ABSTRACT
This study examined the impact of selected monetary policy instruments on credit to private sector in Nigeria.Regulatory policy is a very essential element in achieving desired objectives such as 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 industrialization and economic stability.Bank Industry Performance serving as the dependent variable and is proxied using Private sector credit, and selected regulatory instrument representing the explanatory variables, proxied using minimum rediscount rate (MRR), Liquidity ratio (LR) and cash reserve ratio(CRR).The objectives of the study were to: analyze the impact of minimum rediscount rate on credit to private sector in Nigeria, examine the impact of liquidity ratio on the private sector credit in Nigeria, and assess the impact of cash reserve ratio on private sector credit in Nigeria Banking industry. The study employed Ordinary Least Square (OLS) technique for analysis of the data covering the period of 1981 to 2015.Data for the study were collected from Central Bank of Nigeria(CBN) Statistical bulletin. Results emanating from the study are in three-folds. First, liquidity ratio had a negative but statistically insignificant impact on credit to private sector. Second, loan to depositors had a negative but statistically significant impact on credit to private sector. Third, minimum rediscount rate had a negative but statistically significant impact on credit to private sector. The study recommends that government needs to benchmark best practices in monetary policy development from those economies that are more advanced in order to develop better monetary policies that can improve the performance of the banking industry, indeed, credit to private sector especially with respect to minimum rediscount rate, liquidity ratio and loan to deposit ratio.
1.1 Background to the Study
CHAPTER ONE
INTRODUCTION
Most countries around the globe do make frequent significant changes in the design and conduct of their regulatory policy in order to address the prevailing economic conditions. These adjustments in policies are adopted by both developed and developingcountries in order to respond to the changes in economic changes in various countries or regions. Regulatory policy is a very essential element in achieving desired objectives suchas promoting economic growth, achieving full employment level, reduction in the level ofinflation, maintenance of healthy balance of payment, sustenance of growth in theeconomy, increase in industrialization and economic stability. Recent research has confirmed that regulatory policy has other important objectives such as smoothing of thebusiness cycle, reducing chances of economic crises; stabilization of interest rates andreal exchange rate stabilization (Mishra &Pradhan, 2008).
Regulatory changes largely affect the way banks operate. Ahumada and Rodrigo (2004) argue that the nature of banking activities and the position banks hold asintermediaries makes these financial institutions the most appropriate channels foradoption of the monetary policy of any country. They further assert that there are twoimportant channels of monetary policy transmission that largely depend on thefunctioning of the banking sector. The first is the conventional interest rate channel andthe other is the credit channel. The former channel operates when the central bank’sadjustments to the nominal interest rate have an impact on the real interest rate and thuson the pattern of investment and consumption. This channel will only work, however, if banks transmit the changes in the monetary policy rate to their customers. The creditchannel, in turn, assumes some capital market imperfections, such as asymmetricinformation, that induce a contraction of the quantity of credit when the central bankimposes a restrictive monetary policy (Ahumada& Rodrigo, 2004).
The banking industry is one of the sectors that play an important role in the allocation ofcapital 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 increasedgrowth and welfare, and it will smooth business cycles. There are several functions thatare performed by banks thus making them more appropriate channels of regulatory policyimplementation. For instance banks provide money changing and payment processingservices; transformation
of assets in terms of their maturity, quality, and denominationand more recently management and control of risks. These functions give banks a centralposition within the process of saving and investment allocation. However, these functionsmake banks vulnerable to different sources of shocks, and they have a negative effect onthe economy because of banks’ central role. Consequently, there is a case for strongregulations in a banking environment. Because of the type of functions banks performthere is need to have in place proper regulatory policy involving issues such as barriers toentry, market concentration, the borrower-lender relationship, deposit insurance, and thetaxation of financial intermediation in order to improve the performance of the financialmarket (Ahumada& Rodrigo, 2004).
