THE IMPACT OF MONETARY POLICIES ON NIGERIA DEPOSIT MONEY BANKS

Abstract

This study was on the impact of monetary policies on Nigeria deposit money banks (a case study of zenith bank plc bank). Five objectives were raised which included:  To determine the impact of Cash Reserve Ratio (CRR) on the performance of DMBs in Zenith bank, to determine the impact of money supply (M2) on the performance of DMBs in Zenith bank, to determine the impact of Central Bank Exchange Rate (EXR) on the performance of DMBs in Zenith bank, to establish the impact of Monetary Policy Rate (MPR) on the performance of DMBs in Zenith bank and to determine the moderating impact on the relationship between monetary policy and performance of DMBs in zenith bank. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from Zenith bank in Uyo. Hypothesis was tested using Chi-Square statistical tool (SPSS).

Chapter one

Introduction

1.1Background of the study

Prior to Nigeria’s banking reform of 2004, there were plethora of commercial banks, known today as legacy banks, in the country which were characterised by poor performances either due to inefficient management, inadequate capital, poor utilization of available resources or poor supervision by the regulatory authority. 1999 saw the liberalization and the adoption of the universal banking model. While the 2004 recapitalization reform led to massive consolidations, the recapitalization was meant to correct structural and operational weaknesses that were commonplace in the sector which had also hampered efficient financial intermediation and significantly affected performance.

 The reform brought about a great change in the sector. Consequently, it became even clearer that the banking industry is an important sector which must not fail because it is charged with the responsibility of allocating capital resources as well as risk distribution of future flows in an economy, globally. Therefore, banks are the biggest intermediaries through which the surplus and deficit units in any economy interact to exchange financial value indirectly. When the surplus units make deposits in the banks, they are given out as loans to customers or investors (deficit units) with an interest or profit (in the case of Jaiz and Taj banks) charge on the loan;

Therefore, since DMBs are the pivotal medium for the administration of monetary policy due to its role in any financial system cum economy, the Nigerian government saddle the Central Bank of Nigeria (CBN) with the responsibility of regulating its activities which is partly because any bankruptcy that could happen in the financial sector has a contagion 2 effect that can lead to bank runs, crises and may bring about an overall financial crisis and economic misfortunes (David and Vlad, 2002).

For the CBN to carry out its regulatory functions effectively, it employs monetary policies as the primary tools to regulate the banking sector. The monetary policies are made up of different types of instruments that are used to regulate the operations of banks in any given economy; and since this is an external factor to the banks, the tools are meant to influence banks’ activities which by extension impacts on its performance. The way and manner these factors are applied to banks vary from one country to the other and has a traceable relationship to the state of the particular country’s economy. In stable economies, the tools are rarely altered and vice versa. Economic activities, to a large extent, depend on these tools especially in countries where the capital market is not fully developed.

In Nigeria, monetary policy instruments include the Cash Reserve Ratio (CRR); the Minimum Rediscount Rate (MRR) now Monetary Policy Rate (MPR) since 11th December, 2006; Liquidity Ratio (LR), Money Supply (M1, M2 and M3), and foreign exchange rate which have gone through various forms of changes in keeping with the fluctuations in economic indices. Each time these instruments change, bank operations are certainly affected. However, whether these changes in monetary policy have a significant impact on the performance of Deposit Money Banks (DMBs) depends on the outcomes of an investigation

For instance, the Monetary Policy Rate (MPR) influences the rate of interest (Standing Lending Rate) charged on loans advanced to DMBs (through the Discount Window) by the monetary authority. The Monetary Policy Committee (MPC) determines and makes public the MPR whenever they meet, usually once in two months. A positive movement in the MPR denotes a positive movement in the bank’s lending cost, thus; leading to a reduction in money lending. This consequently leads to decline in DMBs performance and vice versa.

