EFFECT OF MONETARY POLICIES ON NIGERIA DEPOSIT MONEY BANKS
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EFFECT OF MONETARY POLICIES ON NIGERIA DEPOSIT MONEY BANKS
Abstract
A case study of Zenith Bank Plc was used in this study to examine the effects of monetary policies on Nigerian deposit money institutions.
The following five goals were set: to establish the impact of the monetary policy rate (MPR) on the performance of DMBs in Zenith bank; to establish the impact of the central bank exchange rate (EXR) on the performance of DMBs in Zenith bank;
To establish the moderating impact on the re The recruited participants provided a total of 77 responses, all of which were validated and came from the Zenith bank in Uyo. The SPSS Chi-Square statistical tool was used to evaluate the hypothesis.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Before Nigeria’s banking reform in 2004, there were a large number of commercial banks there that are now referred to as legacy banks. These banks had a history of poor performance due to ineffective management, insufficient capital, poor use of available resources, or inadequate regulatory oversight.
The universal banking concept was adopted in 1999, marking the beginning of liberalisation. Massive consolidations resulted from the 2004 recapitalization reform,
However it was intended to address structural and operational flaws that were widespread in the industry and had adversely impacted effective financial intermediation and performance.
The sector underwent significant transformation as a result of the reform. As a result, it became even more evident that the banking sector is a crucial sector that cannot fail since it is responsible for allocating capital resources and distributing risk for upcoming global economic flows.
In order to interact and exchange financial value indirectly, the surplus and deficit units of any economy must go through the largest number of intermediaries, which are banks. Deposits made by surplus units in banks are then loaned to customers or investors (deficit units), with interest or profit (in the case of Jaiz and Taj banks) being charged on the loan;
Therefore, the Nigerian government charged the Central Bank of Nigeria (CBN) with overseeing its operations because DMBs are the key medium for the administration of monetary policy due to their role in any financial system or economy.
This is partly because any bankruptcy that could happen in the financial sector has a contagion 2 effect that can lead to bank runs, crises, and may bring about an overall financial crisis and economic misfortunes (Da).
Monetary policies are the CBN’s main means of regulating the banking industry in order to carry out its regulatory duties successfully. Since this is an external factor to the banks, the tools are intended to affect the activities of the banks, which in turn has an impact on its performance.
Monetary policies are composed of many types of instruments that are used to govern the operations of banks in every given economy. The way in which these elements are applied to banks varies from one nation to the next and might be linked to the economic health of that nation.
The tools are rarely changed and vice versa in stable economies. These tools are crucial to economic activity, especially in nations where the capital market is not yet fully developed.
The Cash Reserve Ratio (CRR), Minimum Rediscount Rate (MRR), Monetary Policy Rate (MPR) since December 11, 2006, Liquidity Ratio (LR), Money Supply (M1, M2, and M3), and Foreign Exchange Rate are some of the monetary policy instruments used in Nigeria.
These instruments have undergone various changes in accordance with changes in economic indices. There is little doubt that these changes to these instruments have an impact on bank operations. However, the results of an inquiry will determine whether these monetary policy adjustments have a major impact on the performance of Deposit Money Banks (DMBs).
For instance, the Monetary Policy Rate (MPR) affects the interest rate (Standing Lending Rate) levied on loans made by the monetary authority to DMBs (via the Discount Window).
The Monetary Policy Committee (MPC), which meets once every two months on average, decides what the MPR is and makes it known to the public. A decrease in money lending results from a rise in the bank’s lending cost, which is indicated by a rise in the MPR. This therefore causes the performance of DMB to degrade, and vice versa.
In order to achieve specific goals like lowering the level of inflation, promoting economic growth, achieving full employment, maintaining a healthy balance of payments, sustaining economic growth, increasing industrialization, and promoting economic stability, among others,
the monetary policy also controls the money supply and exchange rate. The Central Bank increases the money supply during periods of weak economic growth, which reduces interest rates and improves the flow of money (Meshak & Nyamute, 2016).
The continued life of banks in an economy is dependent on their performance, which in turn is entirely dependent on their profitability. The financial performance of the bank is often measured using Return on Assets (ROA), Net Interest Margin (NIM), and Return on Equity (ROE) to determine a bank’s profitability.
However, DMB has never again performed at the same level in Nigeria. Just as there have been a number of shifts in the monetary policy instruments, there have also been variations in their earnings, equity, assets, etc. The MPR ranged from 12% in 2013 to its peak point of 14% in 2017,
before falling to 12.5% in 2020. Along with the money supply and CRR, the exchange rate (EXR: N/$) has suffered comparable swings; it is now at N379.5/$1 in February 2021 as opposed to N155.2/$1 in December 2013.
This study focuses on how monetary policy affects the performance of DMBs in Nigeria. It is important to determine whether CBN monetary policy instruments have any statistically significant impact on that performance and, if so, how much of an impact there is. This research project aims to offer an answer to these questions.
1.2 STATEMENT OF THE PROBLEM
Deposit Money Banks (DMBs) are recognised to accept deposits with the primary purpose of generating risk assets (loans), and as such, they are the most efficient medium for the monetary authorities to use to administer monetary policy.
To accomplish its goals in regulating DMBs, Central Banks employ a variety of instruments. The interest rate that DMBs charge for loans and pay as interest on deposits is influenced by these instruments. Additionally, an unfavourable anticipated policy change puts DMBs in a precarious position that is likely to affect their profitability and, consequently, financial performance.
In some cases, this precarious position exposes some DMBs, which can result in the CBN or other interested parties taking over the operation of those DMBs. For instance, the results of the CBN’s audit assessment of banks in 2009 showed that at least 10 of the 24 institutions had serious liquidity issues.