Put straight, financial regulation and policies have helped to facilitate capital formation and generate growth in the economy,but the consistent and persistent financial intermediation roles of Banks have been able to foster national andinternational development via the means of channeling resources into sectors of priority for sustainabledevelopment. The development of Nigerian financial institution system could be characterized by changes instructure, growth and emerging challenges since the era of Structural Adjustment Programme in 1986 to date(Soyinbo&Adekanye, 1992). It is believed that the financial system remained the framework within which thecapital formation takes place through the intermediation of the financial institutions processes (Obadeyi, 2013 citing Akingunola). Therefore, the regulation of banks in twenty-first century involves the processes offinancial innovations, globalization and deregulation in advanced- economies banking sector; but operations ofother financial institutions if not checked might affect the performance of banks in any economy (John&Kent, 2008; Obadeyi, 2013, CBN, 2014). However, the authorities via Central Bank of Nigeria (CBN) should intervene in the operation of the banking system in order to correct the shortcoming of price fixing mechanismso as to ensure that what is commercially rational for an individual bank also possesses approximatecharacteristics of social rationality as much as possible. Thus, the interest rate charge by bank is regulated toencourage savings mobilization and to ensure enough investment for rapid economic growth. In Nigeria, there is need for operators, regulators andpolicymakers in the financial sector to understand that reform does not imply ‘no regulation’ but entailsrestructuring of the financial system, allowing the forces of the demand and supply to dictate price mechanism as well as liberalizing the financial system further to foster the set objectives of the government in promotingeconomic transformation (Obadeyi, et al, 2013).DemetriadesandAndrianova(2005) argue thatfinancial reform is not the key factor behind the diverse result of financial
development and economic growth of countries, but institutions and political economy; which are the likely factor that are responsible for the successof some countries to succeed in developing their financial systems while other have not.
1.2 Statement of the Problem
The type of regulatory instrument that any given country adopts is a major determinant on thefinancial operations of most financial institutions operating in that economy. Regulatory policy has the potential to trigger or inhibit investment activities through provision ofaffordable and denying access to credit respectively. Commercial banks are usuallyconsidered around the globe as the most appropriate channels of implementing regulatory policy by most Central Banks in many countries. This leaves the commercial banks in avulnerable situation that is likely to affect their financial performance due to changesoccurring in the macroeconomic environment.
Nigeria has experienced unstable macro environment in the last few years which led tochanges in monetary policy. These changes in regulatory instrument forced most of thecommercial banks to shift the effects to their customers. Shifting these changes tocustomers may have an impact on the financial performance of the banks. Studies regulatory policy and bank performance indicate different results on the existingrelationship. For instance Ajayiand Atanda (2012) carried out a study on monetary policyand bank performance in Nigeria. The findings confirmed that bank rate, inflation rateand exchange rate are total credit enhancing, while liquidity ratio and cash reserves ratioexert negative effect on banks total credit. Another finding indicated that although onlycash reserve ratio and exchange rate found to be significant. Fatade (2004) carried out aninvestigation on the impact of monetary policy on banks’ performance in Nigeria. Thestudy established that various policy measures instituted in the country over theyears have directly and indirectly affected performance of the banking sector in a numberof ways while includes Banks profitability, Deposit/Savings mobilization Loans &Advances and so on. The effectiveness of bank’s performances depends on theinstruments used in macroeconomic policies and the prevailing economic conditions.
Monetary policy is a deliberate action of the monetary authorities to influence the quantity, cost and availability of money credit in order to achieve desired macroeconomic objectives of
internal and external balances. The action is carried out through changing money supply and/or interest rates with the aim of managing the quantity of money in the economy. The importance of money in economic life has made policy makers and other relevant stakeholders to accord special recognition to the conduct of monetary policy.
Despite the studies mentioned above, limited studies have been conducted to establish the effectof monetary policy on the credit to private sector in Nigeria. Nigeria varies her policies frequently and there is need to find out the effect of these variations on theperformance of commercial banks.
