THE IMPACT OF MONETARY POLICY ON COMMERCIAL BANK LENDING IN NIGERIA (A CASE STUDY OF FIRST BANK OF NIGERIA PLC)

THE IMPACT OF MONETARY POLICY ON COMMERCIAL BANK LENDING IN NIGERIA (A CASE STUDY OF FIRST BANK OF NIGERIA PLC)
ABSTRACT
This study investigated the impact of monetary policy on commercial bank lending in the Nigerian context. The study aimed to test the effectiveness of some monetary policy component and instruments and how it affects commercial bank loans and advances in Nigeria. The model used is estimated using Nigeria commercial banks loans and advances(CBLA) and other variables such as broad money supply(M2), minimum rediscount rate(MMR), Liquidity ratio of commercial bank(LR), Exchange rate(EXR), and cash reserve ratio of commercial banks for the period of; 1975 – 2009. The study hypothesizes that the specified independent variables mentioned above, have no significant positive impact on the dependent variable (CBLA). From the regression analysis which was done using SPSS tool, the model was found to be significant though the magnitude is not much. This work has the following findings – i. There is non-significant positive impact of broad money on commercial bank lending in Nigeria as Broad money coefficient is 0.903, and a t–value of .958. ii. There is non-significant positive impact of exchange rate on commercial bank lending in Nigeria as exchange rate coefficient is 0.340, and a t–value of 1.372. iii. there was positive correlation between minimum rediscount rate and commercial bank lending as the there is non-significant positive impact of minimum rediscount rate on commercial bank lending in Nigeria as minimum rediscount rate coefficient is 1.408, and a t–value of 0.504. iv. There is non-significant positive impact of liquidity ratio of commercial banks on commercial bank lending in Nigeria as liquidity ratio coefficient is 1.074, and a t–value of 0.964. v. There is non-significant positive impact of cash reserve ratio of commercial banks on commercial bank lending in Nigeria as cash reserve ratio coefficient is 1.300, and a t–value of 0.590. The study then suggests that there should be closer consultation and cooperation between commercial banks and the regulatory authorities so that the effect of regulatory measure on commercial banks will be taken into account at the stage of policy formation and policy makers and others should consider other variables, whether monetary policy variables or others like infrastructural variables, standard of living, entrepreneurship development and others as a determinant of the volume of commercial banks loans and advances in Nigeria.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The importance of monetary policy in the economic development of developing countries has attracted a lot of attention in recent years. The perverse effect of interest rate controls, overvalued exchange rates, controlled lending and other control variables have led to a large volume of research relating to monetary policy. An open and well unregulated monetary policy promotes economic growth and stability. In the current setting with a rapidly globalizing world economy, efficient monetary policy are essential for productive gains from the world market and to protect the domestic economy against foreign shocks.
In attempt to create and provide better living conditions for the populace, various government have embarked in the use of policies (fiscal and monetary) to control economic variables that facilitate growth and development. The focus of this study shall be to examine the impact of monetary policy on commercial bank lending in Nigeria.
Monetary policy in the art of controlling the direction and movement of money and credit facilities in pursuance of stable price and economic growth in an economy (CBN 1998). It is the major economic stabilization weapon, which involve measures designed to regulate and control the volume, cost, availability and direction of money and credit in an economy to achieve some specified macro-economic policy objective. That is, it is a deliberate effort by the monetary authorities (the Central Bank) to control the money supply and credit condition for the purpose of achieving certain broad economic objective. The Central Bank of Nigeria has an important role to play by regulating the stock of money in such a way as to promote the social welfare (Ajayi 1999).
Monetary policy in Nigeria over years has been the combination of measures taken by this monetary authority to influence directly or indirectly or both, the supply of money and credit to the economy and the structure of interest rates with a view to achieving a sustainable rate of economic growth, price stability and balance of payment equilibrium. Although Monetary Policy has been conducted under wide ranging economic environments, the strategy has remained the same. However, the relevant target monetary policy has changed following rapid institution changes in the financial environment. Until the late 1980’s, narrow money stock was the focus of Central Bank of Nigeria Monetary Policy.
In the light of this, the assessment of the banks system (particularly in the area of loans and advances) can be evaluated through the performance of Monetary Policy tools, which can be broadly classified into two categories; the portfolio control approach and market intervention. Under the system of direct monetary control, the monetary authorities use some criteria to determine monetary and credit targets and interest rates which are the intermediate targets to attempt to achieve the ultimate objectives of the policy. In the regime of indirect monetary control, because the intermediate variables are not under the control of Central Bank of Nigeria, only the operating variables (Open Market Operation, Reserve Requirement and Discount Rate), which are related are to the path of intermediate variables in a predictable way are controlled and are the major techniques of influencing the monetary base.
By and large, the main purpose of this research work is to examine the impact of monetary policy on commercial bank lending in Nigeria.
1.2 STATEMENT OF THE PROBLEM
Despite the use of several monetary policy tools, the volume of loans granted by the commercial banks to the Nigerian economy appears not to have improved as to accelerating investment, economic growth as well as economic development.
Central bank as the apex bank controls the activities of commercial banks through the formulation and issuance of monetary policy. Being CBN, the aim is to control and regulate the volume of money in circulation, which are therefore designed to achieve specific, desired social and economic goals. Despite the adoption of these measures, the achievement of the stated social economic goals has us so far.
Therefore, the good implementation, compliance, enforcement and achievement of the monetary policy instrument of the Central Bank of Nigeria pose a problem to this research work. Thus, the impact of monetary policy on commercial bank lending in Nigeria as the study.
