IMPACT OF MONETARY AND FISCAL POLICIES ON THE COMMERCIAL BANKS ACTIVITIES
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IMPACT OF MONETARY AND FISCAL POLICIES ON THE COMMERCIAL BANKS ACTIVITIES
The Central Bank of Niger in Abuja served as the case study for this project work, which focuses on the effects of monetary and fiscal policies on the operations of commercial banks. To collect the data for the study, a total of 50 questionnaires were distributed, of which 45 were returned fully and completed and 5 were deemed invalid.
Chi-square and percentages were used to analyse these survey replies. With chi-square, the hypothesis formulated in Chapter 1 was evaluated with a 5% confidence level. The research for hypothesis’ questions 9 and 17 were employed to test the hypothesis.
For hypotheses one and two, the null hypothesis was accepted. The conclusion’s executive summary showed that the monetary policy tool was statistically negligible. The commercial bank’s profit is unrelated to each other. The researcher recommended the following based on the analysis.
Nigeria’s central bank ought to be independent. Through a liquidity map up exercise, the issue of excess liquidity in the banking sector should be addressed.
1.0 CHAPTER ONE
1.1 INTRODUCTION
Every successful nation’s actions depend on carefully adjusting the appropriate policy measures aimed at achieving the stated goal. The influence of monetary and fiscal policy actions on the operations of commercial banks will be critically examined in this context.
This effect is reciprocal because it can cause both an economic downturn and an economic upturn. For instance, if a policy is implemented that restricts the amount,
flow, and availability of credit in the economy, this may have a negative impact on the commercial banks’ ability to turn a profit and may even force the bank into liquidation.
In fact, a fiscal policy measure is the employment of taxing and spending by the government to affect economic activity in a nation. Commercial banks could nonetheless face ruin if not properly adjusted.
Reviewing some of the important policy initiatives that might be expanded upon or specifically implemented in the area of interest is the goal of this research study.
Their influence on the operations of commercial banks and recommendations for further policy areas to promote commercial activities.
The information has been organised so that it would be easily understood. It has also offered some background for valuable lessons that will act as a guide for developing future policies.
1.1 CENTRAL BANK OF NIGERIA’S HISTORY
Historically, an organisation known as the West African Currency Board (WACB) before the foundation of the Central Bank of Nigeria by the CBN Act of 1958.
This Board, which the former British Colonial Government established, was meant to act as a central bank for the Anglophone nations of West Africa.
As a result, the board was given the primary duty of creating the West African pound, which was used as legal cash in Ghana, Nigeria, Sierra Leone, and the Gambia.
The management of the reserves held in trust for these colonies was another task carried out by WACB. These reserves were invested in the London money market by the board on behalf of the West African countries. The following is the board’s flaw, for which it was criticised:
Alongside other commercial banks, it conducts business banking operations.
The board lacks the necessary tools to regulate the money supply.
The board took part in the actual transfer of money from one location to another.
Its actions were seen as prejudiced against native West African industrialist.
It was not located in a development colony, and the majority of its operations were focused on trade and commerce.
These elements sparked widespread calls for an indigenous central bank in the region.
The primary supervisor of the nation’s financial system is the Central Bank of Nigeria (CBN). It was founded by the CBN Act of 1958 and officially opened for business on July 1st, 1959.
The CBN now has wider latitude in the regulation and supervision of the banking industry as well as in the licencing of finance companies that up until this point had operated outside of any regulatory framework thanks to the 1991 adoption of CBN Decree 24 and Banks and Other Financial Institutions (BOFI) Decree 25.
OBJECTIVES OF THE STUDY
According to the CBN Act of 1958, the bank’s primary goals are as follows:
Nigeria’s issuing of legal tender money
To protect the currency’s worth on the world market by maintaining the external reserve and legal tender value.
To encourage financial soundness and monetary stability
banks in Nigeria and overseas that employ bankers.
FUNCTION
The following tasks are carried out by CBN in order to accomplish the aforementioned goals, and they can be roughly divided into two categories:
Developmental function Regulatory function
REGULATORY PURPOSE
The CBN’s regulatory responsibilities are primarily focused on the goal of fostering and preserving monetary and price stability in the economy.
To carry out its regulatory responsibility, the CBN develops policies to regulate the supply of money in the economy by regulating the quantity of money in circulation, other banks, and significant actors in the financial sector.
CBN employs the following tools to carry out these objectives:
OMO: open market operation
banking rate
Redemption rate
controlling directly bank liquidity
power over bank credit directly
Unique deposit
Moral influence
Minimum cash to equity
FUNCTION OF DEVELOPMENT
The foundation for the CBN’s founding in 1959 was the requirement to foster and hasten Nigeria’s much-needed economic growth and development, which would inevitably foster the expansion of the financial market.
The money and capital markets, support for development banks and institutions, and the creation and implementation of governmental economic policies are all included in this financial market.
The money market is a place where short-term cash can be raised using instruments including Treasury bills, Treasury certificates, commercial paper, CDs, Eligible Development Stocks, and Bankers Acceptances.
The CBN promotes the expansion of the capital market that deals with long-term investments by providing them with an annual subsidy.
The Nigeria Industrial Development Bank (NIDB) is one of the institutions and banks that the CBN supports and promotes. The Federal Mortgage Bank of Nigeria (FMBN), the Nigerian Export-Import Bank (NEXIM), the Security and Exchange Commission (SEC), and the Nigerian Agriculture Insurance Company (NAIC).
