
(MRR) on commercial bank lending in Nigeria?
ii)
Has money supply any impact on commercial bank
lending in Nigeria?
iii)
What is the role of exchange rate on
commercial bank loans and advances in Nigeria?
iv)
How has the liquidity ratio of commercial bank
enhanced bank lending in Nigeria?
v)
To what extent has cash reserve ratio of
commercial bank influence its loans and advances.
1.4 OBJECTIVES
OF THE STUDY
i)
To critically examine and highlight the effect
of Minimum Rediscount Rate (MRR) on commercial bank lending in Nigeria.
ii)
To ascertain the degree of impact money supply
has on commercial bank lending in Nigeria.
iii)
To identify the roles of exchange rate on
commercial bank loans and advances.
iv)
To examine and identify the relationship
between cash reserve ratio of commercial bank as it affects its loans and
advances.
v)
To ascertain the extent of commercial bank
liquidity ratio influence on bank lending.
1.5 HYPOTHESES
OF THE STUDY
Hypothesis
is a tentative statement about phenomena whose validity is usually unknown
(Onwumere, 2009: 25). For the purpose of this study, I shall put the following
hypotheses to test:
|
i)
|
Ho:
|
Broad
money supply does not increase the volume of commercial bank lending.
|
|
ii)
|
Ho:
|
Exchange
rate has no effect on commercial bank lending.
|
|
iii)
|
Ho:
|
Interest
rate has no positive effect on the volume of commercial bank loans.
|
|
iv)
|
Ho:
|
Liquidity
ratio of commercial banks has no positive impact on the volume of its loans
|
|
|
|
and
advances.
|
v)
Ho:Cash reserve ratio of commercial bank does
not have a significant impact on bank lending.
1.6 SCOPE
OF THE STUDY
The
research points at the impact of monetary policy on commercial bank lending as
secured in our country Nigeria from the year 1975 to the year 2009.
The
research interest is on First Bank of Nigeria Plc because it is one of the
leading tier one banks in Nigeria and therefore useful for this research.
1.7 SIGNIFICANCE
OF THE STUDY
This
work will be beneficial to the following:
1.
The Banking Sector:
(a)
The Central Bank: By this work, the various
techniques and tools used to control commercial bank activities, especially the
volume of loans and advances, over the years and their resultant effect would
be brought to light. It would be easily possible to evaluate and appreciate the
effectiveness of the monetary policy initiated by the Central Bank of Nigeria.
The CBN by viewing this work will learn of its effectiveness and lapses
vis-Ã -vis checking and controlling the commercial banks through the
implementation of monetary policies. Other ways of implementing the monetary
policies would be brought to light if there had been lapses in the policies, and
possible remedial actions highlighted through which these lapses could be
corrected.
(b)
Financial Institutions: Other financial
institution like commercial banks especially the bank under study, merchant
banks, insurance houses etc. will find this research work helpful. The roles of
the commercial bank in the implementation of monetary policies will be made
clear in this work and as such, the institutions can learn of the optimum
expectations of them by the Central Bank and the economic sector. Consequently,
they will be able to make corrections and avoid errors.
2.
The Government: The government is in overall
control of the formulation and implementation of monetary policies with aim of
controlling the economy at large. Therefore a critical analysis of this work
would help the government in seeing ways of formulating policies and types of
policies to be formulated so as to achieve the much desired goal of the
economic growth and development. The government would learn from mistakes of
the past which shall be enumerated in this work, thereby helping them formulate
good and effective policies.
3.
The Public: This work shall be useful to the
economic watcher and the public in that, it will help them know of the existing
economic trends of the time and how to fit in thereof.
4.
Research Scholars: Academics in the search of
knowledge would find this research work of tremendous value. Scholars would
learn of the Central banks achievement resulting from the policy guidelines
which formulates in order to stabilize the economy. This work would also act as
a motivator to other researchers who would be geared towards widening their
search for more facts concerning the effects or impacts of monetary policy on
commercial bank lending in Nigeria.
1.8 OPERATIONAL
DEFINITION OF TERMS
For
this study, the following terms will be defined for clarity.
i)
Monetary policy: This is defined generally as
the combination of measures designed to regulate the value, supply and cost of
money in an economy.
ii)
Open market operation: This could be defined
as the prudence power of the central bank made to purchase or sell securities
in the financial markets.
iii)
Liquidity squeeze: This is monetary
contraction or mop-up. It is a situation where the level of fund (i.e loanable
fund) is very low (Okpara, 1997:51, 54, 55).
iv)
Legal Reserve Ratio: This is a quantitative
instrument used by the Central Bank to control and regulate the cash or the
reserve of banks.
v)
Interest Rate: This is that rate at which the
Central Bank as the lender of last resort charges the commercial banks on loans
extended to them.
Ajayi, I (1999). “Evolution and functions of Central Banks”. Central
Bank of Nigeria Economic and Financial Review, 37(4):
11-12.
Anyanwu,
F.A (2003) Public Finance Cremd Publishers. Owerri.
Okpara G.C (1997) Fundamental of Money and banking in Nigeria.
Abakiliki: Willy Rose and Applied Publisher.
Onwumere,
J.U.J (2009) Business & Economic Research, Methods. Enugu:
Vougasen Limited.
The Central
Bank of Nigeria “Monetary and credit guidelines for 1998 fiscal year”,
monetary policy circular No 26.
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