ASSESSMENT OF THE EFFECTIVENESS OF CREDIT POLICY ON ECONOMIC STABILIZATION

Abstract

This study appraises the effectiveness of credit policy on economic stabilization. The study adopted simple percentage and chi-square technique. The findings of the study showed that credit policy have witnessed the implementation of various policy initiatives and has therefore experienced sustained improvement over the years. The result also shows that credit policy had a significant effect on exchange rate and money supply while monetary policy was observed to have an insignificant influence on price instability. The implication of this finding is that monetary policy has had a significant influence in maintaining price stability within the Nigeria economy. The study concluded that for monetary policy to achieve its other macroeconomic objective such as economy growth; there is the need to reduce the excessive expenditure of the government and align fiscal policy along with monetary policy measure

 

 

 

 

 

TABLE OF CONTENT

Title page

Approval page

Dedication

Acknowledgment

Abstract

Table of content

CHAPETR ONE

1.0   INTRODUCTION 

1.1        Background of the study

1.2        Statement of problem

1.3        Objective of the study

1.4        Research Hypotheses

1.5        Significance of the study

1.6        Scope and limitation of the study

1.7       Definition of terms

1.8       Organization of the study

CHAPETR TWO

2.0   LITERATURE REVIEW

CHAPETR THREE

3.0        Research methodology

3.1    sources of data collection

3.3        Population of the study

3.4        Sampling and sampling distribution

3.5        Validation of research instrument

3.6        Method of data analysis

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS AND INTERPRETATION

4.1 Introductions

4.2 Data analysis

CHAPTER FIVE

5.1 Introduction

5.2 Summary

5.3 Conclusion

5.4 Recommendation

Appendix

 

 

 

 

 

 

 

 

 

CHAPTER ONE

INTRODUCTION

• Background of the study

In the past two decades macroeconomic policies has been said to have improved enormously in developing countries, but the expected growth benefit failed to materialize, instead a series of financial crisis, severely depressed growth and macroeconomic instability has been the case. Conceptually, macroeconomic instability refers to phenomena that make the domestic macroeconomic environment less predictable and this is of concern because unpredictability can hamper resource, allocation decisions, investment and growth. Although, macroeconomic instability can take diverse, form such as the form of volatility of the key macroeconomic variables or of unsustainability in their behavior such as the one that predict future volatility. How then can a country like Nigeria experience macroeconomic stability? This problem is widely perceived to have worsened in the developing countries like Nigeria. Surprisingly, monetary policy is known to be a vital instrument that a country can deploy for the maintenance of domestic price and exchange rate stability as a critical condition for the achievement of a sustainable economic growth and external viability. Its role in ensuring an overall macroeconomic stability cannot be overemphasized. Although in Nigeria appreciable progress has been made in this regard since the introduction of various financial sector reform programs in 1986. Despite the fore going, the Nigerian monetary policy has continued to face several challenges. No wonder, the CBN is increasingly focusing more on the aspect of price stability, recognizing the relevance of macroeconomic stability for economic sustainable output and employment growth. In contrast economist has disagree, however about whether price stability and money supply should be the central objective of macroeconomic policies or whether these policy should serve broader monetary policy goals which is now the trust of this current paper. Also the paper will also examine the relationship between money supply and price stability in Nigeria. Hence, this study investigates the effect of monetary policy on macroeconomic stabilization in Nigeria. Since the days of Keynes and the Great Depression, economists and policymakers have generally accepted the view that, unless prices are perfectly flexible and productive resources are fully employed, money and credit can exert a strong influence on economic activity and growth in the short run. In addition to persuasive evidence from econometric models for industrialized countries; economic developments in the United Kingdom and the United States in the early 1980s were especially revealing in this regard. The imposition of monetary restraint (or merely the threat of restraint, depending on the interpretation of the statistics in the case of the United Kingdom), accompanied by record high real interest rates and exchange rates, contributed significantly to a major downturn in economic activity. Much less empirical evidence is available on the experience of developing countries. To date, only a few studies have attempted to assess the effects on employment and output growth of the government’s control over credit from the domestic banking system, and they suggest that these effects are either weak or statistically non-significant. The issue is particularly important for developing countries, where control over bank credit is usually the main direct instrument of monetary policy (see Guitian, 1973) and where bank credit is also the major means of financing public expenditures, so that the effects on output growth of equivalent loses of credit, monetary, or fiscal restraint (or expansion)’are essentially the same in the short run. Sustaining economic development has been the paramount objective of all successive government in the country since Nigeria independence in 1960. This led to the implementation of several national development plans and programmes aimed at boosting productivity and diversifying the economic base. The agenda necessitates the intervention of financial sectors especially banking industry by providing financial resources for large scale production of industries and provision of other credit facilities within the economy. The role of financial intermediation in sustaining economic development cannot be over-emphasized. The development of this sector determines how it can effectively and efficiently discharge its major role of mobilizing fund from the surplus unit to the deficit unit within the economy. The importance of bank credit in developing economy has been acknowledge in Schumpeter (1934) who argue that banking sector facilitate technological innovation through their intermediary role. He emphasized on the efficient allocation of savings through identification and funding of entrepreneur as well as implementation of innovative production processes that are the main tools in order to achieve real economic performance. According to Adekunle, Salami and Adedipe (2013), a well-developed financial system play several roles to boost efficiency of intermediation through reduction of information, transaction and monitoring costs. It will also enhance investment by identifying and funding good business opportunities, mobilizes savings, encourage trading, hedging and diversification of risk as well as facilitating exchange of goods and services. All these resulted in more efficient allocation of resources, accumulation of physical and human capital and faster technological progress, which in turn leads to economic growth. In the same vein, Shaw (1967) and McKinnon (1973) also agreed the fact that financial development facilitates economic growth by increasing savings, efficient allocation and investment of financial resources. These studies further explained that development of financial markets is an essential condition for rapid economic growth. The level of development and sophistication of a country’s financial sectors could be relied on as one of the valuable indicators of economic growth.

