ABSTRACT
This study examined the effect of
monetary policy on the financial performance of deposit money banks in Nigeria.
Using a time series data for 35 years for the period 1981 to 2015, all deposit
money banks as captured by the Central Bank of Nigeria
Statistical Bulletin(2015) were considered. The effect of liquidity
ratio, lending rate, loan to deposit ratio and cash reserve ratio were examined
on the financial performance of deposit money banks measured by their net worth
and total credits.
The study was based on Sangmi and
Nazir (2010) Asset Quality theory. The data was analyzed using descriptive and
inferential statistics. Based on the result of stationarity test, the ordinary
least square method and the Autoregressive Distributed Lag method were
employed. A short run model of net worth and long run model for both the log of
net worth and the log of total credits were estimated. Post estimation test
were also conducted.
The results revealed that the mean
of net worth and total credits are 5455.27 and 79608.63 respectively. In the
long run, monetary policy variables including liquidity ratio, lending rate,
loans to deposit ratio and cash reserve ratio had no significant effect on the
log of net worth. However in the short run, variations in the liquidity ratio,
loans to deposit ratio and the cash reserve ratio for previous years had
significant effect on the log of net worth in the current year. When financial
performance is measured as total credits, the liquidity ratio and loans to
deposit ratio had positive significant effect in the long run. The cash reserve
ratio had a negative significant effect in the long run. The log of lending
rate was insignificant in both the long and short run.
The
study concluded that monetary policy significantly explains the financial
performance of deposit money banks both in the short and long run. Monetary
policies for previous years are particularly highly significant. The lending
rate had no significant effect on financial performance of deposit money banks.
Increasing liquidity ratio in the current year is necessary towards improving
the financial performance of deposit money banks in the future. Efforts toward
upward reviews of the loans to deposit ratio and reduction in the cash reserve
ratio are important for improvements in the financial performance of deposit
money banks both in the current and future years.
CHAPTER ONE
INTRODUCTION
1.1
Background to the Study
The financial sector of the economy
plays a huge role in the economic development of a nation and this cannot be
overstressed. It is the channel through which idle funds are made available to
the productive sector, thereby facilitating the use of surpluses in the economy
to generate employment and promote economic welfare (Aurangzeb, 2012). The financial sector provides strong
confidence for depositors, thereby motivating and encouraging saving in the
economy. A strong financial sector also helps to sustain an economy against
external shock that may arise from fall in external capital flow. A strong and
well-developed financial sector is needed to achieve a sustained growth
(Aurangzeb, 2012). Akomolafe (2014), in his view, opined that sustainable
economic growth is often associated with countries with strong financial
sector. The study indicated that the recent incidence of banking and financial
crises in the world, and its aftermath on the world economies give credence on
the importance of the sector on the performances of an economy. More
importantly, the financial sector also serves as the avenue through which the
monetary policies of the government are carried out. The banking industry is
one of the sectors that play an important role in the allocation of capital
resources and risk sharing of future flows in any given economy or country. An
efficient and effective banking industry in any economy is likely to facilitate
increased growth and welfare, and it will smooth business cycles.
For instance banks provide money
changing and payment processing services; transformation of assets in terms of
their maturity, quality, and denomination and more recently management and
control of risks. These functions give banks a central position within the
process of saving and investment allocation. However, these functions make
banks vulnerable to different sources of shocks, and they have a negative
effect on the economy because of banks’ central role. Consequently, there is a
case for strong regulations in a banking environment. Because of the type of
functions banks perform there is need to have in place proper monetary policy
involving issues such as barriers to entry, market concentration, the
borrower-lender relationship, deposit insurance, and the taxation of financial
intermediation in order to improve the performance of the financial sector
(Ibrahim & Muritala, 2015).
The primary objective of Nigerian
banks’ consolidation reform was to guarantee an efficient and a sound financial
system. The reform was designed to enable the banking sector develop the
required capacity to support the economic development of the nation by
efficiently performing its functions as the head of financial intermediation
(Lemo, 2005). Thus, it was to ensure the safety of depositors’ money, position
banks to play active developmental roles in the Nigerian economy; become major
players in the sub-regional, regional and global financial markets and compete
favorably with international banks. The Central Bank of Nigeria’s (CBN) recent
reform to consolidate the banking sector through drastic increase to 25 billion
naira as minimum capital base of any bank led to a remarkable reduction in the
number of banks from 89 to 24 in 2005; changed their mode of operations and
their contributions to the nation’s economic development (Zhao & Murinde
2009).
