MONETARY POLICY AND ITS EFFECTS ON COMMERCIAL BANKING OPERATIONS

1.1 Introduction

Over the years, Nigeria has made conscious and determined afford to attain a high level of social and economic transformation of the economy. The nation has had several national development plans in which varying emphasis on development goals and objectives were articulated and pursued. In order to achieve these development goals and objectives, several policy tools were adopted including monetary policy, fiscal policy etc. These measures were changed from time to time to reflect the changing economic circumstances.

Monetary authorities, precisely the Central Bank of Nigeria (CBN) adopts some credit control measures in its bid to manage the expansion and contraction of the volume of money in circulation for specific purpose of achieving certain declared economic and social objective. Thus, the conglomerations of these credit control measures are collectively know as MONETARY POLICY.

from the above, it can be deduced that one of the important function of the Central Bank of Nigeria (CBN) is the control of money and credit in the economy. This, they do in order to check inflationary and deflationary pressure within the economic system. This function of the banking sector is performed by mobilizing fund or savings from the surplus sectors of the economy and then enhancing it to the deficit sector. All these activities and operations are made to become effective by the monetary authorities through the monetary policy instruments.

The Central bank of Nigeria, issues monetary policy instruments to commercial bank and also to other non – banks financial institutions in order to control their operations, thereby creating a developmental impact in the economy. Infact, it has been strongly argued that for the nations financial system to be effectively controlled, the operations of financial institutions must be regulated. The impact created is no doubt reflected on the entire economy in any regulated financial system. With regards to this, the important role of commercial bank is not of negligible.

At this point, it has become pertinent to examine the activities of commercial bank and also that of the Central Bank of Nigerian (CBN)

Commercial bank is normally distinguished by their system of operation and the type of services they render to the public. in the early banking system, the commercial banks were only seen as a custodian of funds. But recently, commercial banks cover so many services that it is difficult for any one person to comprehend all those available. This is consequent upon civilization and technological revolution. Some of those banking operation inter – alias includes:

• Cash dispensers
• Provision of encashment facilities
• Credit advancement service
• Business advisory service
• Safe deposits
• Safe custody of valuable and other items
• Guarantees and indemnities
• Proving facilities for the transfer of funds etc.

The CBN plays an advisory role to the government. It is also the regulatory or supervisory body of the commercial banks and other financial institutions. Indeed, it is the apex body of all banking institutions.

The CBN act of 1958, provide that the objectives and function of CBN includes:

• Issuance of legal tender currency in Nigeria
• Maintenance of external reserves in order to safeguard internal value of the currency.
• Promotion of monetary stability and sound financial structure.

We can therefore, deduce that monetary policy is a weapon available to the monetary authorities to correct the financial imbalance of the financial sector. Such imbalances among others include:

• Price instability
• Inflation
• Unemployment
• The excesses of financial institutions
• Balance of payment deficits etc.

Shaw G. K. (1984) defines monetary policy as “any conscious action undertaken by the monetary authorities to change the quantity, availability or cost of money”. More specifically, it refers to central banks policy actions directed to influence the availability and cost of credit, to safeguard the internal and external value of the currency and prevent excessive price increase.

Falegan (1978) saw monetary policy as policies which deal with the discretionary control of money supply by monetary authorizes in order to achieve stated or desired economic and social goals, in essence, monetary policy affects the money supply in the economy, bothering on the cost and availability of credit. in the case of credit availability, priority sector are given much attention.

The instruments according to Onoh (1982) are categorized into two. These of general nature and those that are selected in nature.

The general instruments of monetary policy include:

1. Moral suasion
2. Discount and interest rate policy
3. Open market operations
4. Cash reserve ratio
5. Liquid asset ratio
6. Special deposits

However, the instruments of monetary policy, which are selective in nature, include:

1. Credit ceiling
2. selective credit control
3. Control of non – bank financial instrument

According to Onoh (1982 instrument of monetary policy are part of general policy framework for furthering the objectives of general economic policies. Thus, the main objectives of monetary policies according to Onoh therefore include:

1. High level of employment
2. Stable prices
3. Rapid growth of gross national product
4. Favourable balance of payment position.

Brief Profile of First Bank of Nigeria Plc, Owerri Branch

First Bank of Nigeria Plc, for over a century has distinguished itself as a leading banking institution and a major contributor to the economic advancement and development of Nigeria.

Founded in 1894 by a shipping magnate from Liverpool, Sir Alfred Jones the bank commenced as a small operation in the office of Elder Dempster and company in Lagos.

It was incorporated as a limited liability company on March 31st, 1894, with Head office in Liverpool. It started business under the corporate name of Bank of British West African (BBWA) with a paid-up capital of 12,000 pound sterling, after absorbing its predecessor, the African Banking Corporation, which was established earlier in 1892. This signaled the pre – eminent position, which the bank recorded in the banking industry in West Africa. in the early years of operations, the bank established an impressive growth and worked closely with the colonial government in performing the traditional functions of a Central Bank, such as issue of species in the West African sub-region.

With 328 branches spread throughout the federation, including one in the city of London; the bank maintains the largest branch network in the industry. To satisfy the needs of its customers, first bank has diversified into a wide range of banking activities and services such as corporate and retail banking, Registarship, Trusteeship and Insurance Brokerage.