• STATEMENT OF THE PROBLEM

Financial intermediation is an important activity in the economy because it allows funds to be channeled from people who might otherwise not put it to productive use to people who will. In this way financial intermediation helps to promote a more efficient and dynamic economy. According to Gerschenkron (1962), banks more effectively finance industrial expansion than any other form of financing in developing economies. In Nigeria, banks are the largest financial intermediaries in the economy. Financial intermediaries help to bridge the gap between borrowers and lenders by creating a market with two types of securities, one for the lender and the other for the borrower (Vane and Thompson, 1982). However, the extent to which this could be done depends on the level of development of the financial sector as well as the savings habit of the populace. The availability of investible funds is therefore regarded as a necessary starting point for all investment in the economy which will eventually translate to economic growth and development (Uremadu, 2006). It is in view of the above that the researcher intends to investigate the effectiveness of credit policy on economic stabilization.

• OBJECTIVE OF THE STUDY

The main objective of the study is on an assessment of the effectiveness of credit policy on economic stabilization; but to aid the completion of the study, the researcher intends to achieve the following specific objective;

1. To examine the effectiveness of credit policies on the growth of Nigeria economy
2. To examine the relationship between credit policy and economic stabilization

• To examine the effect of credit policy on investment decisions in Nigeria

1. To ascertain the impact of credit policy on the volume of money in circulation for investment purposes
   • RESEARCH HYPOTHESES

The following research hypotheses were formulated by the researcher to aid the completion of the study;

H₀: the effectiveness of credit policies does not have any effect on the growth of Nigeria economy

H₁: the effectiveness of credit policies does not have an effect on the growth of Nigeria economy

H₀: there is no significant relationship between credit policy and economic stabilization

H₂: there is a significant relationship between credit policy and economic stabilization

• SIGNIFICANCE OF THE STUDY

It is believed that at the completion of the study, the findings will be of great importance to the management of national economic committee as the findings of the study will aid them in decision making and policy formulation, the study will also be of significance to the management of central bank of Nigeria (CBN) and other financial institution on decision making on credit facilities availability and accessibility to potential investors and beneficiaries. The study will also be useful to researchers who intend to embark on a study in a similar topic as the findings will serve as a reference point to further research. Finally, the study will be of significance to students, teachers, lecturers, researchers and the general public as the study will add to the pool of existing literature and also contribute to knowledge on the subject matter.

• SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers an assessment of the effectiveness of credit policy on economic stabilization; but in the cause of the study, there were some factors that limited the scope of the study;

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

Inadequate Materials: Scarcity of material is also another hindrance. The researcher finds it difficult to long hands in several required material which could contribute immensely to the success of this research work.

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).

1.7 OPERATIONAL DEFINITION OF TERMS

Credit policy

A company’s policy on when its customers should pay for goods or services they have ordered a government’s policy at a particular time on how easy or difficult it should be for people and businesses to borrow and how much it should cost

Economic stability

Economic stability is the absence of excessive fluctuations in the macro-economy. An economy with fairly constant output growth and low and stable inflation would be considered economically stable

Monetary policy

Monetary policy is the process by which the monetary authority of a country, typically the central bank or currency board, controls either the cost of very short-term borrowing or the monetary base

1.8 ORGANIZATION OF THE STUDY

This research work is presented in five (5) chapters in accordance with the standard presentation of research work.

Chapter one contains the introduction which include; background of the study, statement of the problem, aim and objectives of study, research questions, significance of study, scope of study and overview of the study. Chapter two deals with review of related literature. Chapter three dwelt on research methodology which include; brief description of the study area, research design, sources of data, population of the study, sample size and sampling technique, instrument of data collection, validity of instrument, reliability of instrument and method of data presentation and analysis. Chapter four consists of data presentation and analysis while chapter five is the summary of findings, recommendations and conclusion.

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