THE IMPACT OF MONETARY POLICIES ON PROFITABILITY OF BANKS IN NIGERIA

1.0 Introduction

1.1 Background of Study

Monetary policy is the combination of measures designed to regulate the value, supply and cost of money in an economy. It can be described as the art of controlling the direction and movement of credit facilities in pursuance of stable price and economic growth in an economy (Chowdhury, Hoffman and Schabert, 2003). Put differently, monetary policy refers to the actions of the Central Bank to regulate the money supply whch could be through discretional monetary policy instruments such as the open market operation(OMO), discount rate, reserve requirements, moral suasion, direct control of banking system credit, and direct regulation of interest rate (Loayza, and Schmidt-hebbel, 2002).

The central Bank as the apex monetary authority has the duty of ensuring that policies are set in motion to regulate the financial sector so as to operate in the same direction with the real sector in order to realize national economic objectives.

Section 2 (c) of CBN decree 24 of 1991 as amended stated that one of the principles “objectives” of bank (CBN) shall be “to promote monetary stability and a sound financial system in Nigeria”.

While section 3 (A) of the same decree provides that “The banking shall power to carryout Open Market Operation (OMO) for the purpose of maintaining monetary stability in the economy of the country and without prejudice to the generality of the forgoing”. The bank may also for that reason issue sell, repurchase, amortize or redeem securities to be known as “stabilization securities (which shall constitute its obligations) and the securities shall be issued at such rate of interest and under such conditions of maturity, authorization negotiability and redemption as the bank may deem appropriate”.

Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Impact of Monetary Policies on Profitability of Banks in Nigeria using Zenith Bank PLC as a Case Study.

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1.2 Statement Of Problem

One area of interest to many researchers is the relationship between banks performance and macroeconomic policies. The impact of interest rate or monetary changes on zenith banks liquidity and profitability has increasingly concerned economics and policy matters as financial market conditions have become more volatile in recent years.

The general opinion that banks and other financial institutions borrow money on short-term and lend on long-term brings about mismatch of funds and this create problem in banking sector like recent distress in Nigerian banking sector.

Some specific problems include the following:

1. Reviewing the range of monetary policy used within the period of 1993-1997.
2. Is there need to continue to use the current monetary policy measure to direct funds in the economy?
3. The limitations or constraints to the effective implementation of monetary policy measure in use within period under review.

Are there some policy measures that have not been useful in the regulation of the activities of economy and hence, the need for a change.

The researcher here has observed that Nigeria as a nation has been characterized by chronic unemployment, galloping inflation, filling inventories, fluctuation in exchange rates, daily depreciation of the value of naira and various cycle to poultry among the Nigerian masses especially in rural areas.

The researchers further observed that although the policies makers may have been trying in designing.

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1.3 Aim and Objectives of the Study

The aim of the study is to investigate the Impact of Monetary Policies on Profitability of Banks in Nigeria using Zenith Bank PLC as a Case Study. In achieving this aim, the following specific objectives were laid out as follows:

1. To ensuring the credit is directed to the productivity sector.
2. To ensuring that there is equitable and fair allocation of credit between the private and public sectors of the economy.
3. To ensuring that there is economic growth that is sustainable over a long term.
4. To ensuring generally, that adequate credit goes to the productive sectors to expand production as a cure against inflation, to curb consumption an hereby dampen the pressure on price increases.

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1.4 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

• Does the impact of monetary policy on the liquidity and profitability of zenith banks play any role in the development of a country?
• Does economic instability influences the country financial sector?
• What could be the outcome of zenith banks when they are unable to meet the liquidity ratio or power of the worthy customers?

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1.5 Research Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

H0: There is no significant Impact of Monetary Policies on Profitability of Zenith Bank PLC in Nigeria

H1: There is significant Impact of Monetary Policies on Profitability of Zenith Bank PLC in Nigeria

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1.6 Significance of Study

The following are the significance of the research work;

1. It has open my knowledge on how to carryout research problem.
2. It is important to everybody especially those who are into banking business that is the customers and bankers.
3. Helps in adding to the stock of existing literatures in banking and the adequate survival of zenith banks.
4. Aid government in the regulator policy and control of money, credit in the economy.

This study will be of immense benefit to researchers who intend to know more on this study and can also be used by non-researchers to build more on their research work. This study contributes to knowledge and could serve as a guide for other study.

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1.7 Scope of Study

The study focuses on the Impact of Monetary Policies on Profitability of Banks in Nigeria using Zenith Bank PLC as a Case Study.

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1.8 Limitations of the Study

During the course of this study, many things militated against its completion, some of which are:

1. Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
2. Establishment Policies: Establishment policies posed a serious limitation as most staffs are not ready to release information needed for this project work. There were lots of information needed from the staffs of this establishment to enhance the study which took them time to release or they did not release at all for security purposes, hence the scope was reduced.
3. Research material: availability of research material is a major setback to the scope of the study.
4. Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
5. Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

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1.9 Definition Of Terms

The following terms have been precisely defined as rates to the context of this research work:

Monetary Policy: An economic stabilization weapon used by the monetary authority to regulate the volume, cost, availability and direction of money and credit in the economy.

Monetary Circulars: Are guidelines the country used to direct the affairs in the allocation of credit within the economy.

Regulation: This is system where the activities of the zenith banks like interest rates are controlled by the central government (CBN).

Profitability: The ability of the bank to make a maximum returns to satisfy the interest of its customers.

Liquidity: The availability of money to meet current or maturing obligations.

OMO (Open market operation): Ability of the CBN to go into market to buy securities when the economy is tight and sell when inflated (i.e. one of the quantitative tools of the CBN).

Securities: Refers to various promissory documents adopted as evidence of claim in the Market.

Bank Discount Rate: The rate that the CBN allows commercial bank to borrow short-term in order to meet liquidity positions or loan demand.

Prime Lending Rate: The rate allow to worthy credit customers on borrowing.

Quantitative Instruments: Those instrument that deal with the volume and quantity of money.