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University of Nigeria Research Publications
OKPALA, Chidi Nkemakonam
Aut
hor
PG/EMBA/98/0127
Title
A Critical Appraisal of the Effects of Monetary Policy on Commercial Banks in Nigeria
Facu
lty
Business Administration
Dep
artm
ent
Banking and Finance
Dat
e September, 2000
Sign
atur
e
A CRITICAL APPRAISAL OF THE EFFECTS OF MONETARY POLICY ON COMMERCIAL BANKS IN NIGERIA
OKPALA CHID1 NKEMAKONAM CMD-UNN/PG/EMBA/98/0127
DEPARTMENT OF BANKING AND FINANCE FACULTY OF BUSINESS ADMINISTRATION
UNIVERSITY OF NIGERIA, NSUKKA.
SEPTEMBER, 2000
A CRITICAL APPRAISAL OF THE EFFECTS OF MONETARY POLICY ON COMMERCIAL BANKS IN NIGERIA
OKPALA, CHID1 NKEMAKONAM CMD-UNN/PG/EMBA/98/0127
SUBMITTED TO THE DEPARTMENT OF BANKING AND FINANCE IN PARTIAL
FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF MASTERS OF BUSINESS ADMINSITRATION
(MBA) DEGREE IN BANKING AND FINANCE UNIVERSITY OF NIGERIA, NSUKKA.
SEPTEMBER, 2000 -r------------ ---
OKPALA, CHID1 NKEMAKONAM, a postgraduate student in the
Department of Banlting and Finance with Registration Number CMD-
IJNNIPGIEMBAI98IO 127 has satisfactorily completed the requirements for
the award of degree of Masters in Banlting and Finance (MBA).
The work embodied in this report is original and has not been submitted in
part or full for any other diploma, degree or award of this university or any
other university
............................. Dr. B. E. Chilteleze Project Supervisor
............................. Mr. G. E. Anelte Head of Department
DEDICATION
TO THE GLORY OF THE ALMIGHTY GOD
ACKNOWLEDGEMENT
One of the major difficulties one faces in acltnowledgement, is the ability to develop a
correct and objective priority list of the support cast.
Foremost, I wish to express my profound gratitude to my Supervisor, Dr. B. E. Chilteleze,
for his timeless supervision, patience, inspiration, encouragement, constructive criticisms
and invaluable contribution.
I am also immensely indebted to the management and staff of Standard Trust Banlt
Limited, Standard Chartered Bank Limited, Citibanlt Limited and the Central Banlt of
Nigeria. They assisted in a great measure to get many of the essential information and
materials I used for the research work.
Also the staff of the CMD-UBR Executive Programme Department and other lecturers
that took pains to visit from Enugu regularly.
I cannot conclude without mentioning my parents, Mr. & Mrs. L. C. Okpala, my brothers,
Emelta and Tochultwu; and Mr. & Mrs. Obi & family.
Finally, to the Almighty and All-conquering GOD, for ensuring that I excel in all of my
endeavours.
Thank you all and GOD bless.
Governments the world over due to the failure of Adam Smith's "invisible hand" to regulate economic activity in a manner that will achieve certain desired goals such as low inflation, full employment, balance of payment equilibrum and equitable income distribution have had cause to deliberately attempt to influence the course of economic activity through several policy options. a number of such options are categorised as Monetary Policy and are geared towards influencing the quantity, cost and direction of money supply in the economy.
This study is focused on the influence of various policy measures on commercial banlts. The importance of banking institutions to the realisation of Monetary Policy objectives is best appreciated when it is realised that they are in the main, channel through which policy measures are made to bear on the real sector of the economy.
-. An understanding of the evaluation of the Nigerian Banking System as a component of the Financial System is therefore imperative as background knowledge on which this study is premised. This we attempted in Chapter One.
The Nigerian Banking System is part of the country's colonial heritage which over the years has undergone certain changes to suit indigenous purposes. However, available literature still point to problems of inadequate financing of certain key sectors vital to econonlic development and self reliance. There are also problems resulting from the underdeveloped stage of the Financial System as a whole which has proved to be a hindrance to the achievement of both internal and external economic balance. The banks have not really lived up to expectations and so gaps exist in the network as can be recognised from the fact quite a large percentage of the country's money supply is outside the banking system. This therefore, results in poor savings and in addition, the mechanism for channeling it into investment is faulty.
Chapter Two examines the role of the Central Bank of Nigeria as the body charged with Monetary Policy formulation and implementation and its effects on the business environment of banks. Here, the relationship between the macroeconomic goals such as full employment, low inflation, economic growth and balance of payment equillibrum and the activities of the banks and the manner in which major instruments of Monetary Policy namely: Reserve
Requirement, lnterest Rate Policy, Credit Ceiling and several quantitative credit control measures bear on banking institutions for the attainment of the goals, are all examined in detail.
In Chapter Three, the methodology to be adopted was designed to collect data that gives a wider knowledge of what is actually happening. 'The Questionnaire and interview methods were used and the information gathered added up to the Findings, Recommendations and Conclusions.
In Chapter Four, relevant data were presented and analysed. Data was presented in a tabular form while percentage movement in variables was employed to aid analysis. Dependent variables such as deposit mobilization, bank loans and advances and their term structure, term structure of deposits, sectoral allocation of credit are analysed in relation to changes in poIicy variables such as discount rate, sectoral credit guidelines, credit ceiling, open market operations and variations in reserve requirements. Correlation coefficient was employed in testing the
. strength of the relationship between credit ceiling and cominercial bank's credit to the domestic economic. sectoral credit guidelines on preferred sectors and total credit to the preferred sectors, interest rate policy and commercial banking system's savings and deposit composition and finally, credit ceiling and maturity structure of commercial banlting system's loans and advances.
In Chapter Five, a summary of the findings from the study is highlighted and recommendatioils and conclusions drawn up accordingly.
vii
TABLE OF CONTENT
'Title Page
Certification
Dedication
Acltnowledgement
Abstract
Table of Content
CHAPTER ONE
1.1 Background of the Study
1.3 Statement of Problems
1.3 Objectives of the Study
1.4 Significance of the Study
1.5 Hypothesis
1.6 Scope and Limitation of Study
1.7 Definition of Terms
References
CHAPTER TWO
2.0 The Review of Literature
2.1 Historical Bacltground of Nigeria's Financial System
2.2 Evolution of Nigeria's Baiilting System
I 2.3 Performance of the Nigerian Banlting System
2.4 Monetary Policy and The Banking Industry
2.5 Instruments of Monetary Policy
2.6 Effects of Monetary Policy on Banks
2.7 Trends in Nigeria's Monetary Policy
References
CHAPTER THREE
3.0 Research Methodology
3.1 Sources of Data
3.2 Sample Size
3.3 Method of Investigation
CHAPTER FOUR PRESENTATION AND ANALYSlS OF DATA 63
4.1 Analysis of Data 7 1
4.2 Testing of Hypothesis 7 1
CHAPTER FIVE
5.0 Findings. Recommendations and Conclusion
5.1 Findings
5.2 Recommendations
5.3 Conclusion
Bibliography
Appendix
CHAPTER ONE
1.1 BACKGROUND OF THE STUDY
Monetary Policy is one of the important tools of economic policy governments apply in
their aim of achieving general economic well being of the citizenry. It is geared towards
controlling the quality, cost and direction of money in the economy.
'Ihe economic system has over the years proved to be unstable and misdirected if left on
its own. In order to avoid alterations between periods of boom and depression, the use of
monetary policy becomes necessary.
Monetary Policy could be aimed at stimulating or restraining the economy depending on
what the authorities interpret changes in certain economic indices to be. The mechanism
through which the impact of monetary policy is felt by the whole economy is the
financial system.
The financial system has the all important of financial intermediation which in summary
is that of channeling funds from surplus sectors to deficit sectors in the economy. It
consists of a framework of laws, regulations and financial practices determining the flow
* of financial resources.
l'he banking industry may be described as a subsystem of the financial system and so has
an important role in execution of monetary policy measures. Monetary policy forms the
major part of the environment within which bank operations are carried out, providing the
banking industry with opportunities as well as constraints on the activities of the industry.
Furthermore, the frequency of changes in the monetary policy is a major contributor to
the risk factor in the industry. The manner in which banlts react or respond to changes
brought about by the monetary policy is of interest as the effectiveness of the industry.
1.2 STAETMENT OF PROBLEM
Banlting institutions like other private sector economic units have a tendency for having a
narrow view of the objectives of their enterprise. The all important objectives is that of
profit malting for shareholders and remaining in business.
The pursuit of this narrow objective often conflicts with overall objectives of government
economic policy. Banlts for instance are ltnown to avoid the establishment of rural
branches and have a preference for lending short because of the need to maintain
liquidity. In addition, the banlts tend to favour commerce rather than manufacturing or
agriculture in credit granting despite the fact that they make up the priority sectors. This
inclinations of the system are not in sympathy with the aim of economic policy which is
the development of a vibrant, self reliant and stable economy. 2
The question then is, to what extent has monetary policy measures affected the operations
of banks and how far are the bank's reactions to the increase in constraints occasioned by
monetary policy been in sympathy with the aims and objectives of policy measures?
1.3 OBJECTIVES OF STUDY
This study is carefully carried out with the following objectives viz:
P To determine the effect of interest rate policy on banking system's deposit
mobilisation and coin binat ion.
i To ascertain the effect of open market operations on commercial banks investments.
P To ascertain the relationship between credit ceiling and maturity of the banking
system's loans and advances.
P To determine the relationship between credit ceiling and bank credit to the domestic
economy.
Z To determine the effect of sectoral credit guidelines on bank financing of preferred
sectors.
This study is significant to the extent that an understanding of the manner in which banks
react to monetary policy measures is a starting point for the appraisal of the effectiveness
of monetary policy. The findings may trigger off further research in this area of study
that will better monetary policy formulation and application. 3
This study therefore is of importance to economic policy makers, bankers, the academic
and students to mention bur a few.
1.5 HYPOTHESIS
Ho: That the CBN's credit ceiling does not modulate the commercial banlting system's
credit to the domestic economy.
Hi: That the CBN's credit ceiling modulate the commercial banking system's credit to
the domestic economy.
Ho: That the sectoral credit guidelines on commercial banks financing of preferred
sector does not affect total credit to the preferred sector.
Hi: That the sectoral credit guidelines on commercial banks financing of preferred
sector affect total credit to the preferred sector.
Ho: That interest rate policy does not affect commercial banlting system's savings and
deposits composition.
Hi: That interest rate policy affect coinmercial banlting system's savings and deposits
composition.
Ho: That credit ceiling does not affect the maturity structure of commercial bank's
loans and advances.
Ho: That credit ceiling affect the maturity structure of commercial bank's loans and
advances.
1.6 SCOPE AND LIMITATION OF STUDY
This study covers various monetary policy instruments and policy options as they affect
banking operations. It is however. limited to con~mercial banking institutions in Nigeria.
Emphasis is clearly laid on applications and not on process of formulation of monetary
policy. The study spans for a period of Ten years, 1990-1 999.
A research of this nature is a no mean task. This basically true considering the fact that
it is carried out when the researcher has a full time job. It is important to note some of
the problems being encountered by the researcher in the course of this research work.
The problems are classified as follows:
7 ?
F Time Constraint: Ihere was not sufficient time for efficient and effective data
collection and compilation. Thc coinbination of work time with the research made
time to be limited for the research work. Also, getting the respondents and other data
from the banks exerted considerable pressure on the limited time available.