The Nigerian banking sector had
undergone a number of major changes over the last two decades caused by
restructuring and liberalization of the financial sector as well as
technological progress. Before 1987, the Nigerian monetary authorities
restricted entry, controlled branch expansion and set both deposit and lending
rates. This institutional framework led to a situation of virtually little or
no competition in the sector, with the concentration of activities in the four
largest banks. In 1990s, a lot of structural reforms were observed in the
sector. There was a significant closure of banks, takeover of management and
control by the Central Bank of Nigeria (CBN) and the Nigerian Deposit Insurance
Corporation (NDIC). The mandatory capital level was increased to 500,000.00
naira, while the statutory minimum risk-weighted capital ratio remained at 8
percent on average, the number of banks in Nigeria shrank by approximately 22
percent between 1997 and 1999 (Asogwa, 2004).
The adoption of universal banking
in Nigeria necessitated the CBN to strengthen the regulatory and supervisory
framework. The requirement of capital base was again increased to 2 billion
naira in 2002 while the risk-weighted capital ratio was raised to 10 percent.
In 2004, the CBN announced a new 13 point reform agenda which was intended to
promote soundness, stability and efficiency of the Nigerian banking sector and
to enhance its competitiveness in the African regional and global financial
system. One of the 13 point agenda was to raise the minimum capital base to 25
billion naira with the statutory minimum risk-weighted capital ratio
maintaining at 10 percent. When the new reform was announced, out of the 89
banks operating in the banking sector, about 5-10 banks’ capital base was
already 25 billion naira; 11-30 banks’ capital base was within 10 billion naira
to 20 billion naira; the remaining 50-60 banks were quite below 10 billion
naira (Zhao & Murinde, 2009).
The attempt to meet the minimum
capital base triggered the merger and acquisition in the industry. Further,
banks raised capital from local as well as foreign direct investment. This led
to the increase in the industry’s capitalization as a percentage of stock
market capitalization and market’s liquidity (Somoye, 2008). The reform brought
about changes in size, structure and operational characteristics of the
Nigerian banking system. It is argued that consolidation could increase banks’
propensity towards risk taking through increases in leverage and off-balance
sheet operations (Somoye, 2008). Furlong (1994) stated that an early view of
consolidation in banking was that it made banking sector more cost efficient
because larger banks could eliminate excess capacity in areas like data processing,
marketing or overlapping.
Monetary policy forms part of the
macroeconomic environment that is very critical in enhancing the financial
performance of organizations. The financial development of any economy largely
depends on the short run stabilization of the monetary policy of any economy.
Financial performance therefore plays a very significant role in implementation
of monetary policy (Amassoma,
Nwosa, & Olaiya, 2011). There is a very high degree of
interdependence between monetary policy implementation and the financial
performance of deposit money banks in an economy (Amassoma, Nwosa, & Olaiya, 2011)
The Central bank of Nigeria is the
lender of last resort in the country and is the banker to all the deposit money
banks operating in the country. The main duty of The Central Bank of Nigeria is
to ensure proper functioning of the financial system in Nigeria, the liquidity
in the county and the solvency of the banks. However, the banking industry in
country faces a number of challenges stemming from unstable macroeconomic
environment such as frequently changing interest rates and mandatory deposits.
This is likely to affect their financial performance. In view of this, it is
therefore pertinent to evaluate the impact of monetary policy on the financial
performance of the deposit money banks.
1.2 Statement of the Problem
The performance of the deposit
money banks is a function of majorly the monetary policies adopted in the
country and this invariably has a multiplier effect on the economy developmental
processes. Deposit money banks are usually considered around the globe as the
most appropriate channels for implementing monetary policy by most Central
Banks in many countries. Therefore, monetary policy should have an effect on
the financial performance of deposit money banks in Nigeria. Despite the steady
increase in the net worth of various deposit money banks, there have been
several declines in total credit which were recorded for the period of 1981 to
2015, depending on net worth and total credit to measure deposit money banks’
performance. Therefore, this study aims at examining the extent to which
monetary policy explains the fluctuations in the performance of deposit money
banks.
1.3 Objective of the Study
The main objective of this study is to
examine the effect of monetary policy on the financial performance of deposit
money banks in Nigeria. The specific objectives are to:
1. estimate
the effect of the liquidity ratio on the financial performance of deposit money
banks;
2. analyze the
effect of lending rate on the financial performance of deposit money banks;
3. analyze the
impact of loans to deposit ratio on the financial performance of deposit money
banks and
4. estimate
the effect of cash reserve ratio on the financial performance of deposit money
banks.