1.3 RESEARCH QUESTIONS
Our research questions for this study are as follows:
i) What is the effect of Minimum Rediscount Rate (MRR) on commercial bank lending in Nigeria?
ii) Has money supply any impact on commercial bank lending in Nigeria?
iii) What is the role of exchange rate on commercial bank loans and advances in Nigeria?
iv) How has the liquidity ratio of commercial bank enhanced bank lending in Nigeria?
v) To what extent has cash reserve ratio of commercial bank influence its loans and advances.
1.4 OBJECTIVES OF THE STUDY
The objectives of this research work are as follows:
i) To critically examine and highlight the effect of Minimum Rediscount Rate (MRR) on commercial bank lending in Nigeria.
ii) To ascertain the degree of impact money supply has on commercial bank lending in Nigeria.
iii) To identify the roles of exchange rate on commercial bank loans and advances.
iv) To examine and identify the relationship between cash reserve ratio of commercial bank as it affects its loans and advances.
v) To ascertain the extent of commercial bank liquidity ratio influence on bank lending.
1.5 HYPOTHESES OF THE STUDY
Hypothesis is a tentative statement about phenomena whose validity is usually unknown (Onwumere, 2009: 25). For the purpose of this study, I shall put the following hypotheses to test:
i) Ho: Broad money supply does not increase the volume of commercial bank lending.
ii) Ho: Exchange rate has no effect on commercial bank lending.
iii) Ho: Interest rate has no positive effect on the volume of commercial bank loans.
iv) Ho: Liquidity ratio of commercial banks has no positive impact on the volume of its loans and advances.
v) Ho: Cash reserve ratio of commercial bank does not have a significant impact on bank lending.
1.6 SCOPE OF THE STUDY
The research points at the impact of monetary policy on commercial bank lending as secured in our country Nigeria from the year 1975 to the year 2009.
The research interest is on First Bank of Nigeria Plc because it is one of the leading tier one banks in Nigeria and therefore useful for this research.
TABLE OF CONTENTS
TITLE PAGE …………………………………………………………………. ii
CERTIFICATION ………………………………………………………… iii
APPROVAL PAGE …………………………………………………………. iv
DEDICATION ………………………………………………………… v
ACKNOWLEDGEMENTS ………………………………………………… vi
LIST OF TABLES ………………………………………………………… x
LIST OF FIGURES ………………………………………………………… xi
ABSTRACT ………………………………………………………………… xii
CHAPTER ONE – INTRODUCTION
1.1 Background of the Study ………………………………………… 1
1.2 Statement of the Problem …………………………………………. 2
1.3 Research Questions ………………………………………………… 3
1.4 Objectives of the Study …………………………………………. 3
1.5 Hypotheses of the Study …………………………………………. 4
1.6 Scope of the Study …………………………………………………. 4
1.7 Significance of the Study …………………………………………. 4
1.8 Operational Definition of Terms …………………………………. 6
References …………………………………………………………. 7
CHAPTER TWO – REVIEW OF RELATED LITERATURE
2.1 Overview of Nigeria Financial System …………………………. 8
2.2 Evolution of Nigeria’s Banking System …………………………. 10
2.3 History of Monetary Policy …………………………………………. 14
2.4 Types of Monetary Policy …………………………………………. 15
2.4.1 Inflation Targeting …………………………………………………. 15
2.4.2 Price Level Targeting ………………………………………….. 16
2.4.3 Monetary Aggregates ………………………………………….. 16
2.4.4 Mixed Policy ………………………………………………….. 16
2.4.5 Fixed Exchange Rate ………………………………………….. 16
2.4.6 Gold Standard …………………………………………………… 16
2.5 Trends of Monetary Policy in Nigeria …………………………… 17
2.6 Monetary Policy and the Performance of Banking Institutions …… 22
2.7 Instruments of Monetary Policy …………………………………… 24
2.8 Effects of Monetary Policies on Commercial Banks …………… 26
2.9 Phases of Nigerian’s Monetary Policy …………………………… 32
2.10 Lags of Monetary Policy …………………………………………… 38
2.11 Brief History of First Bank of Nigeria PLC ……………………. 39
References …………………………………………………………… 40
CHAPTER THREE- RESEARCH METHODOLOGY
3.1 Research Design …………………………………………………… 42
3.2 Nature and Sources of Data …………………………………… 42
3.3 Techniques of Analysis …………………………………………… 42
3.4 Specification of Models …………………………………………… 43
3.5 Anticipated Problems and Limitations of the Study ……………. 44
References …………………………………………………………… 45
CHAPTER FOUR – EMPIRICAL ANALYSIS OF DATA
4.1 Presentation and Interpretation of Data ……………………………. 46
4.2 Test of Hypotheses …………………………………………………… 47
4.2.1 Test of Hypothesis One …………………………………………… 47
4.2.2 Test of Hypothesis Two ………………………………………… 48
4.2.3 Test of Hypothesis Three ………………………………………… 49
4.2.4 Test of Hypothesis Four ………………………………………… 50
4.2.5 Test of Hypothesis Five ………………………………………… 51
4.2.6 Robustness Test ………………………………………………… 52
4.3 Implications of Results ………………………………………… 53
References ………………………………………………………… 54
CHAPTER FIVE – SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings ………………………………………… 55
5.2 Conclusion ………………………………………………………… 55
5.3 Recommendations ………………………………………………… 56
Bibliography ………………………………………………… 57
Appendix 1 ………………………………………………………… 60
Appendix 2 ………………………………………………………… 61
Appendix 3 ………………………………………………………… 66
Appendix 4 ………………………………………………………… 68