7 Non-availability of sufficient data: Most of the libraries visited lacked information
that dwelt on the subject area. Some of the text consulted lacked the required
information and the CBN and commercial banks officials were unwilling to release
all that the researcher needed for the study. and this limited the research work.
1.7 DEFINITION OF TERMS
i Monetary policy: Term used in juxtaposition of fiscal policy to describe the activities
directed at effecting changes in the quantity of money and credit, on the premise that
the control of these qualities is the prime way of maintaining a stable price level and
modifying the business cycle.
r Coinmercial bank: A bank retail in function, which has acceptance of deposits and
credit creation as its main services.
7, Central Bank: Dominant and apex bank of a country distinguished from other banlts
by its functions of currency issuance, discounting for banlts, open market operations,
and holding of reserves. Usually, this bank has official or semi-official status in the
country.
b Financial Intermediaries: Institutions such as banks, finance houses, insurance
companies and mutual trust that act as intermediary between lenders and savers.
b Rediscount Rate: This is the rate at which the Central Bank lends to banks. It varies
with time.
r Credit ceiling: A ceiling placed on the volume of money or credit banks can create or
can give a single individual (Single Obligor Limit) within a time frame. Usually
fixed by the apex bank.
r Quantitative Control: 'l'hese are techniques of monetary policy that affects the
economy generally without regard to various units in the economy.
k Qualitative Control: These are part of monetary policy aimed at influencing the
direction of bank loans and advances and amount that should be directed to a
particular sector of the economy.
REFERENCES
I . Adekanye, Feni: The Elements of Banking, 1" edition, Graham Burn,
Berdfordshire. 1983.
2. Nwankwo, Green: Nigerian Financial System (Effective Lending in a
Developed Economy), Macmillian Publishers, London,
1980. I
3 . Osayameh. Ralph: Practice of Banking (vol. 2), 1" edition, Nigerian Institute
of Bankers, Nigerian, 1986.
4. Perry, F. E.: A Dictionary of Banking. 3"' edition. Maceonal and Evans
Ltd., Plymouth, 1979
5 . Perry, F. E.: A Dictionary of Banking. 2"" edition. Graham Burn,
Bedfordshire, 1970
CHAPTER TWO
2.0 THE REVIEW OF LITERATURE
There are three sub-areas namely: Historical background, Relevant theories to the major
research question and current literature. The historical background treats the scenario of
the field of study.
2.1 HISTORICAL BACKGROUND OF NIGERIA'S FINANCIAL SYSTEM
The need for a financial ssytem results from the transformation of the economic system
from subsistence mode to the exchange mode in the course of development. With the
inconveniences of barter, such as the necessary condition of double coincidence, the need
for money to facilitate exchange arises. Most monetary transactions are of the form of
buying, selling, borrowing. lending, savings, investments and all those activities that have
bearing on the economic well-being of the citizenry (Olashorc 1988). In order that this
well-being is optimized, there is need for an efficient relationship between monetary
activities. This inter-relationship is traceable to the structure within which they
interrelate. 'This structure is known as the financial system.
Integral parts of the financial system include the financial institutions, financial markets,
and financial instruments. A financial system is made up of the entire congeries of
9
institutions and institutional arrangements set-up to attend to the needs of modern
econonlies (Onoh 1981). The financial system serves the need of the economy through
the mobilization of funds from surplus sectors and lending to the deficit sectors of the
economy. This according to G. 0. Nwankwo, is the single most important function of the
financial system upon which any appraisal of its performance should be based.
In addition to the role of financial intermediation. the financial system has the study of
providing the economic system with a sound mechanism for payments (Ojo. 1980).
The above generally constitute the f~mctions of a financial system but it has to be
conceded that whatever role envisaged in the design of the structure of the financial
system will depend on the pcculiar needs of the particular economy, it is to serve. To this
end, a much broader function for the Nigerian financial system can be deciphered from
the view of the committee on the financial system should:
a) facilitate effective management of the economy;
b) achieve greater mobilisation of savings and efficient channeling;
c) provide non-inflationary support to the econoimy;
d) insulate the economy from as much as possible and as desirable from the
vicissitudes of international economic scenes;
e) ensure that no viable project is frustrated because of lack of funds;
10
fl effectively sustain the indigenisation of the economy; and
g) assist in achieving greater integration and linkages in agriculture. commerce and
industry.
The role assigned the financial system will from the above depend on the economic goals
of the nation.
The financial system con~prises of a variety of institutions and institutional arrangements.
At the apex of the system, are the financial authorities made up of the Ministry of
Finance and thc Central Bank of Nigeria. Thesc institutions provide the regulatory
framework for the functioning of the system. Other institutions in the financial system
include the banking institutions such as commercial banks, merchant banks, community
banks and mortgage banks. There are also non-financial institutions like insurance
companies. finance companies provident institutions, etc. There are also the special
financial institutions comprising of development banks. 'The institutional arrangement
that facilitates the functions of the system comprises of the Capital and the Money
Markets.
liptill the late 1960s, most of these institutions were absent in the Nigerian financial
system. The genesis of the Nigerian financial system could be traced to this period and
the early 1960s when conscious attempts were made at economic development. A chain
of financial evolution began with the establishment of the Central Bank of Nigeria in
1958 and with it came monetary and banking developments that liilally resulted in some
form of formal financial market being evolved (Ade T. 0.jo 1966).
Since the establishment of the CBN, other measures have been taken to expand the
country's financial structure and to adjust the ill-shaped tinancial system, a legacy of the
colonial era, towards meeting the requirements of a developing economy. There are at
present, two financial systems in Nigeria namely the Informal and Traditional or
Indigenous and the formal or modern system. The informal consists of intermediaries
such as "esusu" group, age grade associations and the social c h b s (Onoh 1980).
2.2 EVOLlITION OF NIGERIA'S BANKING SYSTEM
For the purposes of this study, we shall be concerned with just the formal or moderll
financial system and particularly, the Banking Sector. Banking in Nigeria dates back to
1892 with the establishment of the British Bank of West Africa (now First Bank). This
was followed by the Barclays Bank in 1917, it is now known as the Union Bank of
Nigeria. The early banlts were mainly expatriate with the main objective of facilitating
the financing needs of foreign economies. They were on integral part of the colonial
financial arrangement that had the British financial system as its pivot. With the banking
scene monopolised by the expatriate banlts and with focus being service to the empire
rather than the needs of the indigenous enterprise and hence, the development needs of
the country. It then became necessary to establish indigenous banlts to fill the gaps in the
financial arrangement.
Successful indigenous banlting efforts in Nigeria began uith establishment of the
National Bank of Nigeria in 1933 (Uzoaga 198 1). BetmIeen this period and 1954, more
indigenous banks were established but among the lot, only the African Continental Bank,
established in 195 1 was successful.
The banlting system has established considerable growth over the years. Between the
period 1960 to 1998, the number of banlting institutions has grown from 9 to 128, assets
of the banking sector also followed with a similar growth trend, fiom N238.5m to over
N900b. Inspite of these developments, Olashore is of the opinion that the banking sector
is still dominated by the exapatriate banks (Olashore 1989). According to Uzoaga, it is
becoming difficult to distinguish indigenous from expatriate banks as a result of the
effects of indigenisation. He however. maintains that inspite of the resultant
transformation in the structure of ounership and management, the destructive feature of
13
foreign interest in the capital and management of foscign commercial banlts has remained
unchanged. The dominance ol' expatriate comn~ercial banks, in Olasl~ose's view, has not
been affected by the upsurge in the number of indigenous commercial banlts and
merchant banlts in the 1980s and 1990s.
Before the banking ordinance of 1952, the financial system was virtually unregulated
(Ade Ojo 1982). The banlting ordinance together with some sections of the companies
ordinance provided some form of control for the banlting system. This situation
prevailed until October '59 when the banking ordinance that established the CBN was
brought into force. The CBN thus from 1959 became thc main mechanism for thc
manipulation for the regulation ol'the banlting system and indeed the tinancial system.
The CBN as a regulatory body for the financial system was charged with the
responsibility of issuing legal tender currency in Nigeria, maintaining external reserves,
safeguarding internal value of the Naira, promoting monetary stability, maintenance of a
sound financial structure in Nigeria and the responsibility for acting as the banker and
tinancial adviser to the Federal Government (CBN Act 1958). The bad< further has the
responsibility of cooperating with other financial institutions for the provision of
adequate and reasonable banlting services to the public. Subsequent amendments to the
Act were aimed at correcting the imbalance in resource allocation perpetrated by the
expatriate commercial banks. The CHN by the Act was also entrusted Lvith monetary and
credit control.
Chris lJdoh is of the opinion that the trend in the development of the Nigerian Banking
Institutions is closely related to the country's colonial experience and the trends in the
political and economic development. the Nigerian Banlting System in his view was
bequeathed the legacy of the British Banlting System such as branch banking,
characterized by conservation in lending, lending short, and urban banking orientation
(CHN Bullion Vol. 12 No. 2). The restructuring of/ Nigeria's political administration
from 4 regions to 12 states in the late 60s had effect on the banking system. In Udoh's
vicw. the foreign owned banlts were unprepared and unable to effectively meet the
challenges posed by the changes in the political terrain. These new states required
financial services which the foreign banks were unable to deliver adequately. This failure
on the part of the expatriate banlts resulted in the emergence of state owned banlts in the
banking system. These banlts however, suffered as a result of ineptitude on the part of
management and undue interference by the various state governments. The banks were
politicised and abused so much so that they were not much different from other state
owned parastatals.
The banking system in 1970s was also affected by the indigenisation decree, which
changed the equity structure of the foreign owned banlts. The decree provided for
minimum of 60% equity shareholding for Nigerians. The oil boon1 of the 1970s
increased bank's liquidity tremendously and this led to the emergence of merchant banks
to finance industrial and cominercial activities and to provide other specialized merchant
banking services such as equipment leasing and loan syndication.
The emergence of the merchant banks introduced into the system new instruments and
technology (CBN Bullion Vol. 12 No. 2 AprilIJune 1988).
The depressed economy of the 1980s witnessed the introduction of new banking
products. With the need to diversify the forex carning sources for the country, many
banlts developed specialised departments whose responsibility is to promote exports.
The development banks, which are the Nigerian Industrial Development Bank (NIDB),
the Nigerian Bank for Commerce and Industry (NBCI), the Nigerian Agricultural and
Cooperative Bank (NACB) established in the 1970s and the Peoples Bank, Comnlunity
Bank, Urban Development Bank and the Nigerian Export Import Bank (NEXIM)
established between the late 80s and the early 90s respectively for the purposes of
financing economic development, have had their policy towards small and medium scale
enterprises. An additional welcome development took place in the 80s with the
establishment of the National Deposit Insurance Corporation (NDlC), for the provision of
insurance cover for all deposit liabilities of licenced banlts.
Perhaps the most coinprel~ensive changes in the Nigerian banking system in the late 80s
could he observed in the light of the deregulation of economy; a product of the Structural
Ad-justment Programme (SAP). The effects include market determination of interest
rates. abolition of exchange control system and greater role given to banlts in the
management and allocation of foreign exchange. Deregulation resulted in the banking
system having greater role to play in the management oS the Nigerian economy. The
number of banks also rose astronomically.
Deregulation of the banking system in Nigeria created greater competition in the banking
industry as this period witnessed an even greater growth in the number of licenced b a i h
operating in Nigeria and their products.