Theories are being constantly challenged in the light of new research, old ones are being subjected to new empirical investigations using the advantages of progress in information communications technology and computerized econometric software
The studies are few and there is need to carry out more studies to ascertain the authenticity of the previous finding. Also, the methodologies are poorly specified, therefore, there is need for more advance methodology like ordinary least square (OLS)
This is therefore a research gap the study sought toaddress by answering two main questions: What is the main monetary policy instruments used in Nigeria? And how does the monetary policy instruments affect credit to the private sector in in Nigeria.
1.3 Objectives of the study
The main objective of this study is to assess the impact of selected monetary policy instruments on credit to the private sector in Nigeria. The specific objectives are as follows;
1. To examine the impact of liquidity ratio on the private sector credit in Nigeria
2. To assess the impact of loan to deposit ratio on private sector credit in Nigeria.
3. To analyse the impact of minimum policy rate on credit to private sector in Nigeria.
1.4 Research Questions
1. How does liquidity ratio affect private sector credit in Nigeria?
2. How far has loan to deposit ratio affect private sector credit in Nigeria?
3. To what extent does minimum policy rate affectprivate sector credit in Nigeria?
1.5 Research Hypotheses
Base on the objective of this study the following research hypothesis are therefore formulated;
Hypotheses one
Ho: Liquidity ratio does not have a positive and significant effect on private sector credit in
Nigeria. Hypotheses two
Ho: Loan to deposit ratio does not have a positive and significant effect on private sector credit in Nigeria.
Ho: Hypotheses three
Minimum policyrate does not have a positive and significant effect on private sector credit in
Nigeria.
1.6 Scope and Limitation of Study
The study covers the operation of the regulatory authorities as it relates to the banking industry in the past thirty four years which was marked by the Nigerian general strike of May
1981 on the struggle between Nigeria military regime and organize labour.The rational for choosing 1981 as bench mark for this study is as a result of general strike carried out by the organized labor during military regime which stagnated the economic activities. The study would be limited to the period of 1981-2015.According to Muyiwa (2005), this period witnessed a more intensive intervention in banking by the regulatory authorities in light of the perception of the link between finance and development and the desire to maximize the banking sector’s contribution to Nigeria’s economic development.
Secondly, the Nigerian banking industry before the 2004 reform was a case of a system heading to a total collapse as incidence of failure and liquidation arising from weak capitalization and operational inefficiency were common phenomenon (Ike 2006)
In view of the technicalities involved information gathered is limited to those accessed and gathered with the aid of local newspapers, magazines, journals and annual reports of the Central Bank of Nigeria (CBN), Nigeria Deposit Insurance Corporation (NDIC),and the internet. However, the effect of this limitation has been reduced to the barest minimum.
1.7 Significance of the Study
1. Bank customers: This study is significant in that it will help depositors of funds in financial institutions to fully understand the factors that affect the loanable funds available to the private sector.
2. Regulators of the financial industry: It also provides a platform for the regulatory authorities to appreciate the impact of their activities on the banking industry, and underscores areas for improvement.
It is also imperative to state that a study of this nature provides an independent platform via which the regulators can appraise fundamental tools of regulation in a bid to make reasonable adjustments where necessary.
3. Bankers: The findings of this study will be of immense benefit not only to the Nigerian banking industry and its related institutions, but also to those interested in understanding the inter-relationship between the actions of the regulators on one hand and the banking institutions on the other as well as providing a platform for promoting an efficient and effective banking practice.
4. .The government/researchers: Other researchers will find this study very useful since it will add to the existing knowledge. Such researchers and students who wish to carry out a related study will have to use it as a research material. Indeed, the government will use some of the recommendations in this work for policy direction and implementations.
This material content is developed to serve as a GUIDE for students to conduct academic research
IMPACT OF SELECTED MONETARY POLICY INSTRUMENTS ON NIGERIAN BANKING INDUSTRY CREDIT TO THE PRIVATE SECTOR 1981-2015
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