This research examined the effect of Monetary Policy on the financial performance of Deposit Money Banks in Nigeria. Specifically, the study establishes the effect of Central Bank Rate (CBR) on the financial performance of Deposit Money Banks, it also establish the effect of Reserve Ratio Requirement on the financial performance of Deposit Money Banks. The methodology used for data collection was mainly from primary source which included questionnaire and personal interview in order to have knowledge of Monetary Policy on the financial performance in Commercial banks in Nigeria. Information was also gathered from the secondary source which includes literature review of previous research, consultation of textbooks and internet. Simple percentage and Chi-square statistical method were used to analyse the data collected before reaching conclusion. The findings of the research indicated that deposit money bank policy affect banking operations in its bid to regulate money supply in the economy with particular reference to deposit and credit creation. The recommendation is that while bank size was found to lead to better financial performance, it is important that banks understand the source of its funds and the costs associated with the funds.
1.1 Background of the Study
Banks play an important role in financial system and the economy of a country. Banks among other financial institution are organizations which through its activities (Such as accepting or accepting and handling of deposit of its customer, making available loans to individuals and organizations based on request among others) contributes to a nation’s economic growth in particular and national development at large.
Ajayi (2014) refers to banks as “the linchpin of the economy of any country, they occupy central position in the country’s financial system and are essential agent in the development process. By intermediating between the surplus and deficit saving units within an economy, banks mobilize and facilitate efficient allocation of national saving thereby increasing the quantum of investment and national output”.
According to Chirwa and Mlachilla (2014) cited in Soyemi et al (2013) banks are financial intermediaries which play a key role in transforming deposits into financial assets; they channel funds from entities with surplus liquidity to those with deficit liquidity thereby facilitating capital formation and trade, bank also play a role in performing loans and creative accounting practices among many other very serious infractions by management of some of these banks.
According to Ekpung, Udude and Hope (2015) the existence of an effective banking sector is necessary for every economy because it creates the necessary environment of economic growth and development through its role in intermediating fund from surplus sector to deficit sector of the economic unit. Banking sectors are financial intermediaries, whose activities are for collection of saving and lending, thus standing in between the ultimate lender and borrower and matching the investment requirement of the lender.
The banking industry as regulated by central bank of Nigeria is made up of deposit money banks usually referred to as commercial bank and other financial institutions which include Micro-Finance bank, Finance Companies, Bureau De change, Discount house and Primary Mortgage Institution.
Soyemi, Akinpelu and Ogunleye (2013) state that the role of deposits money bank (DMBs) otherwise known as commercial banks is central to financial economic activity in an economy, especially in developing country like Nigeria.
Ongore (2013) posits that “the performance of commercial bank can be affected by internal and external factors which can be classified into bank specific (internal) and macroeconomic variable. The internal factors are individual bank characteristics which affect the bank performance these factors are influence by internal decision of the management and board, the external factors are sector wide or country wide factor which are beyond the control of the company and affect the profitability of the bank”.
In Nigeria, the type of government (military or democratic), environment (the society), and other institutions are external factors that could affect a bank. On this note, the central bank of Nigeria (CBN) as the apex of banking institute influences or affects the operation and survival of other banks. It is a significant external factor whose polices, principles and regulations in one way or the other affects the operation of other banks.
The central bank of Nigeria (CBN) is regarded as the central control unit of Nigeria banking system whose policies, principles and action influences or affects individual banks and the nation’s economic development. CBN is an institution established in 1958 and commenced operation in 1959. However, the major regulatory objectives of the bank as established in the CBN Act are to maintain the external reserve of the country, promotes monetary stability and a sound financial environment, and act as a banker of last resort and financial adviser to the federal government.
CBN act as financial adviser and “banker” to both the federal government and other banks. A major significant influence mechanism of CBN is the instrument of monetary policy in Nigeria to regulate external reserve, safeguard the international value of legal currency, promote and maintain monetary stability. Change in monetary policy affect the overall activities of the economic, such change affect the performance of the banking sector which will as well affect the profitability of the banking sector.
In furtherance, David and Lee (1978) states that commercial banks are the front line troops when it comes to implementing monetary policy because of this connection, they as a group are influence heavily by the action of the nation’s monetary policy maker. Monetary policy refers to the credit control measure, adopted by the central bank of a country. In another words, monetary policy enables central bank to control the supply of money as an instrument for achieving the objective of general economic policy.
According to Ajayi (2014) monetary policy involves the regulation of money supply and interest rate by the central bank in order to control inflation and stabilize currency. It is also a major economic stabilization weapon, which involve measure, designed to regulate and control the volume, cost availability and direction of money and credit in an economy to achieve some specified macroeconomic policy objective (Anyanwu 1997).
Claudio, Leonardo and Boris (2015) note that understanding the link between interest rate and bank profitability is important for evaluating the effect of monetary policy stance as captured by the interest rate structure i.e the level and slope of the yield curve on the soundness of financial sector, while monetary policy is not the only influence on the interest rate structure, it has a major impact on it: the central bank set the short term rate and influence longer term rate through direct purchase of securities and by guiding market participant expectation about short term rate.
According to Demirguc-kunts and Huizinga (1999) cited in Claudio et al (2015) to be among the first to relate bank profits to macroeconomic indicators such as real interest rates. They find the high real interest rate as associated with higher interest margin and profitability especially in developing countries where demand deposit frequently pay below market interest rate.
