THE IMPACT OF MONETARY POLICY IN NIGERIA BANKING INDUSTRY

Chapter one

Introduction

1.1Background of the study

The existence of an effective banking sector is necessary for every economy because it creates the necessary environment of economic growth and development through its role in intermediating funds from surplus sector to deficit sector of the economic units. Banking sectors are financial intermediaries whose activities are for collection of savings and lending, thus standing in between the ultimate lender and the borrower and matching the investment requirement of the lender. This stimulates investment as well as international trade and balance of payments. In playing this important role of financial intermediation, the banking sector is seen as effective institution in 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 monetary policy influences financial and economic activities has been widely argued over the years, it is equally accepted that monetary policy affects economic and financial performance of any economy. There are divergence views on the extent of the effects and the channels through which these effects are achieved. This is particularly relevant in the Nigeria setting where the money and capital market are under-developed and Nigerian government has over the years adopted various instruments of monetary policy to regulate and control the cost, volume, availability and direction of money credit and also the performance of commercial banks.

On the other hand, most financial intermediaries are often apathetic towards channeling resources to productive investment even in the face of lower interest rates. All these factors have been cited as limiting the performance of monetary policy in Nigeria. Main while, severe structural supply constraints are deemed to inhibit expansion of output even when the demand for it increases. An expansionary monetary policy consequently often results in inflation rather than output growth.

Statement of the problem

The financial intermediation function of the banking sector presupposes the needs to satisfy the ultimate goals of the sector. Like other private sectors or enterprises, banks have private goals (other than the necessity to effectively perfect the intermediation role) of profitability, liquidity and solvency. Profitability is perhaps more important for financial intermediaries, like banks because it is an evidence of strengths and progress and it helps to generate and radiate confidence in the bank. Banks do not operate in a vacuum; they operate within the framework of the monetary and banking policies provided by the economy. Nigeria has over the years employed these policies at one time or the other to regulate and control the cost, volume, availability and direction of money credit in order to influence the broader objectives of the policy which include price stability, high level of employment, sustainable economic growth development and balance of payments. This raises a number of fundamental questions – What are the precise channels through which monetary policy affects the performance of commercial banks in Nigeria?; To what extent has the application of monetary policy in Nigeria brought about sanity in the operation of commercial banks?

Objective of the study

The objectives of the study are;

1. Examine the impact of banking sector performance on economic development in Nigeria.
2. Identify the channel through which monetary policy influences the performance of banking sector in Nigeria.
3. Examine what changes in profitability resulted from changes in monetary policy.
4. Articulate tentative policies that promote the performance of the banking sector in Nigeria.

Research hypotheses

The following research hypotheses will be formulated;

H₀:   there is no impact of banking sector performance on economic development in Nigeria.

H₁: there is impact of banking sector performance on economic development in Nigeria.

H₀²: there is no channel through which monetary policy influences the performance of banking sector in Nigeria.

H₂: there is channel through which monetary policy influences the performance of banking sector in Nigeria.

Significance of the study

The study will be very significant to students and banking sectors. The study will give a clear insight on the impact of monetary policy in Nigeria banking industry. The study will also serve as references to other researcher that will embark on the related topic

Scope and limitation of the study

The scope of the study covers the impact of monetary policy in Nigeria banking industry. The researcher encounters some constraints which limit the scope of the study namely:

The research materials available to the researcher insufficient, thereby limiting the study

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Definition of the term

Monetary policy: Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing or the money supply

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