Then came in the mid 90s, the Distress Syndrome. The rapid growth in the industry was
not followed up by an equivalent growth in volume of business in the economy and GDP;
this was complicated by a directive to all Government Ministries and parastatals to move
their funds from the commercial and merchant banks to the CBN. The result: death of
17
manpower, inadequate volume of business to oil the enlarged number of banks.
management ineptitude and abuse etc. This led to massive distress in the system and
about 30 banks wend under.
2.3 PERFORMANCE OF THE NIGERlAN BANKING SYSTEM
The basis for an appraisal of the Nigerian banking system's performance will depend on
the role assigned to the banking system within the economy. We have already mentioned
these roles as seen by Ojo, Nwankwo and the Financial System's Review Committee.
We may therefore, sunmarize by stating that the function which contribute to economic
growth within the framework of a relatively stable price level (Uzoaga 1986).
One of the ways through which the banking system executes this function is through its
enhancing of capital formation. These growth and development of banlting is supposed
to result in an increase in savings. In Ojo's view. the Nigerian banlting system has not
excelled in the performance of its functions. He is not the opinion that banks have not
been innovative enough in the introduction of new products that will induce and increase
the volume of savings. Ade 0-jo also pointed out that the capital flight experienced by the
Nigerian economy was as a result of the inability of the banlting system to adequately
' serve the needs the people by providing a broad range of products that will make them
save their investible funds within the country (Bullion Vol. 10 No. 1 JanIMarch 1988)
18
Banking services in Nigeria are either cheap nor convenient and they are definitely not
accessible. These three conditions are necessary for the much sought after banlting habit.
7 7
I hc result is that the banlting system has not performed creditably in he mobilsiation of
savings which is part of its function of financial intermediation.
The Nigerian banking system has not fully shaken off the characteristic of the British
banlting system from which it evolved. The rural sections have generally been
o\.erlooked by the banking system. I11 Nwanltwo's view, the economy is underbanlted
with most bank branches centred around the urban cities and Lagos in particular. A result
of this is the large amount of investible funds outside the formal banlting system
(Nwankwo 1986 Pg. 155).
The commercial banks have displayed the typical characteristics of such institutions in
he i r lending and investment policies, preferring to lend short for reasons of their
liabilities being of short maturity. Nwankwo opined that this attitude of the commercial
banks has the effect of their not linancing industry and commercc but merely servicing
them. The emphasis has been on self liquidating loans. Unlike their counterparts i n
Europe, America and Asia, they do not in general provide medium and long-term finance
(Nwankwo 1986). The development banks have not fared much better in providing for
the desired development needs of the country. In Nwanltwo's view, the duplication of
functions that resulted from the creation of the NIDB and the NBCl is wasteful.
The banlis for reasons of not making full use of their wide borrowing powers have not
been able to make the desired impact because of paucity of funds. These lack of funds
issue currently rearing its ugly head in the banking system is attributable to the use of
stabilimtion securities, high interest rates at the inter-bank market, increasing default
cases in banlis and constraints imposed by the credit and monetary policies to ensure the
economy is not awash with excess liquidity (Business Times June 23. 1998). The banks
also have not contributed much to development for reasons of what Nwankwo termed
faulty operational philosophy are therefore ill-equipped for the lofty task assigned of
them. They indulge in excessively in risk aversion in their investment patterns, with 80%
of their financial commitments being in the form of loans rather than equity participation
(Nwankwo 1986. Pg. 154). The merchant banlts in their iiwestments have tended to act
like commercial banlts and as such their financing of commerce and industry has not been
inadequate. The sudden clamor for iuniversal banking says it all.
Banlting systems loan to certain sectors of the economy have over the years not reflected
the economic development needs of the economy. The agricultural sector and the small
business sector has not been favoured by the ,banking institutions due to risk aversion
20
stance. To redress this anomaly, the CBN had through its policy placed minimum
percentage of total credit that must go to these preferred sectors and there are appropriate
penalties for those that were found wanting. This has however been scrapped by the
Babangida administration.
The banks have also not performed satisfactorily in the financing of indigenous
enterprises. Again targets were set in this respect but it has been scrapped. The targets
were put in place because small-scale enterprises ensure rapid industrial growth.
In summary, the banking system has not adequately met the development needs of the
country not only for poor provision of funds but also poor saving facilities. A lot of
business units in key sectors of the economy that would do without external finance have
failed to obtain them as a result of the existence of what 0.jo termed "gaps" in the system.
These gaps are in the form of information gap preventing them from knowing how and
where to obtain finance which is the failure of financial institutions to appreciate the
importance of these business enterprises in economic development (CBD Bullion Vol.
10. No. 1 .Tan/March 1996).
' l 'he banks of recent have been increasingly accused speculative buying of forex and
round-tripping. This contribute immensely to the rapid decline in the value of the Naira.
2 1
It is pertinent to note that the prudential guideline has unfortunately succeeded on doing
one thing: it has tecl~nically converted the inefficiencies of our banks to allowable
expenses for tax purposes. Imaginc a bank that is not a public company (so the issue of
share price in the stock exchange never comes up) and where government has no control
shares; it pays the banks so much to provide for bad debts because apart from running
away from payment of company tax, the government is still denied the benefits of tax on
dividends that would have been paid by the shareholders. Sincerely, it may not sound too
Sunny to suggest that while the provisions of the prudential guidelines are judiciously
executed by our banks, half of the provision for bad debts must be written for to profit for
tax purposes only.
It must be empl~asised that banks themselves contribute not less than 80% towa'rds the
incidence of bad debts in the industry and this is a by-product of the gross indiscipline
\.;hich has long been the stock-in-trade in our banking industry. Lots of loan agreement
are perfected vis-a-vis through call cards of the MDs and EDs, and one can imagine what
happens when a borrower of NlOm has to part with about half a million as bribe before
the loan could be approved. Until our banks completely overhaul their administrativc
organs, the problems of non-collectibility of loans will for a long time remain a problem
in the industry
2.4 MONETARY POLlCY AND THE BANKING lNDUSTRY
IJzoaga defined Monetary policy as the management of the expansion and contraction of
money in circulation for the purpose of achieving certain declared national objectives
(Uzoaga 1989).
Eltezie simply defined monetary policy as the regulation of nloney supply to achieve
desired aims. Similarly, Falegan defined monetary policy as the discretionary control of
money supply by the monetary authorities to achieve desired economic objectives
(Adeltanye 1986). In Otiti's opinion, monetary policy involves the measures to regulate
and control the volume, cost and direction of nloney and credit in the economy to achieve
some specified macro-economic objectives (Bullion Vol. 7, No. 2. AprilIJune 1998).
The last definition does not in addition to money supply. include the cost of credit as the
variable that monetary authorities use in order to influence the economy. The definitions
are therefore, in agreement with monetary policy being geared primarily towards the
control of money supply. What then are these macro-economic and national objectives of
Monetary Policy'? According to Uzoaga, the objectives of monetary policy are usually
not clearly defined and as such Monetary Policy is not easily recognisable (Uzoaga
1989). The exception is where the monetary authorities specify what they intend the
policics to achieve as does the ( 'BN. The objectives 01' monetary policy as contained in
karious CBN guidelines include the moderation of inflation, reducing pressure in balance
of payments and stabilisation of exchange rates, including increased financial savings,
investments, employment and econoinic growth. According to Oltefie Uzoaga, policy
nialters are constrained to pursue these objectives simultaneously and this poses a
problem in that some of the objectives are incoinpatible (Umaga 1989). While the
objectives of maintaining a healthy balance of payments and avoidance of inflation are
mutually reinforcing, anti-inflation measures that reduce aggregate demand may also
reduce investment. employment. rates and rate of growth. The anti-inflation in this case
will have adverse effect 011 these other ob.jectives of Monetary Policy.
The effectiveness of monetary policy in achieving these objectives will depend on the
assumed relationship between money supply and the real sectors of the economy. Over
the years, economists have held divergent views as to the relationship between monetary
and real sectors of the economy. Late 19"' and the early 20"' century economists such as
Juan Stuart Mill never considered money important except for its role in effecting
convenient transactions. Money to them has no bearing on such economic variable as
employment, income, and its distribution (Horvitz 1963). In the words of Mill, money is
a machine for doing quicltly and more coinmodiously what would be done, though less
quickly and cominodiously without it (Horvite 1963).
According to Mill, money becomes a problem only when it is not of order. To the
inerchantilist however, money is the most important variable in the economy. Production
in their view is not for its own sake nor for the sake of consumption but because it can be
sold for money. Between these two extreme views of thc lnodern economists. Money
gets out of order in the short run. In the words of John Maynard Keynes. in long run we
are all dead. Money often gets out of order and so is an important influence on the real
sector of the economy. They however differ on what variables should be used in effecting
economic stability.
While the monetarists believe that changes in the stock of money have close relationship
affect other general economist aggregates. They hold the view that changes in the supply
of money are consequence as well as an independent cause of changes in prices and that
when they occur they will in turn produce further effects on the income and prices
(~ul l ion Vol. 7 No. 2 AprilIJune 1986).
There is however, a time lag between the cause and effect. that is between the time
monetary changes are initiated and the time the effects are felt. This time lag may
therefore lead to a misunderstanding of inonelary policy and its effecliveness.
'1.0 the Keynesians or Fiscalists, money has some relationship with the general economic
aggregates such as real output and general price level. National income, in their view,
depends on the interplay between variables such as expected rate of profit and interest.
The rate of interest is a f~mction of the demand and supply for money. The demand for
money has three components: precautionary demand or demand for idle balances,
transactionary demand and speculative demand for money. These three variants of
demand for money respond to changes in interest rate. For equilibrium in the
Keynesian's model, planned savings must equal planned investment and secondly, money
supply must equal demand for money. To the Keynesians thereihre, the desired effect on
the real sector can be achieved by manipulating interest rate policy as being only a
supplenlent for fiscal policy which they consider money effective. In summary, the
monetarists prefer the control of money supply as for achieving macro-economic
objectives while the Fiscalists/l<eynesians believe in the efficacy in interest rate variation
and government expenditure and taxes (Bullion Vol. 7 No. 2 AprilISune 1986)
2.5 INSTRUMENTS OF MONETARY POLICY
Adel~anye defined the instruments of monetary policy as the devices which the monetary
authorities vary the supply, cost, and the direction of credit in the economy (Adelianye
1990). They have been classified into two broad groups, namely quantitative and
qualitative or selective monetary instruments (Uzoaga 1986). Quantitative monetary
26
policy instruments are used for the conlrol of the quantity of money used in controlling
the quantity of money available for specific purposes.
The latter therefore controls the direction of credit within the economy. The quantitative
monetary policy instruments consists of what Adekanye described as the four traditional
instruments of Monetary Policy and they are:
o Open Market Operations
o Reserve Requirements
Re-discount Rate
u Moral Suasion
Open Market Operations: involves the buying or selling of government securities from
or by the banks and the non-bank public by CBN. The effect of the purchase of securities
is the increase of banlts liquidity or reserves and the reserve is the case when such
securities are sold. Ekez.ic insists that a precondition for the successful application of this
instrument of monetary policy is the existence of well developed money and capital
markets.
* Reserve Requirements: the need to control the liquidity of banlts arises because of two
reasons; ensuring solvency ol'the banking system and control of money supply. They are
2 7
usually expressed as a percentage of the banks assets that have to be liquid. Cash and no
interest bearing assets malte up the bank's liquid assets. An increase in the reserve
requirements means that the bank will have to liquidate some of its interest bearing assets
such as loans and investments inorder to meet the requirements.