However, the financial intermediation function of the bank sector assume the need to satisfy the ultimate goals of the sector, the bank have private goals (profitability, liquidity and solvency) other than performing the intermediation function. Most financial intermediaries channel resource to productive investment even at lower level of interest rate, this is among the factors that limit the performance of monetary policy. For instance the expansionary monetary is use to increase money supply in an economy but it lead to inflation.
In order to survive in long run in relations to the influence of CBN through its formulation and implementation of various polices, the deposit money bank is expected to take cognise of those factors that affect it financial performance via its profitability.
1.2 Statement of the Problem
The primary function of banking sector as a financial institution is to source for fund from the surplus unit to the deficit unit of the economy in relations to the institutions survival, economic growth and National development. However, banks major or primary goal, aims and or objectives is to survive through profit making more like other commercials organizations in other to survive and remain significant in a competitive environment. Profitability is important for financial intermediaries like banks because it show the strength and progress of the bank and it help to generate and radiate confidence in the bank.
However, as much as the bank can control its internal factor, it has no or limited control over its external factors such as Government and CBN in relations to policies formulation and implementation, as Bank operate within the framework of the monetary policy and banking regulation that is provides by the central bank of Nigeria. The CBN has employed different policies to regulate and control the cost, volume, availability and direction of money creation in order to achieve the objective of monetary policy which includes price stability, full employment, economic growth and reducing inequality of income and wealth.
Therefore, this study will ascertain the factors that influence the banking sector performance using bank’s deposit liabilities as proxy for bank performance.
1.3 Objectives of the study
This study examine monetary policy and financial performance of deposit money bank in Nigeria. Therefore, it will:
- Determine whether monetary policy has significant effect on banking sector.
- Identify the channel through which monetary policy influences the performance of banking sector in Nigeria.
- Examine what changes in profitability resulted from changes in monetary policy.
- Examine the impact or effect of monetary policy on economic development.
1.4 Statement of Hypothesis
Ho: Monetary policy have no significant effect on bank deposit liabilities in Nigeria .
H1: Monetary policy have significant effect on bank deposit liabilities in Nigeria.
1.5 Significance of the Study
The impact of monetary policy on the financial performance of deposit money bank’s has make the regulators, bank management, researchers, educational institutes, to take significant interest to examine whether monetary policy has a negative or positive effect on the financial performance of commercial banks.
This study will be socially relevant. It would benefit the staff and the customer of the selected deposit money banks in Nigeria, This study provided essential knowledge on how monetary policy affect the financial performance of deposit money banks in Nigeria. Moreso, it will contribute to frontiers of knowledge as it will serve as an additional literature to the existing ones.
1.6 Scope of the Study
The researcher will be restricted to Nigeria and the work will be both empirical and theoretical. On the empirical side the researcher will run an econometric regression using Ordinary Least Square method. The period of focus will cover from 2006-2012.
The theoretical aspect will be directed towards reviewing d extent and impact of monetary policy on the financial performance of DMBs. The study will concentrate on the banking industry in order to capture the essence which is the impact of monetary policy and the financial performance of DMBs and it will focus the activities of the following banks: SKYE BANK, ZENITH BANK, FIRST BANK, FCMB, GTB,WEMA BANK, UNION BANK and DIAMOND BANK
1.7 Definition of Terms
- Financial Performance
Financial Performance analysis refers to analytical tools to measure the strength and weakness of a firm in relation to its balance sheet and profit and loss statement. Examples of bank financial performance tools and ratios include operating income, earnings before interest and taxes, Total Asset value. Financial performance analysis is carried out to ascertain the profitability position and performance of a firm. It can be conducted by management, owners, creditors, investors as demonstrated by Chenn (2011).
1.7.2 Monetary Policy Rate (MPR)
Minimum Rediscount Rate (MRR) now known as Monetary Policy Rate (MPR) was used to signal the desired direction of interest rate movement (Nwude, 2013).
1.7.3 Deposit Mobilization
Deposit Mobilization measures the aggregate mobilization of deposits in the economy. Deposits are bank accounts that allow the owner of the account (creditor) to make demand on banks. They include demand, time and savings and money market deposit account.
1.7.4 Credit to the Private Sector
Domestic credit to private sector by banks refers to financial resources provided to the private sector by other depository corporations (deposit taking corporations except central banks), such as through loans, purchases of non-equity securities, and trade credits and other accounts receivable, that establish a claim for repayment. For some countries these claims include credit to public enterprises (IMF, 2016).
1.7.5 Loans and Advances
Loans refers to a debt provided by a financial institution for a certain period while Advances are the funds provided by the banks, which needs to be payable within one year
The ability of a bank to meet its current obligations when they are due, and is normally a short term debt measures.
1.7.7 Reserve Requirement
This refers to the proportion of total deposit liabilities which the commercial and merchant banks are expected to keep as cash in vaults and deposits with the Central Bank of Nigeria.
1.7.8 Quantitative Directives
These are directives from the Central Bank of Nigeria to the banks and other financial institutions under its control as to the total amount of money which they may lend.
1.7.9 Financial System
The channel or conduct through which the sayings of surplus sectors (the household) flow to the deficit sectors (business organizations).
1.7.10 Monetary System
A system whose main function is the provision of adequate stock of money or currencies i.e.
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