Money supply and exchange rate are also regulated by the monetary policy in order to achieve certain desired objectives such as reduction in the level of inflation, promotion of economic growth, achieving full employment level, maintenance of healthy balance of payment, sustenance of growth in the economy, increase in industrialization and economic stability, etc. During low economic phases, money supply is increased by the Central Bank which in turn leads to a decline in interest and enhances the circulation of money (Meshak & Nyamute, 2016).

Like every other business, the continual survival of banks in an economy is contingent on its performance which in turn completely depends on its profitability. Banks’ profitability is usually assessed by the performance of the bank financially using Return on Assets (ROA), the Net Interest Margin (NIM), and the Return on Equity (ROE). However, DMBs performance in Nigeria has never remained the same. There have been fluctuations in their earnings, equities, assets, etc. just as there have also been series of movements in the monetary policy instruments. The MPR has fluctuated from 12% in 2013 and was highest in 2017 at 14%; it then dropped to 12.5% in 2020. The exchange rate (EXR: N/$) also experienced similar fluctuations, alongside the money supply and CRR, which is currently at N379.5/$1 in February, 2021 as against N155.2/$1 in December, 2013

This study focusses on the impact of monetary policy on DMBs performance in Nigeria and the pertinent question to answer include whether CBN monetary policy instruments have any statistically significant impact on the performance of DMBs in Nigeria as well as the magnitude of such impact if it does exist. It is the answer to these questions that this research study seeks to provide.

Statement of the problem

Globally, Deposit Money Banks (DMBs) are known to accept deposits with the key function of creating risk assets (loans) and as such the most effective medium for the administration of monetary policy by the monetary authorities. In regulating DMBs, Central Banks use different instruments in order to achieve its objectives. These instruments influence the interest rate which DMBs charge on loans and pay as interest on deposits. Furthermore, unfavorable anticipated policy change leaves DMBs in a vulnerable state that is likely to have an effect on their profitability and hence financial performance and sometimes exposes the precarious situation of some DMBs, leading to taking over of its operation by CBN or other interested investors. For instance, in 2009, the outcome of the audit examination of Banks conducted by CBN revealed that at least 10 out of 24 banks were in grave liquidity problem. Their capital base had been eroded due to high level of non-performing loans, poor corporate governance practices, lax credit administration process, and non-adherence to the banks’ credit risk management practices (Gololo, 2018). The issue of asset quality problems, thinning spreads, critical corporate governance issues, risk management practices; challenges with services and diversified delivery channels; high cost of banking services etc. has continued to affect DMBs performance. This trend has affected Diamond bank Plc which led to its merger with Access Bank Plc in 2019, even though the purpose of reform and the use of monetary policy is to enhance stability and competitiveness of the banking sector, among other objectives. Consequently, the concern as to whether monetary policy has any effect on the performance of DMBs has remained worrisome since they are the main medium through which 5 monetary policy transmission takes effect; therefore, poor performance of the banks will certainly lead to poor transmission to the economy as a whole. Furthermore, if any of the monetary policy instruments impact on the performance of DMBs is not statistically significant, then it will be of a great concern to the monetary authority and policy makers. There are quite a number of studies conducted on monetary policy and financial performance of commercial banks in third world countries but only a few studies have been completed in this area in Nigeria. However, some of those studies picked only one or two banks in Nigeria to analyse and most of the works were conducted using qualitative tools to analyse monetary policy and bank performances. Some used simple regression analysis but the few that used multiple regression analyses only concentrated on the profitability of one bank while others used Net profit Margin as a proxy for financial performance. All the studies in Nigeria failed to incorporate the repeated (time series) cross-section nature of the observations through the use of panel data model and thus, are inconclusive. By studying the repeated cross section of observations, panel data are better suited to study the dynamics of change; it gives more informative data, more variability, less collinearity among variables, it relates to individual, firms, states, countries, etc., over time there is bound to be heterogeneity in these units. The techniques of panel data estimation can take such heterogeneity explicitly into account by allowing for subject-specific variables; it enables the study of more complicated behavioural model. It can also summarise the bias that might result if individuals or firm are aggregated; also, it enriches empirical analysis in ways that may not be possible if only cross – section or time series data is used (Baltagi, 1983). The interest of this study is to bridge the gaps in existing literature on the impact of monetary policy on DMBs’ performance in Nigeria. Furthermore, unlike previous studies,  this study does not only consider bank size and its moderating influence on the relationship between monetary policy and DMBs’ performance in Nigeria but also included all the DMBs that have been doing business in Nigeria from 2013 to 2019 using panel data regression model. Therefore, this study will provide much reliable policy recommendations for policy makers in Nigeria and the world at large