Re-discount Rate: the rate at which the CBN, as a lender of last resort, lends to the
banking system. The impact of this policy instrument is to alter the cost of credit. For
the commercial banks to maintain its margin of' profit on loans and in the same direction
as the change in re-discount rate. This means that the cost of credit is altered all round
and either discourages of encourages borrouing depending on whether the discount rate
was increased or reduced (Adeltanye 1990).
According to Ezeife, due to the lack of developed money and capital markets in Nigeria,
the rediscount rate policy has not bcen sufficiently effective in Nigeria and has been
Qaringly used.
Moreover, owing to the high returns on investment in Nigeria, a rise or fall in interest
rates has little impact or an impact on borrowers. Whetl~er -'announcement effects" or
discount rate policy really have much impact on the economy is debated. Generally, the
CBN can immediately influence all rates of interest charged on short-term loans by
changing the re-discount rates. 2 8
If banks are lending short with funds borrowed from CBN, they do not have to change
their customers less than what is charged by CBN. The oldest rule of banking is that to
lend money for any period of time at a lower rate than one is paying for borrowing the
same money is a sure way to financial ruin (Eltezie 1990).
Moral Suasion: This is an informal method by which the CBN intimates the banlts of
the required money direction of money. An agreement and commitment to comply with
the proposed policy could in the process of such discussion bc reached 011 the part of the
banks. Though such agreements are not binding legally, on the banlts, the CBN always
has the option of using legal instruments to exert compliance of the banlts will the
monetary it adopts.
The traditional monetary policy instrulnents are beset with many limitations especially in
developing countries like Nigeria. Open market operations for instance, has not been an
effective instrument mainly because bank money constitute a small percentage of
aggregate money supply and the financial markets are not well developed (Adekanye
2.6 EFFECTS OF MONETARY POLICY ON BANKS
Monetary policy as defined earlier has to do with the manipulation of money supply for
, the achievement of desired macro-economic objectives. 1 he financial system especially,
the banking institutions. is the target of monetary policy. It is assumed tliat the effecting
changes in the behaviour of the banking system will lead to the desired effects being
transferred to the real sectors of the economy. The banking system is the focus of
monetary policy since the ~noney supply, which it intends to influence, is the banking
system's tool. Money supply has been defined as the currency in circulation and demand
deposits.
Paul Hervitz defined money supply as all things which the public can use to pay bills
(Hervitz 1963). Because cheque can be used in the settlement of bills, demand deposits
against which cheques are drawn by the depositors are included in money supply. Ajayi
and Ojo defined money supply as the total currency outside the banlts, demand deposits
a; commercial banlts, domestic deposits at the CBN, less Federal and State governments
deposits with the commercial banks.
'I'he importance of the operations of the commercial banlts to the control of the money
supply stems from the fact tliat coiniilercial banlts create money. Banlts ability to create
inoney implies that they can on their own increase the volume of IOUs. The banlts do
30
this by granting loans or overdrafts in excess of actual cash available (Adeltanye 1990).
111e assumed direct relationship between discount rate and other interest rates does not
hold in any dekeloping country. Where the banlting system has excess reserves, the
direct (inverse) relationship between reserve requirements and the bank multiple credit
expansion does not hold. As a result of this limitation. the CRN also varies the categories
of assets that could be used in calculating the liquidity rates of banks. In addition, special
deposits are sometimes required to be lodged at the CBN by the banlting system. This
augments the effectiveness of the instrument of reserve requirement. According to
Eltezie. moral suasion has been Sound to be a very effective instrument of monetary
control in Nigeria (Ekezie 1990).
In view of the limitations of the traditional instruments of monetary policy in relation to
the development needs of the country as discussed in our appraisal of the banking system,
the CRN also employs selective credit instruments or controls to influence the sectoral
allocation of the bank credits. 'l'l~is is used in redressing the lopsided structure of the
banlting systems credit against the preferred seetors of the economy. There are also CBN
policies aimed at making banlting services available to rural dwellers. These included the
allocation of rural branch targets and target proportion of rural generated deposits to be
givcn as loans and advances to rural borrowers.
An overdraft beneficiary is permitted to issue cheques beyond his balance. A loan
implies that the banlt contracts to grant a beneficiary of fixed sum of money even though
he may have no account with the banlt. The banlt therefore, creates money by granting
credit since the beneficiary can use their cheques to make payment though their accounts
are not funded. In other words, every loan and overdraft approved creates a new deposit
and so creates money.
Monetary policy among other things as mentioned earlier, is directed towards controlling
the money creation ability of commercial banlts. Commercial banks in their operation
face the conflicting objective of achieving profitability and liquidity. The ultimate liquid
assets of the bank is cash or primary service and they do not earn any asset and as a result
of the short-term structure of con~mercial banlts liabilities, the banks need to maintain a
reasonable level of liquid assets to maintain safety in the system. The money market
which Woodworth defined as the various arrangements that have to do with the issuance,
trading and redemption of low risk short-term marltetable obligations whose prices vary
only moderately is a mechanism by which banks ensure that their liquidity positions are
efficiently adjusted in line with the objectives of profitability and liquidity (G. Walter
Woodworth 1972).
The money market is usually dominated by banks which are continuously in a process of
varying their liquid reserves. Monetary policy has a major impact on this process of
banks liquidity management. We cautioned earlier that co~nmercial banks reserves in
excess of what is required for their granting of loans that ultimately result in multiple
credit expansion which stated otherwise, is the ability to create money.
Where deposit are destroyed as result of loan repayment for instance there results a
multiple contraction of credit. Monetary policy whose main aim is the control of money
supply focuses primarily on the ability of comnlercial banks to create money. We shall
examine how the various monetary policy instruments explained earlier affect the
operations of coinmercial banks.
Reserve requirements which as earlier stated initially to ensure a minimum liquidity and
safety in the banlting system has over the years become an important tool of monetary
policy (Woodworth 1972). 'l'he effect reserve requirement variation will have on a
commercial bank will depend on the state of the banks reserve at the time of imposition
of a new reserve requirement by the C'HN and the direction of change, i.e. whether it has
been reduced or raised. Accordingly to Woodworth, in a situation of excess reserve,
raising the reserve requirement will curtail the multiple credit expansion capability of the
bank (it is assumed here that the new reserve requirement does not wipe out the banlts'
initial excess). l'he effect of raising the reserve when no excess reserve is in existence is
far reaching. The bank will as a result of the hike in reserve requirement become reserve
deficient. In the event of its failure to generate money to correct the imbalance,
Woodworth opines that it will have two options: Firstly, deposits will have to be reduced
by selling securities and other liquidity reserves to non-bank financial institutions, and by
reducing loans and advances.
Secondly, the bank has the option oS borrowing from the CBN which is the lender of last
resort. This however, could bc expensive to the bank especially of' the like in reserve
requirement is affected simultaneously with a rise in discount rate by monetary
authorities. The increase in reserve requirement which indicates tight monetary policy
would have the impact of restructuring of the banks assets portfolio in favour of liquid
assets which do not earn any income (Woodworth 1972). This ultimately results in
negative effect on the profitability of the bank.
It then follows that if on the othcr hand, the reserve rccluirement is lowered, an existing
excess reserve will be greater in magnitude so that the ability of the bank to invest
earning assets is improved on as well as profitability. For a reserve deficient bank.
' reduction in reserve requirement depending on its magnitude will either lead to greater
investment in earning assets maintenance of existing level of earning assets or a reduction
3 4
in the amount of earning assets that would be converted to primary reserves in other to
maintain a level of liquidity required by the monetary authorities.
'The discount rate as stated before is the rate at which the CBN lends to other banking
institutions. Two theories have been developed on the impact of discount rate changes on
the borrowing (Woodworth 1972). The Profit Theory states that banlts borrow from the
CBN when it is profitable to do so. In other words, the cost of borrowing is a major
determinant of the amount borrowed. It then follows that so long as the differential
between the discount rate and the lending rate or the prevailing rates in the open market is
positive, banlts will borrow from the CBN. When open marltet rates are higher than the
discount rates of the CBN, the central bank is hence cheaper and banlts will tend to
borrow more. The reserve will result in less borrowing by banlts.
Thc Need Theory of bank borrowing on the other hand states that banlts borrow from the
central bank when they are short of reserve and repay when reserve deficiency is
eliminated regardless of the discount rate. According to Winfield Riefler, there is a
correlation between open marltet interest rates and discount rates though not very close.
He used his findings to bolster the argument in favour of the Need Theory (Woodworth
1972). While the Profit theorj tends to uphold thc efliciency of discount rate as a
n~onetary policy, the Need theory is inclined to dismiss the discount rate as not affecting
bank borrowing. Adekanye liowe\er. expressed the view that changes in the discount
rate are usually associated with an increase or decrease in central banks credit to
coinmercial banlis (Adelianye 1990).
An increase in the discount rate will lead to the commercial bank raising its own interest
rate. assuming there is no ceiling 011 the interest rate, in other to maintain profit margin.
Cost of credit generally will increase when the discount rate is increased with banks
having no other way of fund raising other than borrowing horn the central bank. A rise
in-discount rate will result in a decline in spending (Adelianye 1990). Again the view can
be challenged on the grounds of demand for credit for investment.
The impact of raising the discount rate is not really certain as it will also depend on the
lcvel of' reserve already in thc banlting system. When commercial b a i h have exccss
reserves or where they depend on other sources than the CRN for their reserves, the effect
of changing the discount cannot be resounding. Its effect may not get through the real
sector if there is no direct positive relationship between other rates of interest in the
economy and the discount rate.
Adeltanye opines that the above is the case of discount rates in developing economies
where the discount rate is used more as an instrument of development policy than any
36
other instrument of monetary policy (Adekanye 1990). The impact of discount rate
therefhre, will be minimal. Where the government also places a ceiling on the interest
rate on deposits, there is usually a shift by corporate bodies from other short-term
in~estments especially in periods of high inflation. where the real interest rate is low.
This tends to attract money away from the banking system (First Banlt Quarterly
Economic and Business Review, March 1991).
Rigid regulation of interest rates on Adc 0.jo.s view results in financial disintermediation.
Bank services will not be attractive in such a situation. Surplus funds in corporate hands
in era of sophisticated corporate financial management are placed in inter-company
interest bearing assets rather than in demand deposit accounts where they are sterile or in
time deposit accounts where losses are incurred as a result of low or even negative real
interest associated by rising inflation rate. There will then be a tendency to by-pass banks
by the companies in certain financial transactions (First Banlt Quarterly Economic and
Business Review, March 1997). The competitive standing of commercial banks in terms
of attracting deposits is weakencd vis-A-vis those of non-bank financial institutions that
have institutionalised savings because of the banlts higher capital requirements. Interest
rate policy also has an effect on the maturity structure of bank loans and advances. With
rigid regulation of interest rates, there is a tendency of such rates not to reflect differences
in maturity, risk and administrative costs of different instruments. Lenders therefore
37
under this condition refuse to make longer term, riskier or more expensive loans (P.O.
Sanusi - Deregulating the Nigerian Economy: Achievements and Prospects - CBN
Economics and Financial Review Vol. 26 No. 4, December 1996).
On the other hand, where banlts fall to explore other sources to neutralize the effect of
central bank selling securities in the open marltet, they will be forced to reduce deposits
by a n~ultiple of the resulting reserve deficiency from the sale. The impact of open
market operations like other instruments is the restructuring of commercial banks
portfolio of assets and ultimately adjustments in the money creation capabilities. The
el'fectiveness of open marltet operations in Nigeria is suspect &hen the narrowness of the
money market is taken into consideration.