1.4 Research Questions
1. What is the effect of the liquidity ratio on the financial
performance of deposit money banks?
2. Does the lending rate have an effect on the financial
performance of deposit money banks?
3. What effect does the loan to deposit ratio have on the
financial performance of deposit money banks?
4. What is the effect of the cash reserve
ratio on the financial performance of deposit money banks?
1.5 Hypotheses
The research hypotheses are: At 5% level of
Significance
H01:
liquidity ratio has no significant effect on the financial performance of
deposit money banks in Nigeria.
H02:
lending rate has no significant effect on the financial performance of deposit
money banks in Nigeria.
H03:
loans to deposit ratio has no significant effect on the financial performance
of deposit money banks in Nigeria.
H04: Cash reserve ratio has no significant effect on
the financial performance of deposit money banks in Nigeria.
1.6 Scope of the Study
This study examined the effect of
monetary policy on the financial performance of deposit money banks in Nigeria.
The study includes all the deposit money banks in Nigeria as captured by the
Central Bank of Nigeria Statistical Bulletin 2015. The period of the study is
34 years (1981-2015) which
were considered relevant to this study because of the availability and
accessibility of the data as at the period this study was carried out.
1.7 Significance of the Study
This study is significant because
it would provide information and recommendation to assist the government to
come up with appropriate monetary policy that can enhance not only the
performance of deposit money banks but the economy at large. The deposit money
banks in Nigeria would be able to understand how changes and variations in
monetary policy by the existing government are likely to affect or impact on
their financial performance. This would enable them to take necessary
approaches to react to variations in monetary policy.
1.8 Justification for the Study
Several studies exist on financial
performance of the deposit money banks using variables such as return on assets
(kolapo et al (2012), return on Equity ( Jhu and Hui 2012), return on Capital
(Korir et al 2015)to measure their financial performance. Akanbi and Ajagbe
(2012) in their study analysis of monetary policy and deposit money banks in
Nigeria, employed panel data from 1992 to 1999 using net profit to measure the
performance of deposit money banks.
Ajayi and Atanda (2012) study on monetary policy and bank performance in
Nigeria also measured commercial bank performance using profitability from 1978
to 2008. Punita and Somaiya (2006) examined the impact of monetary policy on
profitability of banks in India from 1995 to 2000 using return on asset and
return on equity to measure profitability of banks. Udeh (2015) examined the impact of
monetary policy instruments on profitability of deposit money banks in Nigeria
from 2005 to 2012 using profit before tax to measure bank profitability.
The study will contributes to the recent studies that exist on monetary policy
effects on financial performance of deposit money banks by covering the period
1981 to 2015. Little emphasis has been placed on net worth despite its
importance as a measure of financial performance. Hence, the study will include
net worth as a variable for measuring the financial performance of deposit
money banks in Nigeria.
1.8 Operational Definition of Terms
Net worth
(NW): is the total asset minus total outside liabilities of an
individual or a company. Net worth is used when talking about the value of a
company or a personal finance for an individual’s net economic position.
Total
credits: is the amount deposited in the account.
Deposit
money banks: is any financial institution which has
been legally authorized by a governing body of the State, Country, Nation (for
example central banks Nigeria) to accept money in form deposits and also lend
money to individuals for an agreed percentage.
Liquidity
Ratio (LR): are the ratios that measure the ability of
a company to meet its short term debt obligations. These ratios measure the
ability of a company to pay off its short liabilities when they fall due.
Lending
Rate (LR): is the amount charged, expressed as a percentage of principal, by
a lender to a borrower for the use of assets. Lending rates are typically noted
on an annual basis, known as the annual percentage rate (APR).
Loans-to-Deposits
Ratio (LDR): is used to calculate a lending
institution’s ability to cover withdrawals made by its customers.
Cash
Reserve Ratio (CRR): is a specified minimum fraction
of the total deposits of customers, which deposit money banks have to hold as reserves either in cash or as deposits with the central
bank. CRR is set according to
the guidelines of the central bank of a country.
================================================================
Item Type: Postgraduate Material | Attribute: 92 pages | Chapters: 1-5
Format: MS Word | Price: N3,000 | Delivery: Within 30Mins.
================================================================
No comments:
Post a Comment