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THE EFFECTS OF NIGERIA MONETARY AND FISCAL POLICIES ON COMMERCIAL BANK’S FROM 1990 – 2000

CHAPTER ONE

INTRODUCTION

Background of the Study

Banks can hardly survive without a positive return on capital invested. Profitability is therefore the driven factor for activities of commercial banks. Consequently, banks engage in a variety of products and services for the achievement of this profit or to be profitable. The commonest and most important of these activities is the given out of loans to borrowers seeking financial accommodation. In doing this, it is expected that the borrower pays back the principal and interest. This interest in all bank services forms the bedrock of profitability in the banking sector.

Banks are the 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 to loan seeking customers or investors preparing to embark on viable projects with an interest charge on the loan.   Consequent on the vital role of intermediation played by banks, the banking sector is highly regulated by the government.

To carry out this regulation effectively, government employs monetary policies as the primary tool to regulate the banking sector. Embedded in these monetary policies are the different types of instruments that are used to regulate the operations of banks in the economy. Being an external factor to the banks, the tools could act as a militating or mitigating factor in boosting banks profitability. The way and manner these factors are applied to banks vary from one country to the other and has traceable relationship to the state of the particular country’s economy. In stable economies, these tools are spared of frequent manipulations and vice versa. Economic activities, to a large extent, depend on these tools especially in countries where the capital market is still in its primordial stages of development.

In Nigeria, monetary policy tools have been subjected to various forms of gyrations in keeping with the fluctuations in economic indices. Each time these policies change, bank operations are certainly affected. However, whether these changes in monetary policy instruments significantly affect profitability of banks remains a matter for investigation. The paper therefore, seeks to examine the impact of monetary policy instruments on profitability of Zenith Bank Plc between 2005 and 2012.

Zenith Bank within twenty-two years has demonstrated its resilience irrespective of the business/economic cycle and witnessed exponential growth in virtually all areas (Zenith Bank, 2012). In spite of the monetary policies, this growth seems to be persistent. Is it that the monetary policies do not actually influence their operations? For the purpose of this study, the monetary policy instruments to be examined are; the Cash Reserve Rate (CRR), Liquidity Rate (LR), Interest Rate (IR), and Minimum Rediscount Rate (MRR).

Statement of the Problem:

One of the most complex issues facing government is identifying the appropriate level and form of intervention in the banking sector. Its efficiency as a regulator is a significant determinant of the overall efficiency of the economy. The extent of regulatory intervention may also determine whether financial markets can develop to their full potential or not. Ultimately, any inefficiency must be funded by higher charges passed on to the community as cost arising from stringent regulation. The more sophisticated the monetary policy, the greater its vulnerability to failure of banks to deliver against its promises.

When these failures occur, investment which is an important factor in economic growth is kept low. Consequent upon this, trust and confidence in the financial system may go down and sourcing of funds from banks may face a downward trend due to increase in cost of loan.

The increase in cost of capital often deters prospective investors from engaging in new ventures as well as discourages customers of companies from optimal patronage of their products. It therefore, stands to reason that increase in cost of capital results in cyclical effects in the economy. In view of this, any review of monetary policy is often greeted with widespread apprehension, that cuts across various sectors of the economy.

On the other hand, a decrease in the cost of capital tends to stimulate more aggressive investment in any economy. The higher the volume of investment, the greater the competition.   Even though consumers of products from various companies stand to benefit from this situation in the short run, it may portend serious danger in the economy if it is allowed to stretch to the extreme. As companies engage in stiff competition, weak ones (especially those that are disadvantaged technologically) may be driven out of business. This may result in monopolies with their obvious consequences in the economy.

Objectives of the study

The general objective of this study is to examine the impacts of monetary policy instruments on the profitability of commercial banks in Nigeria (2005-2012). However, the specific objectives are:

1.      To ascertain if Cash Reserve Rate (CRR) has significant effect on the Profit Before Tax of Zenith Bank Plc from 2005 – 2012.

2.      To determine if Liquidity Rate (LR) has significant effect on the Profit Before Tax of Zenith Bank Plc from 2005 – 2012.

3.      To examine if Interest Rate (IR) has significant effect on the Profit Before Tax of Zenith Bank Plc from 2005 – 2012.

4.      To ascertain if Minimum Rediscount Rate (MRR) has significant effect on the Profit Before Tax of Zenith Bank Plc from 2005 – 2012.

Research Questions:

1.      Does Cash Reserve Ratio have significant effect on Profit Before Tax of Zenith Bank Plc.

2.      Does Liquidity Ratio have significant effect on the Profit Before Tax of Zenith Bank Plc.

3.      Does Interest Rate have significant effect on the Profit Before Tax of Zenith Bank Plc.

4.      Does Minimum Rediscount Rate have significant effect on the Profit Before Tax of Zenith Bank Plc.

Research Hypotheses:

The following hypotheses were formulated to guide the study:

Ho1: The Cash Reserve Ratio does not have significant effect on the Profit Before Tax of Zenith Bank Plc.

Ho2: The Liquidity Ratio does not have significant effect on the Profit Before Tax of Zenith Bank Plc.

Ho3: The Interest Rate does not have significant effect on the Profit Before Tax of Zenith Bank Plc.

Ho4: The Minimum Rediscount Rate does not have significant effect on the Profit Before Tax of Zenith Bank Plc.

Significance of the Study

This study will be of immense benefit to other 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.

Scope of the Study

The scope of this study encompasses the period from 1990 to 2000 and investigates the influence of Nigerian monetary and fiscal policies on the operational performance and financial stability of commercial banks within the country. It will analyze key policy changes, their impact on banks, and their implications for the Nigerian banking sector during this decade.

Limitation of the Study

The demanding schedule of respondents at work made it very difficult getting the respondents to participate in the survey. As a result, retrieving copies of questionnaire in timely fashion was very challenging. Also, the researcher is a student and therefore has limited time as well as resources in covering extensive literature available in conducting this research. Information provided by the researcher may not hold true for all businesses or organizations but is restricted to the selected organization used as a study in this research especially in the locality where this study is being conducted. Finally, the researcher is restricted only to the evidence provided by the participants in the research and therefore cannot determine the reliability and accuracy of the information provided.

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).

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.

Definition of Terms

1.   Nigerian Monetary Policies: These refer to the regulations and actions implemented by the Central Bank of Nigeria (CBN) during the specified period to control the money supply, interest rates, and overall financial conditions in the country.

2.    Nigerian Fiscal Policies: These encompass the government's decisions and actions regarding taxation, public spending, and budgetary policies designed to influence economic activities and financial stability within Nigeria from 1990 to 2000.

3.    Commercial Banks: In this context, commercial banks are financial institutions in Nigeria engaged in traditional banking services, including deposit-taking, lending, and various financial intermediation activities.

4.    Effects: The term "effects" pertains to the consequences, impacts, and outcomes that resulted from the implementation of Nigerian monetary and fiscal policies on commercial banks during the specified decade.

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