The CBN also participates in the development and implementation of the government’s workable economic policies and measures. The bank has also played a significant role in the promotion of fully owned Nigerian businesses since 1970.
The emergence of more banks and other financial intermediaries as a result of the structural adjustment programme (SAP) required the passage of Decrees 24 and 25 of 1991,
which strengthened and expanded the authority of the Central Bank of Nigeria (CBN) to cover the new institutions and improved the efficiency of monetary policy regulation and supervision of banks and non-banking financial institutions.
The CBN (Amendment) Decree No. 37 of 1998, which repeated the CBN (Amendment Decree No. 3 of 1997, established the present legal framework within which the CBN operates. The Decree gives the CBN some operational autonomy to carry out its historic role and increase its adaptability.
1.3 STATEMENT OF THE PROBLEM
The lack of coordination between the monetary and fiscal authorities on compliance with the fiscal and monetary policy directives, along with the ambiguity of the policy objectives,
have all contributed to the ineffectiveness of fiscal and monetary policy measures. This has made it challenging for those responsible for policy implementation to understand the core of the policy.
Perhaps the most significant monetary constraints on how monetary and fiscal policy affect the operations of commercial banks are:
Lack of access to cash issue
Insufficient capital Issue with excess cash shortfall Inconsistent discount and interest rate policy
unrestrained credit expansion in different industries
inadequate tools for removing too much liquid
CBN’s reserve ratio is poor.
1.4 OBJECTIVES OF THE STUDY
If the Central Bank of Nigeria’s profits, loans, and advances have been impacted in any way by monetary and fiscal policies over the research period.
To provide the required advice that can help Nigeria’s monetary and fiscal policy.
To identify the monetary and fiscal policy instruments and each one’s unique roles in regulating commercial banks.
Lastly, to assess how monetary and fiscal policies affect commercial banks.
1.5 RELATIONSHIP TO OTHER STUDIES
The study of how monetary and fiscal policies affect commercial banks and many economic sectors is crucial nowadays. This period, banking operations have played a laudable part in the social and economic advancement of our country.
The paper contains a richness of monetary and fiscal policy definitions, as well as information on their implications for commercial banks from a variety of fiscal, statistical, and discursive sources.
The study will be advantageous to the banking sector because it aims to show the CBN and commercial establishments the impact and implications of these policies.
This is done to show the investing public how different monetary and fiscal instruments affect commercial banks and how the government use them to promote or inhibit economic and social activities.
The highlighted issue will have a substantial impact on monetary and fiscal policy, making the goals of those policies unachievable. Banks, financing companies, and business owners who are impacted by government policy will also find it important.
1.6 RESEARCH QUESTIONS
The study’s research question would be the following.
When may monetary policy affect the performance of a commercial bank in Nigeria?
Which monetary policy tool has the most impact on Nigerian banks?
How much does monetary policy affect the operations of commercial banks?
Whichever weapon for monetary policy is careless.
1.7 RESEARCH HYPOTHESIS
There are two key hypotheses that will be investigated throughout the study process and are included in this section. Assuming the positive statement is the alternative hypothesis (Hi) and the negative statement is the null hypothesis (H0), they are as follows:
H0: The amount of cash reserves, the interest rate structure, and the minimum rediscount rate have no bearing on the loans and advances made by Nigerian commercial banks.
Ho: The ratio of cash reserves, the interest rate structure, and the minimal rediscount rate all have an impact on the loans and advances given by Nigerian commercial banks.
1.8 SCOPE OF THE STUDY
This study focused on how monetary and fiscal policy affected commercial banks. The study’s focus is on the commercial banking sector in Nigeria with a particular focus on a critical examination of the monetary and fiscal policies for a four-year period, from 1994 to 1997. It is based on monetary and fiscal policy because it is only available in our Nigerian setting.
There are some issues with this study, as they say: “There is no rose without a thorn.”
Time constraints prevented trip to several branches to gather data, hence this job was not exhaustive.
Unfriendly response: Some CBN employees who were questioned showed no interest and ignored all attempts at persuasion.
1.9 LIMITATIONS OF THE STUDY
Throughout the research process, this study will encounter numerous restrictions. First and foremost, time is the biggest obstacle that must be overcome. Taking into account the strain and other academic tasks that the research must complete.
1.10 DEFINITION OF TERMS
FISCAL POLICY: Generally speaking, this is when the government uses spending and taxing to affect the economy of a nation.
According to Uzoaga, monetary policy is the expansion and contraction of the value of money in imitation for the specific goal of achieving, and it either aims to influence the cost and accessibility of credit or, alternatively, to control the supply of money in order to counteract undesirable trends in the economy.
Taxation is a level of collection that is imposed by the government (federal, state, or municipal) on individuals, business entities, and wealth, profit, or consumption. Company and Allied Matters Act of 1990 (registered).
Open Market Operations (OMOs) are when central banks buy or sell securities on the stock exchange or in the money market to increase (decrease) the volume of credit with the aim of raising (decreasing) the cost and availability of credit.
The Federal Funds Rate is the price that commercial banks charge one another for loan surplus reserves, which often occurs daily.
The term “liquidity traps” refers to situations when the interest rate is so low that people and businesses want to hold any additional money that is created in the banking system as speculative balances.
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