Over the years, the bank has experienced phenomenal growth, with a share capital growth from N55.6m in 1980, to N1, 016m as at March 2002. The total asset base stood at N266.4B, while its deposits base stood at N168.2B and market capitalization was N47.604B that is N23.44k per share as at 31st March 2002. by now deposit will have increased.

1.2. Statement of Problems

Monetary policy instruments in one way or the other affect the operations of the banking system.

The implication is that it is either felt to create positives or a negative impact on the overall operations of the commercial banks. However, the main aim of monetary authorities is to provide a regulated environment that would stabilize the macro-economic imbalances.

Other problems there fore to studied in this research work include:

1. The negligence exhibited by some commercial banks in implementing some of these policies established by the monetary authority.
2. Causes and situations where the operations of the commercial banks may wish to flout some of these directives and the effect of penalties imposed on them.
3. The inconsistencies of those monetary policies issued by the monetary authority and the instruments mostly affected and its responsiveness to the operations of the commercial banks.
4. There is a significant crises of confidence, which will eventually, have serious implications for our socio-economic system, for example the delays and other high transactions cost in Nigerian banks have been blamed for the high cost of business operation in Nigeria.

1.3 Purpose of Study

It is obvious that the central banks control the activities of commercial banks through the formulation and issuance of monetary policy. The purpose being to regulate the volume of money in circulation, which is thus, designed to achieve specific and desired social and economic goals.

It is against this background that this study is designed to:

1. Critically examine the role of CBN as it regards monetary policy and its control measures on commercial banks.
2. Examine in details the instruments of monetary policy and their individual roles as control measures on commercial banks.
3. Evaluate critically the role of commercial banks exemplified by the First Bank Plc as it regards compliance with monetary policy.
4. Highlight the effects of monetary policy on the economy in general.
5. The study among other things highlights on the objectives and limitations of monetary policy. This becomes necessary this time when most banks are going distressed. which is partly as a result of their inability to comply with the appropriate control measures as directed by CBN and partly due to other intrinsic factors.

1.4 Significance of the Study

The recent economic trend, especially in the financial sector has prompted this study on monetary policy and its effect on commercial banks operations. This study will test the workability of those policy instruments issued by the monetary authorities and its responsiveness to the commercial banks.

The study has a wealth of factual, statistical and discursive information on the subject under study.

It therefore becomes of invaluable help to finance and business students who intend going into the banking and finance industries or the business world in general after their career.

Also, to further researchers, it provide both a theoretical and empirical framework of reference to them.

Besides, participants in Nigerian financial system will benefit from this study as it is hoped to unravel some major policy instruments that will ensure effective economic growth, proper implementation and consequences of recklessness, neglect or abandonment of these policies.

Finally, the study will provide limitless beneficial interest to the public in general especially those interested in the financial sector.

1.5 Scope and Limitations of Study

This research centers on the effects of monetary policy on commercial banks operations.

It is based on monetary policy as is obtainable only in our Nigerian context,. The object of the study is the commercial banks in Nigeria with particular reference to First Bank of Nigeria, Plc., Owerri Branch.

However, it is apparent that a study of this nature will often beset some short falls. All the same, some problems that befell this course of study ranged from time constraints, other academic work leads to the unwillingness of some of the management and staff of First Bank of Nigeria Plc, Owerri Branch as well as some CBN officials in Owerri to grant interviews or release some important information for fear that such information might be used to their own detriment.

Finally, in tune with the current economic hard times the country is passing through, financial constraints which affects both the extent of investigation carried out and the size of this work, cannot be over – emphasized.

1.6 Research Question / Hypothesis

In order to accomplish the purpose of this study these research questions will offer a general guide to the researcher.

• What was the instrument of monetary policies available in this bank?
• Can monetary policy be used to control and regulate the activities of commercial banks, especially this bank?
• What are the main objective of the monetary authorities that issue these monetary policies?
• Are these policies issued by the monetary authority strictly implemented by your bank?

The problem of monetary policy administration and application in commercial banks is a concern to any rightful thinking citizen of this country.

The researcher therefore identified the problems of the commercial banks and also how it affects the economy as a whole. The researcher also advanced some suggested solutions to some of these problems. The researchers work is therefore based on the following assumptions:

• H₀1: The operations of the commercial banks are affected by they monetary policy instruments and so impact is created in the economy
• H₀2: There is a positive relationship between the role of commercial banks and successful implementation of monetary policy

1.7 Operational Definition of Terms

Monetary Policies:

Refers to the combination of measures or actions designed to regulate the value, supply and the volume of money in an economy in consonance with the expected level of economic activity.

Central Bank of Nigeria (CBN):

Refers to the apex banking institution that regulates the activities of other banks

Regulation In Banking:

Refers to the body of specific rules or agreed behavious either imposes by some government or external agency or self – imposed by the explicit or implied agreement within the banking industry.

Universal Banking:

A system of banking which abolishes the dichotomy between merchant and commercial banks. Every bank in Nigeria now has a uniform license to undertake conventional banking functions without dilineation as to “commercial” or “merchant”. This was effective January, 2001.

Financial Institutions:

This refers to all the institutions that operates within the financial sub – sector of the economy.

Contractional Policy:

This refers to all the policies that are put in place by the financial, authorities to reduce the amount of currency in circulation.

Expansionary Policies:

This refers to those policies that are put in place by the monetary authorities to increase the volume of money or currency in circulations.