Objective of the study

The general objective is to determine the impact of monetary policy on the performance of Deposit Money Banks (DMBs) in Nigeria. While the specific objectives of the study are as specified below:

1. To determine the impact of Cash Reserve Ratio (CRR) on the performance of DMBs in Zenith bank.
2.  To determine the impact of money supply (M2) on the performance of DMBs in Zenith bank.
3.  To determine the impact of Central Bank Exchange Rate (EXR) on the performance of DMBs in Zenith bank.
4. To establish the impact of Monetary Policy Rate (MPR) on the performance of DMBs in Zenith bank.
5.  To determine the moderating impact on the relationship between monetary policy and performance of DMBs in zenith bank

Research hypotheses

H1: there is no impact of Cash Reserve Ratio (CRR) on the performance of DMBs in Zenith bank.

H2: there is no impact of Monetary Policy Rate (MPR) on the performance of DMBs in Zenith bank.

Significance of the study

The study is of immense importance to the Nigerian Government as it will assist policy makers in the formulation of sound policies relating to DMBs and other financial institutions. Furthermore, the study will make the general public to appreciate the influence the monetary policy of the CBN is exerting on DMBs performance; and lastly, the study is expected to contribute to the existing literature in the field of monetary policies and future scholars that may want to use this research as a basis for further research in the area of monetary policy theories.

Scope of the study

The scope of the study covers the impact of monetary policies on Nigeria deposit money banks.  The study will be limited to zenith bank plc bank.

Limitation of the study

The most common challenges when using secondary data arises from the source of data. Therefore, the researcher ensured that the study data was gotten from authorized sources which include the Central Bank of Nigeria for the monetary policy instruments and Deposit Money Banks’ websites for their annual financial reports. In addition, the researcher proposed the use o f yearly data, however, not all the data on the study variables were in yearly form. In addressing this, the researcher transformed all non-yearly data to yearly form using monthly weighted average where necessary. Another limitation of this study is the time constraint and the stress involve in combining office work and the research work

Definition of Terms

Liquidity: The ability of a bank to meet its current obligations when they are due, and is normally a short-term debt measure.

 Interest Rate: It is the price of money. It is the opportunity cost of holding money and the return for parting with liquidity.

 Narrow Money (M1): Is made up of all currencies in circulation and demand deposits belonging to different households and businesses with DMBs. It is the sum of all paper notes and coins in circulation and balances in current accounts used for effective payment.

 Broad Money (M2): In Nigeria, it is made up of M1 plus time deposits and saving deposits.

Financial System: It is the channel or conduit through which the savings of surplus units (e.g., households) flow to the deficit units (e.g., business organizations).

 Monetary System: A system whose main function is the provision of adequate stock of money or currencies i.e., notes and coins for the economy.

 Bank Size: The size of a bank is measured by its total assets. For the purpose of this study, bank size is measured using the log of its total assets.

 Money Supply: This is the total stock of money that is circulating in an economy. It includes safe assets, such as cash, coins, and balances held in checking and savings accounts that businesses and individuals can use to make payments or hold as short-term investments.  

Return on Equity: This represents the rate of return earned on the funds invested in a bank by its stockholders

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