Omotunde Johnson is of the opinion that selective credit control affects commercial
banks adversely. This is because the preferred sectors that such policies favour are
subsidised by the taxing of consumer banlts and their traditional clients. Compelling
banlts to raise the ratio of preferred sector loans has the effect of both reduced
profitability and liquidity for the banks. The banlts therefore, have to rearrange their
portfolio of assets.
However, so long as the loans to the preferred sectors are not of comparable liquidity as
the earning assets they have replaced, the banlts, all things being equal, will not be
willing to substitute among their earning assets enough to o~e rcome the effects of
unprofitability brought about by the loans. Johnson is of the opinion that the ultimate
eflkct of this taxing of banking institutions in order to subside the preferred sectors is to
reduce the return on their financial internlediary function. This will lower interest on
savings, increase cost of investment and increase cost of investment and increase
transaction cost of transmitting funds from surplus to deficit spenders.
Apart from controlling the sectoral allocation of credit, the monetary authorities also
employ direct control of the growth of money supply by imposing credit on the overall
credit expansion will curtail the freedom of banlts to create deposits.
The banlts will then be left with excessive loanable funds for which they have to find
investment avenues in order not to suffer a down turn in profitability. Where such
investment outlets are not easily available as a consequence of under developed money
marltet and restrictions on banks involvement in equity of corporations; the excess
liquidity could result in banks nor accepting time and savings deposit on which they are
required to pay interest. This is one of the negative fallauts of imposition on the system
comprising what Cameron, Mcltinnor and Shaw term financial repression (Ade, Ojo,
39
W o k Adewunmi 1982). Financial repression discourages mobilisation of savings and
whatever is mobilised has to be among a small group of favoured borrowers in order to
remain within the imposed credit ceiling and any other control imposed by the monetary
authorities.
From the discussion so far, it becomes very clear that the monetary policy has an overall
impact of constraining the activities of commercial banlts. It would however be
misleading to assume passivity on the part of the banlting institutions when faced with
severed monetary restraints placed by monetary authorities. Marshall and Swanson are
of the opinion that an innovative banking institution has a greater leverage in minimising
the distortion effected by monetary policy on their operations (Marshall and Swanson
1974). To this end, they explored the concept of liability management in banking
operations.
While asset management involves ad.justing the voluinc, cost and availability of bank
credit in response to changes in banking reserve. It irnplics that banks in response to a
decline in reserves. increase standing. Under liability management on the other hand,
banks respond to changing liquidity needs by changing rates of interest offered on
' various liabilities and introduce new products that will induce greater inflow of funds into
the banking system.
One of the techniques employed by banks in liability management is that of repurchase
agreements or what Marshall and Swanson termed "Sale and Lease Back" arrangement,
the commercial bank selling a loan asset or security asset formally agrees to repurchase
the asset on a specific future date at the stipulated price or yield. This arrangement either
reduces it the selling bank is paid for the asset by a reduction in the buyer's demand
deposit at the bank. Additional reserves is generated if the selling bank is paid for the
assets by cheque. According to Marshall and Swanson, repurchasing agreements produce
excess reserves when a transfer of liabilities occur from demand which are subject to
reserve requirements to tmn-deposit liabilities that are not subject to reserve requirements
(Marshall and Swanson, 1974).
Johnson and Johnson are of the opinion that the principal responsibilities in managing
what they termed deposit functions are coordinating of deposit activities related to
meeting bank objectives and the planning and execution of strategies for attracting and
retaining funds. Strategies for attracting and retaining funds include management of
interest rate and the control of transaction processing systems and developing product
lines and setting them in operation. Another way of looking at this view is the adoption
of the marketing concept by the banl<s in trying to provide services. The new products
should have a need to serve for them to be successfully introduced into the market.
Banks also respond to inonetary policy induced constraints by diversification into other
areas of financial market not traditionally associated with cominercial banks. Some are
linown to provide such services as accident insurance, death insurance, raffle. etc.
I n conclusion, banks do not just react lo monetary policy in a inanner that will just
facilitate the broad aims of inonetary policy but also try to respond in a way that will
maintain their primary objectives of profitability and liquidity.
2.7 TRENDS IN NIGERIA'S MONETARY POLICY
As an overview of the Nigeria's monetary policy, we have decided to identify twelve (1 2)
phases in the application of nlonetary policy covering 1959 (when the CBN was
established) to 1999. The phases are as follows:
1 . July 1959 - March 1962
Formative Years and Passive Monetary Policy
i. April 1962 - September 1964
Cheap Monetary Policy
3. November 1966 July 1969
Easy Monetary Policy
' 4. July 1969 - March 1972
Moderate Monetary Restraint Policy
42
April 1972 - March 1976
Easy Monetary Policy
January 1980 - December 1983
Short Term Crises Management
January 1 984 - .lune 1986
Medium Term Crises Management with Tight Monetary Policy
July 1986 - August 1987
Long Term Crises with SAP and Restrictive Monetary Policy
August 1987 - December 1989
Long Term Crises Management with SAP and More Liberal Monetary Policy
January 1990 - December 1993
Long Term Crises Management with SAP and Liberal Monetary Policy
January 1994 - December 1999
Liberal Monetary Policy
Monetary policy in the period 1959 to 1962 was concerned primarily with the provision
of the banking system with a strong credit base as well as the establishment of domestic
infrastructure lil<e Money and Capital market.
There was also the need to Nigerianise the credit base. The major instruments of
monetary policy employed wcre interest rates and luoral suasion. Variation rediscount
rates were employed to induce banlts o repatriate their short term funds in the British
Financial markets.
'The period 1962 to 1964 was marlted by an easy monetary policy planned to coincide
with the launching of the Second National Development Plan. An outlet was provided
for the investment of surplus term funds of commercial banlts with the establishment of
the Call Money Fund in 1962. Greater use was made of the issue of treasury bills with
the issue rate reduced from 1.5% to 3.5% within the period. Similarly, rediscount rate
was reduced from 5.4% to 4%). This led to an increase in banking system's credit to the
economy. This cheep money policy resulted in balance of payments problem as the
nations foreign reserves were drained. Credit restraint was therefore adopted for the
period October 1964 to October 1966.
Direct credit control, moral suasion and variable liquid assets were instruments of
monetary policy applied during the period. 15% annual liquid asscts were instruments of
monetary policy applied during the period. 15% annual growth rate ceiling was clamped
' on commercial bank lending. Minimum rediscount rate was raised from 4% to 5%.
Treasury bills issued was increased from 3.5% to 4.5%. While Minimum lending rates
44
moved from 7% to 7.5% with maximum deposit rates moving up from 3% to 4%. A
reduction in domestic credit resulted from these restraining measures and the balance of
payments moved up from a deficit of N62m to a surplus of N23.9m.
The period November 1966 to June 1969 saw the government relaxing some of the
stringent policies of the previous period in order to avert the recessional trends in the
country. The credit ceiling was relaxed with moral suasion employed in persuading
banks in de-emphasising non-essential impacts in their lending. The rediscount rate was
lowered from 5% to 4.5%. in order to control the inflation that was i~nminent as a result
of the easy money policy of the 1966 to 1969 period, a moderate monetary restraint
policy was adopted in the period July 1969 to March 1972. Selective credit control,
moral suasion and a partial upward revision of interest rates were the major instruments
used.
onet tar^ policy circular number 3 issued on the 30"' March, 1971 placed a ceiling of
8.4% on the growth of bank credit to the private. Selective monetary policy was also
employed in this period. Loans to indigenous businessmen were fixed at 35% of all loans
and advances. The banlting system as a result of excess liquidity failed to comply with
the 8.4% ceiling on credit growth. This resulted in the CBN introducing the special
deposits.
The improved position of external reserves and the government finance which was on
outcome of the oil boom led to the rapid increase in money supply in the period 1972 to
1976. This period was characterised by a monetary easy policy. 'I'he Nigerian currency
was allowed to appreciate in relation to other currencies.
Selective credit policies were retained with minimum credit to illdigellous borrowers at
40% of all loans and advances. Government fiscal measures in this period increased
money supply with the banking system awash with excess liquidity.
In order to correct the anomaly. restraining measures were introduced. The period 1976
to 1979 saw monetary authorities introducing several measures aimed at reducing banks
liquidity. Two new money market instruments were introduced namely Bankers' Unit
Fund and the Certificate of Deposit. In this period, sanctions were introduced for non-
compliance of banking institutions with credit guidelines. Graduated cash reserve was
ilso introduced based on deposit liabilities. 'l'he ratio was YO, 7%, 10% and 12.5% for
deposit categories of less than N300m. NlOOm - N300m and over N300m respectively.
These were to be deposited with the CBN and earn interest of less than 2.5%.
Stabilisation Securities, which were non eligible for statutory liquidity ratios, were
introduced. Deposits against letters of credits were also excluded from the eligible liquid
46
assets. The minirnuni rediscount rate was introduced from 3.5% to 4% in 1977 and
subsequently to 5% in 1978. In the period, the treasury bill rate increased from 2.5% to
3% and then 4%.
Monetary policy in the period 1980 to 1985 cuts across two phases. LJp till December
198 1 , government adopted a moderate restraint policy while a stringent monetary policy
was preferred in the period 1981 to 1985. Instruments used in the moderate monetary
restraint phase included Direct Credit Ceiling, Cash Reserve Requirements, Stabilisation
Securities and the exclusion of deposits against Letters of Credit from eligible liquid
assets. The objectives of the policy measures were that of solving the problems of price
inflation, low industrial and agricultural production and unhealthy external balance of
payments (G. 0. Okoli, Lessons from Nigeria's recent monetary and fiscal policy
experience). Measures taken to control inflation include the setting of a credit ceiling of
25% for the big banlts and 35% for small banlts in 1983. Credit ceiling was further
reduced to 12.5% and 20% for the big and small banlts respectively. A ceiling of 7% was
adopted by monetary autliorities with respect to the growth of banking systems loans and
advances over the outstanding as at the end of 1984.
' I11 order to ensure that more finailcia1 resources were channeled to productive sectors of
the economy, a minimum of 10% of commercial banks loans and advances was directed
47
to the Agriculture sector. In 1985. this was increased to 12% while the share of loans and
advances to export and domestic trade moved from 3% to 2% and from 11Y0 to 10% of
commercial banks loans respectively. Loans aild advances to indigenous borrowers were
fixed at 8% in 1983, this was raised to 9% in 1984 and 1985 (Oltoh 1986). In order to
reduce the problem of rural areas. the percentage of loans to rural areas was raised to
40% of funds sourced from the area. in 1985.
In order to redress the balance of payment problems, compulsory advance deposit scheme
was introduced 1982 to dampen imports. The deposit being a proportion of the value of
goods to be imported was graduated in a manner that made deposits for non-essential
il~iports to attract higher percentages. Interest rates for the period 1980 to 1985, were
gradually increased with a view to encouraging institutioiialised savings.
Monetary policy measures in the period 1986 to 1989 were effected in the context of
~iructural Adjustment Programme (SAP) which was introduced in July 1986. The crux
of the programme was institutional relationship through determined prices. The objective
01' monetary policy measures in this period were the same as those mentioned earlier
which can be summarised as the achievement of both external and internal equilibrium
with an acceptance and sustainable rate of economic growth. Emphasis was however,
placed on curbing inflation and the efficient allocation of available forex among the
4 8
various sectors of the economy with particular interest on the preferred sectors (Business
Concord, Tuesday, July 17. 1990). The second tier foreign exchange marltet was
established on the 29'" of September, 1986 to facilitate the latter objective. This market
has come to be known as the Foreign Exchange Market.