Due to the high percentage of non-performing loans, inadequate corporate governance procedures, lax credit administration procedures, and non-compliance with the banks’ credit risk management procedures, their capital base has been depleted (Gololo, 2018).
The performance of DMB has been impacted by problems with asset quality, thinned spreads, important corporate governance issues, risk management procedures, difficulty with services and diversified delivery channels, high costs of banking services, etc.
Despite the fact that among other things, the goal of reform and the use of monetary policy is to increase stability and competitiveness of the banking industry, this trend has harmed Diamond Bank Plc, which led to its merger with Access Bank Plc in 2019.
Since banks are the primary channel for the transmission of monetary policy, the question of whether it has any impact on their performance has therefore remained troubling. Poor performance of the banks will undoubtedly result in poor transmission to the economy as a whole.
Furthermore, the monetary authority and policy makers will be extremely concerned if any of the monetary policy tools have an impact on the performance of DMBs that is not statistically significant. Only a small number of studies have been undertaken in Nigeria on monetary policy and the financial performance of commercial banks compared to other developing nations.
But several of the studies only looked at one or two Nigerian banks, and the majority of the research was done using qualitative methodologies to evaluate monetary policy and bank performance. Others employed Net Profit Margin as a stand-in for financial performance, while some used simple regression analysis.
The handful that used multiple regression studies solely focused on the profitability of one bank. All of the investigations conducted in Nigeria were inconclusive because the recurring (time series) cross-sectional nature of the observations was not taken into account.
Panel data are better suited to study the dynamics of change because they examine the repeated cross section of observations; they provide more informative data, more variability, and less collinearity between variables, and they relate to individuals, firms, states, countries, etc.; over time, there is bound to be heterogeneity in these units.
By allowing for subject-specific variables, panel data estimate techniques can explicitly account for this variability, enabling the exploration of more complex behavioural models. Additionally, it summarises any potential bias that may occur from grouping people or businesses together.
Furthermore, it enhances empirical research in ways that might not be possible if only cross-section or time-series data are utilised (Baltagi, 1983). The goal of this study is to fill in the gaps in the body of knowledge regarding how monetary policy affects DMB performance in Nigeria.
Additionally, unlike earlier studies, this one used a panel data regression model to include all DMBs operating in Nigeria from 2013 to 2019 in addition to taking bank size and its moderating effect on the relationship between monetary policy and DMB performance into account.
As a result, this study will offer considerably more trustworthy policy recommendations to decision-makers in Nigeria and around the world.
1.3 OBJECTIVES OF THE STUDY
The main goal is to ascertain how Nigeria’s Deposit Money Banks (DMBs) are performing in relation to monetary policy. Even though the study’s particular goals are listed below:
To assess the effect of Zenith Bank’s Cash Reserve Ratio (CRR) on the DMBs’ performance.
To ascertain how the money supply (M2) affects the efficiency of DMBs at Zenith Bank.
To ascertain the effect of the Exchange Rate (EXR) of the Central Bank on the performance of DMBs in Zenith Bank.
To determine how the Monetary Policy Rate (MPR) affects the DMBs’ performance at Zenith Bank.
In order to ascertain the moderating effect on the relationship between monetary policy and DMB performance in Zenith Bank.
1.4 RESEARCH HYPOPTHESES
H1: The performance of DMBs at Zenith Bank is unaffected by the Cash Reserve Ratio (CRR).
H2: The performance of DMBs at Zenith Bank is unaffected by the Monetary Policy Rate (MPR).
1.5 SIGNIFICANCE OF THE STUDY
The report is crucial for the Nigerian government because it will help decision-makers create sound regulations for DMBs and other financial institutions. In addition, the study will help the general public understand how the CBN’s monetary policy affects the performance of DMBs.
Finally, the study is anticipated to add to the body of knowledge already available on monetary policies and to serve as a starting point for future researchers interested in monetary policy theories.
1.6 SCOPE OF THE STUDY
The study’s focus is on how monetary policies affect Nigeria’s deposit money institutions. Zenith Bank Plc would be the sole subject of the study.
Study’s shortcomings
The source of the data presents the most frequent problems when using secondary data. As a result, the researcher made sure that the study’s data came from reputable sources, such as the websites of Deposit Money Banks and the Central Bank of Nigeria for information on the instruments of monetary policy and annual financial reports, respectively.
Additionally, the researcher suggested using yearly data, but not all of the information on the study variables was available in that format.
In order to solve this, the researcher converted all non-yearly data to yearly form, where necessary using a monthly weighted average. The time restriction and stress involved in juggling office employment and research activity is another drawback of this study.
1.7 DEFINITION OF TERMS
Liquidity is a short-term debt indicator that refers to a bank’s capacity to pay its current commitments when they are due.
The price of money is the interest rate. It is the return for releasing liquidity as well as the opportunity cost of retaining cash.
Narrow Money (M1): Consists of all legal tender in circulation as well as demand deposits held by various households and businesses that have DMBs. It is the total of all currently circulating paper money, coins, and current account balances that are used to make payments.
In Nigeria, broad money (M2) is made up of M1 plus time and saving deposits.
The financial system is the conduit via which savings from surplus units, such as households, are transferred to deficit units, such as commercial organisations.
A monetary system is one whose primary duty is to supply the economy with an adequate supply of money or currencies, such as notes and coins.
Bank Size: A bank’s total assets serve as a gauge of its size. The log of a bank’s total assets is used in this study to calculate a bank’s size.
The total amount of money that is in circulation in an economy is known as the money supply. It consists of secure assets that both individuals and corporations can use to make payments or keep as short-term investments, such as cash, coins, and balances in checking and savings accounts.
Return on Equity: This reflects the rate of return made on the money stockholders invested in a bank.
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