MONETARY POLICY AND THE BANKING PERFORMANCE IN NIGERIA.
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MONETARY POLICY AND THE BANKING PERFORMANCE IN NIGERIA.
Chapter one
1.0 Introduction
Several factors influence the performance of banks. In this study, profitability will be employed as a performance metric for banks. Bank profitability is mostly influenced by the regulatory structure in place.
This framework can be separated into two categories: monetary and banking policies. Because of the critical responsibilities that banking institutions play in the intermediation process, these policies are typically embedded in all economies.
Banks play critical roles in setting the price of money and creating high-powered money as a result of this procedure. This describes the primary functions of banks: mobilising cash from excess income units and channelling them to deficit expenditure units.
However, such a licence to generate many is regulated by the Central Bank in the public interest. Banks, for example, are required to retain reserves in the form of cash in their vaults or a deposit at the Central Bank that is equal to specified fractions of their various forms of deposits under monetary policy.
Monetary policy is the discretionary regulation of the money supply by monetary authorities in order to achieve specified or desired economic goals. Governments strive to manage the money supply because they believe the rate of increase has a substantial impact on the inflation rate. ·.
As a result, monetary policy refers to the government’s actions designed to influence the behaviour of the monetary sector. The policies are desired in order to change the trends of the same monetary variables in specific directions, hence inducing the desired behavioural change in the monetary sector.
The Central Bank’s role is to implement appropriate monetary policy that is consistent with the key economic objectives of attaining real GDP growth, keeping inflation low, and maintaining a stable balance of payments.
This applies regardless of whether a direct or indirect technique is employed to control the money supply and credit availability. The primary goal of monetary policy is to ensure that the expansion of money and credit is sufficient to meet the long-term demands of a developing economy at stable prices.
To optimise earnings for bank shareholders, banks must change their asset and liability portfolios to fulfil profitability objectives while adhering to solvency and liquidity limitations. This profitability target is heavily influenced by the Central Bank’s monetary and banking policies.
Other elements influencing bank profitability include managerial efficiency, workforce costs, size, and capital investment. The amount to which a bank is successful in collecting deposits and making lucrative use of them has a significant impact on its profitability.
However, this study will evaluate the effects of monetary policy factors on bank profitability and the effectiveness of monetary policy. Profitability is seen as a key indicator of a bank’s performance. It is described as a bank’s ability to generate excess revenue over expenditure or excess returns in the course of conducting business while maintaining liquidity and solvency requirements.
1.1 Statement of the Problem
Every year, the monetary authorities develop policy guidelines aimed at improving and maximising the efficacy of policy variables targeted to ensure the optimal performance of the Ute banking sector.
Banks, however, face challenges when implementing such policy variables. Banks face issues such as the difficulty to comply with numerous monetary policy standards.
For example, a change in the required reserve ratio affects the magnitude of the money multiplier, loan expansion, money supply, and so bank profitability. Similarly, the employment of interest rate policy, lending limitations, discount rate policy, and other policy instruments is intended to change the degree of profitability of banks.
Another issue arises when banks encounter rigorous policies aimed at limiting their profitability levels. For example, bankers have complained bitterly about the usage of stabilisation securities.
There are various groups in society with an investment interest in the Nigerian banking sector and bank profitability. Therefore, banks must be moderately lucrative. Reasonable returns help reassure depositors that the business is run efficiently.
It has been argued that unproductive banks are likely to be liquidated and distressed. In Nigeria, mounting cases of bank distress have been a key cause of concern for policymakers. Between 1994 and 2004, 33 banks were closed (Adam 2004), with around five (5) being summoned in 2009.
Monetary authorities aim to achieve broad economic goals through monetary management. To achieve these goals, the Central Bank of Nigeria uses a variety of instruments, including Open Market Operations (OMO), Cash Research Rates, Liquidity Ratios, credit ceilings, and selective credit policies, among others. It should be mentioned that direct monetary control tactics were popular in the 1990s, 1970s, and until June 1986.
This resulted in inefficiency and misallocation of resources in the financial system, and the government has now adopted indirect tools, while the use of direct techniques has decreased.
Other problems confronting monetary policy necessitate the examination and analysis of some fundamental issues and prospects for monetary control in the Nigerian economy in the near future.
The major goal of the study would be to assess the effectiveness of the CBN’s monetary policy over time. This will help determine the extent to which monetary policies have influenced Nigeria’s economic growth.
1.2 The Aim and Objectives. of the Study
The study’s goal is to investigate the link between monetary policy and banking performance in Nigeria. The objective is divided into the following:
a. Examine the impact of monetary policy variables on bank profitability.
b. To emphasise the various monetary policy measures implemented on commercial banks during the review period.
.c. To investigate the methods by which government authorities regulate banking operations in Nigeria.
d. To assess the efficiency of monetary policy measures implemented over the years under varied economic conditions.
1.3 Significance of the Study
Today, most African researchers and policymakers hold a conventional understanding of central banking. That viewpoint prioritises monetary policy objectives far more than theoretical orthodoxy or African central banks did in the 1960s and 1970s.
It contends that central banks that fail to specialise in monetary stability, prioritising low inflation over output stabilisation, fiscal support to the government, or a competitive real exchange rate, result in excessive inflation with no offsetting gains in economic performance.
Independent central banks, statutorily mandated with either primarily or entirely achieving price stability, have become the norm in theory and proposal, if not always in fact.
There is little place for an active development role here; instead, long-term growth is fostered by keeping inflation low, which boosts investment and growth by lowering macroeconomic uncertainty.
The modern viewpoint also recognises that in order to ensure long-term price stability, the monetary authority may need to be flexible in response to the changing economic and political environment.
Rigid or automatic policy norms, for example, may destabilise pricing in the face of shifts in crucial behavioural linkages, such as actions. If the pursuit of price stability is so rigid as to cause a recession, the political consensus within which the monetary authorities function may be shattered.
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