In the period 1986 to 1989, the various traditional monetary policy instruments were
employed along with selective monetary policy instruments. I11 addition, new measures
in the form of directives by the CBN were aIso employed. With the establishment of the
foreign exchange market, banlts were made the sole authoriscd dealers in the market.
'Ihe first of these new measures was taken when banlts were ordered to remit to the CBN
all monies deposited by customers for the purpose of the purchase of foreign exchange.
This had the impact of withdrawing a total of N4b from the banlting system.
I'he minimum rediscount rate of the CHN was increased from 1 1 % to 15% in 1987. Due
to the unfavourable reception given to the increase by the financial marltet operators, it
was reviewed downwards to 12.75% (Business Concord, July 17, 1990). The interest
rates were also deregulated in 1987 and this had the effect of exposing the
more competitive market structure. Monetary policy measures in the late
banlts to a
1980s were
' focused on controlling of the excess liquidity in the banking system. A combination of
the use of offshore guarantee for domestic loans was abolished in April 1989 while a
49
nlonth later, the FGN directed that ri~nds of all government ministries and parastatals be
transferred to the CBN. These measures reduced the liquidity of the banking system by
N8.27b (Business Times, October 22, 1990). With this reduction come intense
competition for deposits by the banks.
The cumulative effect of the interest rate deregulation and liquidity squeeze was the
soaring of the interest rates with lending rates reaching 82% p.a. as at December 1989
(Business Concord, July 17, 1990). Reserve requirements for banks were actively used
by monetary authorities. Liquidity ratio which remained at 25% in 1988 and raised again
to 30% in 1989. ,411 these were aimed at reducing banking systems credit to the
economy.
Other regulatory measures taken by the government with respect to the financial system
include thc doubling of the share capital required to establish commercial and merchant
banlts from N5m to Nl Om and from N3m to N6m respectively in 1988. It was further
doubled from NlOm to N20n1 for commercial banks and from N6m to N12m for
merchant banlts. I'hese measures were taken to check the influx of investors as well as
ensure a strong capital base for newly established banks. The government also took other
important measures to instill conlidence in the banking systcm, perhaps the most
important of these is the establishment of the Nigerian Deposit Insurance Corporation
50
(NDIC) as an additional monetary authority through decree 22 of 1988. The objectives
of the corporation was to safeguard depositors interest and ensure sage and sound
banking system. l'he first major assignment of the corporation was the establishment of a
N2.3in life-line for some banlts that faced adverse liquidity condition following the
withdrawal of the federal and state government funds from the commercial and merchant
banks in 1988. Credit ceiling and selective credit control were also used in the period
under review. In 1989, the share capital of the commercial banks was raised to 50% and
merchant banks, to 40%.
The monetary policy measures during the period 1990 to 1993 had the same objectives
namely moderation of inflation rate. reduction of pressure on balance of payments and
the stabilisation of the exchange rate, inducing increased financial savings, investments,
tx~ployinent and growth and the reduction in free market arbitrage.
The aggregate credit ceiling was increased from 10% in 1989 to 12.5% in 1990 and
unlike the past when it only applied to loans and advances, the 1990 ceiling applied to all
credit granted to the public sector. It was raised to 13.2% in 1991 16.0% in 1992 in 1993,
there was selective lifting of credit ceiling on banlts.
111 giving effect to the phased iinplernentation of the indirect approach to monetary and
credit control, the CBN removed the ceiling for any bank that met the following criteria
viz, specialised cash reserve, specified liquidity ratio, adherence to prudential guidelines,
statutory minimum paid-up capital requirement, capital adequacy ratio and sound
management.
The percentage allocation to the priority and other sectors remained unchanged; priority -
50% and others - maxinlum of 50%. Commercial banks were allowed to engage in
equipment leasing in 1990 but were told not to put more than 15% of their total asset in
it. The bank's rural lending to deposits mobilised in rural areas was raised from 45% in
1989 to 50% in 1990. It remained at 50% for the subsequent years.
Also, the minimum of 16% of bank's total credit outstanding to small scale enterprises
was raise to 20% in 1990. They were to be strictly given out for industrial purposes and
17ot for general commerce. The rate was also implemented for the subsequent years.
Existing grace periods on agricultural loans were retained during the period. In keeping
with international standards, the minimum ratio of capital to total risk assets was
increased from 7.5 to 8.0% in 1993 and was retained in 1993.
Commercial banks were urged in 1997 to start paying interest on current accounts. The
rate shall be subject to negotiation between banks and their customers. This persistent in
the subsequent years.
Penalties for failure to adhere to monetary policies were intensified during the period as
more and more baillts were cniltinuously found wanting especially in their forex
transactions. In general, the combined effect of the contractioi~ary monetary policy
undertaken in the periods under review has been as mentioned earlier, constitute a
liquidity squeeze on Nigerian banlts to which they reacted by devising methods of
enhancing their competitive edge. This resulted in a whole range of new products
designed to enhance deposit inobilisation with greater diversification. Some of the banlts
for instance introduced Saturday banlting and offered several services that now make
them achieve enormous results in product innovation aimed at improving their services to
their customers. There is hardly any commercial banks in Nigeria that has neither
c'omputerised its operations nor planning to do so.
The performance of banks in terms of assets and profitability has largely been successful.
Indeed, the banking sector has been described as the only growth sector in the declining
economy.
NOTES
Adekanye Femi:
Ekezie Emelta
Horvitz Paul
Ornotunde Johnson:
Marshall Robert, Swanson & Rodney:
0-jo Ade T.:
0-jo Ade:
Onoh J. K.
Okoh G. 0 . :
Elmnts of Banking in Nigeria, 1986, pgs. 123, 125,
129, 139, 130 & 131
Elements of Banlting, 1990, pgs. 12, 19,7 & 8.
Monetary Policy and Financial System 1963.
Selective Credit Control as instruments of
development in the light of economic theory, 1989.
Pgs. 112& 113.
Monetary Policy process - Essentials of Money &
Banlting, 1974. Pgs. 78 & 83
Overview of the financial system: An appraisal of
Nigeria's economic system, 1980. Pgs. 19, 15 &
13.
Monetary Policy and Competition for deposits in
the 1990s (CBN quarterly review, March 1990)
Nigeria's traditional finance system, 198 1. Pg. 15
Lessons from Nigeria's recent fiscal and monetary
policy experience, 1986 (CBN review Vol. 24, No.
2, June 1986)
10. Sanusi J. 0 . :
1 1 . Suyanbola Tomori:
12. Udoh Chris:
13. Woodworth Walter:
14. Oladele Olashore
15. Otiti A. 0. Ci.
Deregulating the Nigerian Economy: Prospects and
Achievements. (CBN review. DEC 199 1)
How effective is CBN's monetary policy? (Business
Times, Monday, October 22, 1990)
Banking in Nigeria: A way to the future. (CBN
Bullion AprilIJune 1988)
Money Market and Money Management, 1972 Pgs.
3 ,28 1,28,258, 185 & 157.
Perspectives on finance, banking and economic
policy in Nigeria, 1988. Pgs. 3 & 8.
Overview of the financial system: an appraisal of
Nigeria's economic developinent in 1980
CHAPTER THREE
3.0 RESEARCH METHODOLOGY
The methodology adopted was designed in a way as to collect data that gives a wider
lmowledge of what is actually happening to the commercial banks as regards the effects
of monetary policies on them and whether actually, there are problems encounters in
meeting the requirements of the policies. The methodology also was designed as to be
able to collect necessary information from the particular officials concerned with the
above facts; this made the data to be free from bias.
3.1 SOURCES OF DATA
To obtain a reliable information that will help the researcher to measure the effects,
achievements and prospects of monetary policies; different sources of data were
involved. There are two broad sources of data used for the research work viz:
A. Primary Data
13. Secondary Data
3.1.1 PRIMARY DATA
This consists of raw data or information collected directly from the field of study which
the researcher arranges into a form useful for statistical inferences. The researcher made
use of two forms of Primary Data: thc Questionnaire and Oral Methods.
5 6
a) QUESTIONNAIRE METHOD: A set of questionnaires corresponding to the
research topic were designed and sent to the various divisions of some selected
commercial banks. This helped acquire the information used. They were pretested
before circulated. Pre-testing is the system by which a clean draft of the questionnaire is
sent to prospective respondents. Any flaws in the language of structuring are discussed
elaborately and reframed into a better questionnaire before it is finally circulated to actual
respo~dents and this is exactly what the research did so as to avoid obtaining irrelevant
information.
The questionnaire was distributed to personnel of banks that are in divisions related to
monetary policy implementations, mainly the Financial Control, Credit & Risk
Management and Treasury departments.
Questions on the questionnaires consist of two major forms namely:
i 1 Open-Ei~cicd Questions: I'hcsc type of questions were framed in such a manner
that calls for responses more than a few words. Respondents were given the
chance of phrasing their own answers in their own forms and words. The
respondents were not limited to a particular choice so as to enable them answer
adequately without restrictions.
ii) Close-Ended Questions: These type of questions were designed in a manner that
calls for responses that are strictly limited. Respondents are offered a choice of-
alternative replies from which the given answers are ticked by them. Two types
of close-ended questions were used namely:
Dichoton~ous Questions - These are questions framed in a manner such
that only two options are available. They are often referred to as the YES
and NO questions.
Multiple-Choice Questions - These questions were merely an extension of
thc dichoton~ous questions. Respondents were allowed to choose from a
wide range of possible answers. This type of questions were clearly and
easily understood by the respondents and this made the answers to be
easily standardised for the purpose of con~parisons.
b) INTERVIEW METHOD: An interview is a conversation directed to a definite
r'espondents. As a follow-up to the questionnaire, the answer obtained from the interview
is validated information supplied in the questionnaire. Interview was of great importance
because it provided a quick response, giving the respondents a chance of explanation and
it provided a high response rate.
The researcher visited the Supervision and Inspectorate Division of the Central Bank of
Nigeria. Also visited, were the offices of Zenith International Bank, Standard Trust
h n k . Wema Bank. Owena Bank All States Bank, Diamond Rank, IJnited Bank for
Africa plc. And Citibank Limited. The researcher has the rare opportunity of meeting the
Treasurers and Financial Controllers of the Banks. The researcher's background as a
banker, facilitated this opportunity a great deal. The researcher discussed issues related
to the research with special reference to their particular b a l k
The researcher also conducted and indirect interviews on some management, senior and
junior staff of the various banks visited including the CRN. Hence, this helped the
researcher to generate valid data for the research work. It is highly pertinent to note at
this juncture that the information or data generated from the questionnaire and the various
interviews helped the researcher to arrive at a correct view, findings and conclusions.
i: 1.2 INTERVIEW QUESTIONS
i What are the instruments of monetary policy used by the CBN during the
period of study?
ii) Monetary and Fiscal policy instruments; which are more effective?
iii) Who is to blame for the ineffectiveness of any instrument'?
iv) Do you encounter problems in implen~enling thcse policies?
v) What are the general factors inhibiting the effectiveness of these
instruments and the achievement of policy objectives?
vi) What are the reasons for the monetary policy trend?
vii) Does the relationship between the CBN and the Ministry of Finance have
any effect on the effectiveness of monetary policies'?
viii) How did the prc- 1999 political instability al'kct your reactions to
monetary policies during that period?
ix) How does the CBN reconcile between policy objectives and government's
macro-economic ob,jectives. and what are the main areas of conflicts?
x) What suggestions do you proffer?
3.1.3 SECONDARY DATA
This is the data that has passed from primary stage. It is normally called Second Hand
Inf~~rination. Secondary Data s processed information for analysis, inference or other
uhes for which the data is meant. Secondary data includes information from newspapers,
magazine. journals, bulletins, etc. A review of such information is termed literature
review. Here, the researcher made use of literature related to this research as secondary
data. Simple correlation coefficient was used to test the hypothesis.
The mass of the articles, magazines, papers, lectures, journals, bulletins, symposia and
results of empirical researches, conducted within the past decades on the subject matter
helped in the hypothesis, appraisal and criticisms and equally helped in finding and
criticism and in reaching the conclusion at the end of this study. The researchers main
aim in reviewing literature was for the fact that new Itnowledge is usually communicated
to the world for the first time in form of journals, textbooks and articles.
I;urthermore, literature review helped the researcher in the following ways:
a) it helped in testing of hypothesis;
b) it helped to establish a basic background in the field concerned;
c) it helped in the acknowledgement of the research efforts of the pioneers;
d) it helped to examine critically the styles and procedures of earlier worlts and this
helped in criticising or appraising the findings and recommendations;
e) it helped the researcher to find a better way of improving on past work undertaken
by them and this guided the researcher in aiming at the conclusion.
3.2 SAMPLE SIZE
Sampling involves taking any proportion of a population as a representative of that
population: The researcher used a good size so as to have a fair representative of the
entire population. Because of this, the sample was two fold; Central Bank of Nigeria and
6 1
the commercial banlts made up of Standard Trust Bank, Zenith International Bank,
Diamond Bank, Wema Bank. LJBA Plc., and All States Trust Bank.
The format is like this: the CBN is to provide information on implementation and results
while the commercial banlts were to provide the information on the effects. The
researcher covered this for his research work. In the course of the research work, care
was taken to see that the sample drawn was not biased, hence in the sample, the
researcher made sure that biased samples were outrightly rejected.
3.3 METHOD OF INVESTIGATION
All relevant information for the study were collected and obtained from a combination of
personal examination, oral interview, questionnaire, observation and reading of literature.
The information obtained were used o critically analyse the effects of monetary policy on
comnlercial banlts.
CHAPTER FOUR
TABLE I
INTEREST RATE STRUC'TIJRE ON COMMERCIAL BANKS DEPOSIT
(PERCENTAGE PER ANNUM)
3 Months SAVINGS
SOURCE: CBN Economic and Financial Review (Various issues)
End Of
Year (DEC) -. - - -
1990
TABLE 2
DEPOSITS AT COMMRCIAL BANKS (N Billions)
Demand Deposits SavingsITime Deposits Total
43,298
56,359
SOURCE: CBN Economic and Financial Review (Various issues)
TABLE 3
COMMERCIAL BANKS I>F,POSITS (Percentage Distribution)
SavingsITime Deposits
SOURCE: Computed fro111 CRN Economic and Financial Review (Various issues)
TABLE 4
SECTORAL DISTRIBIJ'I'ION OF COMMERClAL BANKS LOANS AND
SECTOR
1990 Preferred: Less Preferred 1991 Preferred: Less Preferred 1992 preferred: Less Preferred 1993 Preferred: Less Preferred 1994 Preferred: Less Preferred
1995
ADVANCES (%)
PRESCRIBED I ACTUAL I DEVIATION
SCRAPPED I - I
50.0 50.0
50.0 50.0
SCRAPPED
SOURCE: CBN Economic and Financial Review (Various issues)
40.0 60.0
41.3 58.7
SCRAPPED
SCRAPPED
SCRAPPED
-0.1 +O. 1
-0.87 +0.87
-
TABLE 5
COMMERCIAL BANKS LOANS AND ADVANCES ($4 BILLIONS)
End Of Year (DEC) Loans & Advances Percentage Growth ("0)
SOURCE: CBN Economic and Financial Review (Various issues)
TABLE 6
COMMERCIAL BANKS DEPOSITS (Percentage Distribution)
Issues 7,542 2,752
Commercial Banks 1,337
SOURCE: CBN Economic and Financial Review (Various issues)
TABLE 7
MATURTY POFILE OF COMMECIAL BANKS LOANS AND ADVANCES (N
BILLIONS)
Loan on Year Call
12 Mths Maturity '%I
12 Mths Onward Maturity :3 --
10.4
Total
SOURCE: CBN Econoinic and Financial Review (Various issues)
TABLE 8
COMMERCIAL BANKS CREDIT TO THE ECONOMY ($4 BILLIONS)
( End Of 1 Year (DEC
Credit Ceiling ( A ) - 12.5
Aggregate I Growth Rate 1 Deviation I
SOURCE: CBN Economic and Financial Review (Various issues)
PRESENTATION AND ANALYSIS OF DATA
4.1 ANALYSIS OF DATA
Analysis will be in the form of simple percentage changes in variables considered
Correlation Coefficient is also employed to determine the closeness of the relationship
betwccn the variables considered. llypothesis testing will be based 011 simple correlation
coefficient.
Tables 1,2 and 3 depict the interest rate structure on deposits, trends in commercial
bank's deposit mobilisation and its structure respectively.
Table 1 shows that there has been a remarkable increase in interest rate during the period
o'f study ranging from an average interest rate of 6.08% in 1990 to 9.65% in 1995 and
Also. there was an impressive growth in tota .I deposits. Tota I deposits grew from N43.3B
in 1990 to N146.3B in 1995 and N416.4B in 1999. The growth was consistent with the
growth in interest rates. The positive relationship between interest rates and deposit
7 1
mobilisation is better shown from the figures for 1992 and 1997. Interest rates for 1991
rose on the average by about 5% over 199 1 level.
While there was an increase in total deposits, there was also changes in the composition
of deposits during the period. Total deposits comprises Demand, Time and Savings
deposits.
The general trend of increase in interest rate has from the analysis resulted in greater
mobilisation of savings by commercial banlts. The attractiveness of earning assets has
been enhanced and this generally has induced greater bank savings on the part of
individuals and corporate entities.
Table 3 represents the composition (percentage) of the commercial bank's deposits.
There was a consistent increase in the deposit mix with almost equal percentage increases
ih the deposit components during the period under review.
Table 4 revealed the consistent failure of con~mercial banlts to comply with the
prescribed minimum percentage of loans and advances to the preferred sectors during the
period that the rule was in force.
The trend in the subscription of Treasury Bills and Certificates bear a close relationship
with the bank's investment structure during the period of study.
Generally, there was a decline in the demand for Treasury Bills issues by the Central
Bank of Nigeria and subscribed by comlnercial banks while the CBN was subscribing to
the issues.
'The Ranks did overshoot the ceiling on loans and advances and so there was excess
liquidity during the period which heightened inflation and the devaluation of the
exchange rate of Naira.
The maturity structure of commercial banks' loans and advances was generally stable
during the period with over 80% of all loans and advances maturing within a period of 12
months. Term loans and advances, with maturity of over 1 year was consistently the
lbwest during the period of study. 'The table clearly depicts commercial banks preference
lending short and avoiding to get involved in long term loans and advances.
4.2 TESTING OF HYPOTHESIS
Hypothesis testing will be carried out to test the strength of the relationships between
credit ceiling and commercial bank's credit to the domestic economy. sectoral credit
guidelines on preferred sector, interest rate policy and commercial banking system's
savings and deposits composition, and finally credit ceiling and maturity structure of
commercial banking system's loans and advances.
In testing the hypothesis, we used simple correlation coefficient and assumed therefore:
HO: ~ 0 . 7
HI: r 4 7
When r = nExy - Ex EY
Nex2 - (Ex)2 (nEy2 - (Ey)2
HYPOTHESIS I
Ho: That Central Bank's credit ceiling does not modulate the commercial bank's
credit to the domestic economy.
Hi: That Central Bank's credit ceiling modulate the coinlnercial bank's credit to the
domestic economy.
' X: CBN credit growth ceiling in %
Y: Annual growth in commercial banks credit in %
Year 1
Since r = 0.3889<0.7
We reject Ho and accept Hi
HYPOHESIS 11
Ho: 'I'hat sectoral credit guidelines on commercial banking system's financing of
preferred sectors does not affect credit to the preferred sectors.
Ho: That sectoral credit guidelines on commercial banl<ing system's financing of
" preferred sectors affect credit to the preferred sectors.
X = Prescribed credit to preferred sectors
y - Actual deposit in %
Year
l3(52,23 I ) - (809)"2 (1 3*44,798.2) - (748.9)"'2
r - - 0.9794
Since r = 0.9794
We accept Ho and reject Hi
HYPOTHESIS 111
Ho: That interest rate policy does not affect commercial banking system's "savings
and deposits" composition.
Hi: That interest rate policy affects commercial banking systenl's "savings and
deposits'' composition.
X: Interest rate on savings and deposits in %
Y: Annual composition of savingsltime deposits (only time deposits will be used).
Year
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
7--- -
--
r - -
l3(2,338.4) - (161.3)" (13*43,011) - (761 "2)
r - - 0.002
Since r = 0.9794
We re.ject Ho and accept Hi.
HYPOTHESIS IV
Ho: That credit ceiling does not affect the maturity structure of commercial banking
system's loans and advances.
Hi: That credit ceiling affects the maturity structure of con~mercial banking system's
loans and advances.
X: CBN credit ceiling in 96
Y: Composition of loans of 12 months onward maturity in % (only loans of < 12
months will be used for the purpose of this analysis
Year
1987
1988
1989
1990
199 1
1992
1993
1994
1995
1996
1997
1998
1999
r - -
13(4,499.8) - (214.4)"2 (13"5,677.7) - (265.5)"2
r - - 0.3127
Since r = 0.3 127 < 0.7
We reject Ho and accept Hi
CHAPTER FIVE
5.0 FINDINGS, RECOMMNDATIONS AND CONCLUSION
From the analysis of the data and the testing of the hypothesis in the previous chapter, a
number of revealing results were obtained and based on these; findings, recommendation
and conclusion is made on how best commercial banlts could be made to respond more
fkvourably to the objectives of government monetary policy measures.
5.1 FINDINGS
First among the findings is the change observed in the structure of Bank's deposits as
well as the remarltable increase in total deposits over the years. This however,
considered with the gradual removal of rigidity in the control of interest rate structure
culminated in the present deregulation of interest rates. This policy measures therefore,
has resulted in greater mobilisation of savings by the commercial banlts and this no doubt
has increased the proportion of the economy's money supply within the banking system.
The changes in the structure of bank deposits resulted in a greater proportion of total
deposits being held in the form of time deposits and savings with a corresponding
reduction in the proportion of deposits held in the form of demand deposits.
During the period under review, it was also found that open market operations were not
effective as a means of controlling the activities of the coininercial banlts. This is borne
out of the meagre proportion of Treasury Bills and Certificates issued by the CBN and
subscribed by the cominercial and mcrchant banlts in thc prc-97 era. The CBN on its
own ended up purchasing the bulk of the instruments issued.
In the period during which the sectoral guidelines were in application, commercial banks
did not conform with the sectoral guidelines of the CBN. There was actually a decline in
the proportion of total commercial bank loans allocated to the preferred sector during the
years that the preferred sector guideline applied. This could be deciphered from
Flypothesis 11.
The maturity structure of co~nmercial banlts loans and advances for the period under
review reflected the reluctance of commercial banlts in malting term loans, a
phenomenon described as sekicing rather than financing commerce and industry. This is
inspite of the monetary measures such as the spread in the interest rates and changes
observed in the maturity of commercial banking system's loans and advances as shown in
Hypothesis IV
From the study, we found out that during the period. the credit ceiling (Single Obligor
Limit et al) regulated the commercial bank's credit to the domestic sector. It was also
found out that despite the measures taken to control excess liquidity in the banking
institutions in the aggregate, the baillts were awash with excess thus malting it rather
difficult for the government to effectively control their impact on inflation and other
indices of nations economic well being. This perhaps explains why the Federal
Government had to take extra measures such as withdrawal of its accounts and those of
its parastatals from banlts and the insurance of Stabilization Securities to mop up excess
liquidity.
5.2 RECOMMENDATIONS
1. The interest rate structure as we have seen has had some impact in boosting
deposit mobilization especially with the deregulation of interest rates. Very high
interest rates induce savings but at the same time could become a disincentive for
borrowing. It is therefore recommended that deregulation be matched with these
monitoring to ensure that interest rates on banlts credit do not get out of control
and result in reduced growth and investment or contribute to inflation. This could
be achieved by the means of having an adjustable ceiling below which different
rates will operate. However, a wide spread of interest rates should be maintained
with a view to matching the high earnings from such loans. There should
84
therefore, be a significant margin rates paid on deposits and the various categories
of loans with term loans also attracting rates that are significantly higher than
those of short term credit.
2. 111 order to further encourage the commercial banks to finance economic activity
rather than merely servicing them, it is recommended that additional incentives be
given to the commercial banlts. This could take the form of incentives based on
the proportion of each banlts long term loans and advances. A form of graduated
tax allowances based on the above is recommended.
3. The commercial banlts have not been able to meet the required proportions of
total loans and advances to the preferred sectors namely Agriculture and Industry.
in malting this recommendation, it is assumed that government has certain
objectives with respect to the growth of this sector. These objectives therefore
have not been fully realised. It is therefore recommended that the continued
abrogation of sectoral credits should be maintained. the commercial banlts should
be allowed to treat all applications for loans and advances purely on merit. This is
in line with the policy of deregulation of the banking system. However, in order
to ensure that the preferred sector which is vital for the economic development of
the nation is adequately provided with financial banking. Government should rely
on specialised banking institutions in the form of development banks as banks of
this sought are already in existence. Their scope of operation should be
broadened to adequately handle the preferred sectors loan requirements which
commercial banks do not consider as commercially viable.
4. It is recommended that the CBN's financial instruments be made more attractive
in terms of rates payable on the instruments such as Treasury Bills and Treasury
Certificates, to ensure active participation by cominercial banlts and hence a more
effective control on their lending activities. This ensures the CBN is relieved of
the burden of subscribing a greater proportion of these instruments issued by
them.
5 . We recommend the suc of punitive measures to command greater response of the
commercial banks to changes in the growth rate of bank credit allowable by the
monetary authorities.
6. A graduated kind of fine should be imposed on the credit provided by any bank
beyond the limit set by the credit ceiling. The fine should be made to be greater
than the interest earnings that could be derived from the loans made beyond the
credit ceiling. This way, possible preference for fines on the part of the banlts
8 6
would be greatly reduced. Where non-compliance is persistent, it is
recommended that the banking licence of the defaulting bank should be
withdrawn for three months and if no changes are observed, the monetary
authorities should consider permanent withdrawal of the banlting licence.
7. The CBN should review the Prudential Guidelines for banlts to encourage them to
offer more credits to the seal sectors. Since the intention of the guidelines is to
shift emphasis from collaterals to repayment ability to borrowers, they could only
constitute a very effective tool for protecting depositors' and investors' funds.
The major hurdle is the blanket time frame for identifying non-performing credit
facilities without consideration for the peculiarities and risk content of different
types of lending which has the tendency of exposing the bank to the antics of
professional borrowers. The possible danger is that banks may shun long-term
lending and channel the bulk or their credits to trade and other short-term
investn~ents where risk is minimal rather than Agriculture and Industry with
longer maturities and higher risk contents.
8. The Supervisory and Compliance Department of the CBN should be strengthened
and adequately equipped with human and material resources to completely
monitor the financial system.
9. Full autonomy should be granted the Central Bank of Nigeria to adequately meet
up with the challenges of a modern and fast growing financial system without
undue interference.
10. Government should resume the licencing of more banks since the economy is
currently under-banked. The banlts will be the engine for the rapid developn~ent
of the economy. The ROFID should be reviewed and all other policies restraining
foreign investment in the baillting industry should bc reviewed to attract foreign
participation in the financial system thereby ensure that the country is not left out
in the current globalisation.
1 1 . There is the need for the Central Bank to urgently review the Minimum
Rediscount Rate, since banlts tale a cue from this MRR to price their risk assets.
12. Finally and very importantly, government should maintain the current
deregulation of the financial system since it will absolutely lead to rapid
development of the system.
5.3 CONCLUSION
a) The government regulation of the banking industry through the monetary
policy is in order and it still remains the most efficient control measure for
banks in the interest of the nation. The problem remains implementation
and this should be tackled headlong.
b) Most of the banks lack the right quality of manpower to interpret and
implement the policies to equate the coinpetitive challenges of the time.
The current expansion in the industry has exerted a tremendous amount of
the pressure on sliilled human resource resulting in the paucity of
thorougll-bred bankers. - _,
c) The banks are not affected by the penalties instituted by the Central Banli
because they are very mild. They prefer to breach the guidelines and
make huge earnings and then pay the meagre penalty
d) The Central Banli should stop managing the economy by personality and
until the apex bank is courageous enough and fully insulated from
pecuniary interests and political manipulation, the problems enumerated
above will remain with us for a long time.
89
e) Some of thc Central Banl<'s measures have been very stringent and do not
agree with the bank's profitability goals.
f> The government needs to urgently desist from policy sommersaults.
Policy changes should be infi-ecluent and consistent.
g) Socio-political influences affect the Central Bank's credit guidelines.
Most credit rules are dictated by political influence on the CBN's officials.
So what we have sometimes is political lending rules and not economic
lending rules.
In conclusion. if the recommendations made here are appropriately carried out by
both the Central Bank of Nigeria and the commercial banl<s to take control of the
issues raised in the findings, there would obviously be favourable response by the
commercial banks to CBN's monetary policies resulting in the achievement of the
aims and objectives of monetary policies in Nigeria.
BIBLIOGRAPHY
Adekanye, Femi (1 983)
Ekezie, Emeka (1 990)
Coates Warren L, Khate Khate 8( Deena R. (1 980)
Horvitz, Paul (1 963)
Inanga, Eno ( 1985)
Harshall, Robert & Swanson, Rodney ( 1990)
Okefie, Uzoaga (1 98 1 )
Ojo, Ade & Adequnn~i, Wole (1 982)
Okigbo, P. N. C. (1 98 1)
Olashore, Oladele (1988)
Elements of Banlting in Nigeria. Fand A Publishers, Lagos.
Elements of Banlting. ESUT Press, Enugu.
Money and Monetary Policy: A survey of issues and evidence. IMFICentral banking department. Pergamon Press, New York.
Monetary Policy & Financial System. Prentice Hall Inc., New Jersey
Managing Nigeria's Economic System. Centre for Management StudiesIHeineman Educational Books, Ibadan
Money and Banlting. Houghton Hifflin Co.. London.
Nigeria's Financial System. Macmillian Publishers, London.
Money and Banking in Nigeria. Fourth Dimension Press, Enugu.
Banking in Nigeria. Lindade Beds, Graham Forum
Nigeria's Financial System: Structure and Growth. Longman. Sussex.
Perspectives on Finance, Banlting & Economic Policies in Nigeria. Heineman, Ibadan.
Foundation of Nigeria's Financial Infrastructure. Greomtell, London.
Woodworth, Walker (1 985) Money Market and Monetary Management. Harper and Row Publishers, New Yorh.
First Bank of Nigeria Plc. Quarterly Economic and Business Review. March 1990.
First Bank of Nigeria Plc. Quarterly Economic and Business Review. April 1993.
Bullion, Volume 10, Number 1 JanuaryIMarch 1992.
Bullion, Volume 10, Number 2 JanuaryIMarch 1994
CBN, Economic and Financial Review Volume 23, Number 4 December 1998
CBN, Economic and Financial Review Volume 13, Number 4 December
Bullion, Volume 12, Number 2 JanuaryIMarcli 1993.
CBN, Economic and Finaiicial Review Volume 27, Number 4, December 1988
CBN, Economic and Finailcia1 Review Volume 32, Number 7, December 1999.
Annual Reports and Financial Statements of the Central Bank of Nigeria, 1990 - 1999.
on eta;^ Policy Circulars. I990 - 1999.
APPENDIX
QUESTIONNAIRE ON A CRITICAL APPRAISAL OF THE EFFECTS OF MONETARY POLICY ON COMMERCIAL BANKS IN NIGERIA.
Kindly tick into he circle ( ) as it affect you and give explanations or brief comments as
required of you by the questioils.
There is no right or wrong answer, so do not hesitate to make your honest responses to
each question and reason(s) as the case may be.
A sample of what to do:
1 . Do you keep your money in the bank(s)?
(a) YES ( d
(b) NO ( 1
2. Give your reasons for the actions in question 1 .
I believe banks are well secured.
Now turn to the next page and respond to the following questions.
= A =
1 ) What do you know about Monetary Policy?
2) Monetary Policy is effective in controlling the commercial banks in Nigeria.
(a) I strongly agree (
(c) I slightly agree ( 1
(d) I strongly disagree (
(e) I slightly disagree (
(f) Indifferent (
3) Give reasons for your response to question 2.
4) What are the instruments of monetary policy used by the CBN?
5 ) Who is to be blamed for the ineffectiveness of any of the instruments?
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
...................................................................................................
6) What are your reactions to the fullintroduction of a market oriented approach to monetary and credit control in Nigeria like?
(a) Positive
(b) Negative
(c) Indifferent
(d) Others (specify) ( 1
7) Briefly comment on answer to question 6.
8) Was this introduction timely?
(a> YES (
(b1 NO ( )
9) Why?
10) The following has been identified as factors which impinge on the success of policy guidelines by causing distortion in money management process thereby increasing liquidity in the economy.
( i ) Extra budgetary spending
(ii) Ways and Means (irresponsible printing of money)
. (iii) Funds from illegal practices e.g, corruption, laundering, advance fee fraud, smuggling, etc.
(a) i & ii
(b) i, ii & iii
(c) i & i i i
(d) ii & i i i
11) Which of them do you consider the most serious as regards the success of future monetary policy guidelines and why?
12) Briefly suggest solutions to the problem raised in question 1 1.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
...................................................................................................
...................................................................................................
13) Briefly comment on the total effect of monetary policy guidelines on your bank.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14) Do you feel CBN can cope with the enormous responsibility that guidelines carry?
(a) YES
Give reasons for your answer to question 14.
16) the autonomy of the apex banking institutions has been identified as prerequisites to effective monetary control. How would you assess the autonomy of CRN vis- a-vis the effectivencss of n~onetary policy
17) Will the guidelines produce a strong, solid, reliable and viable banking system?
(a) YES ( )
(b) NO ( )
18) . Please give reasons for your answer to question 17.
19) what likely recommendations would you advance in checking banks huge bad debt portfolio.
* (a) Positive custoiner attitude ( 1
(b) Adoption of sound appraisal techniques ( )
(c) Adequately trained staff in Credit Depts ( )
(d) Constant credit monitoring ( )
(e) None of the above ( )
(f) All of the above ( )
(g) Others (specify)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. ..................................................................................................
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20) Is it right to say that monetary policy guidelines achieve its purpose in the Nigerian Banking System. Brietly explain.