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CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND OF THE STUDY

One of the ways taken by all economy to make the banking sector effective is the use of the monetary policy introduced by the federal government and carried out by the apex bank of the country. Apparently, the existence of an effective banking industry is vital to every economy and it encourages economic growth and development via its role in financial interdiction of funds supplies to deficit economic units.

This stimulates international trade, investment economic growth as well employment growth as well as employment. Monetary policy is one of the steps taken by every economy to make the banking sector effective. Monetary and banking policies are the sole responsibilities of monetary authority, which comprises of The CBN for the initiation, implementation and articulation of monetary system. The CBN carried out these duties on behalf of the federal government according to CBN decree 21 of 1991 and the banks and other financial institution BOFIA A4, of 1991 as amended. The banks proposal on monetary policy is subjective to the federal government. The policies to be pursued is usually out in form of ‘’Audience’’ to all banks and other financial institutions. The guideline are general in operation within a fiscal year but could be amended on the course of the year.

The CBN is equally empowered to direct the activities of the financial institutions in other to carry out certain duties in pursuit of approved monetary policy of which penalties are prescribed for non-compliance with specific provision of the guidelines. Monetary policy affects financial and economic activities over the year. In other to appreciate the impact of monetary policy on the banking industry, it would be wise to move a review of changing views of monetary influence. Usually when the quantity of money changes in relation to financial activities as viewed by FISHER (1932). Fisher, take other neoclassical writer who held the view that in short run, money influences real cash balances. According to him, when the money stock increases, example; An increase commodity prices since output and velocity were fixes initially. He assumed that a rise in commodity prices would exceed the increase in interest rate which was regarded as a component of a firms operating cost.

In the whole analysis, rise in commodity prices will lead to an increase in a firm’s profit, demand, money stock and deposit which will eventually lead to a further rise in investment and commodity price. The excess reserved for lending will decline with interest rate, which was stocky earlier. In the analysis of long-term transmission of monetary influence, Fisher replaced ‘’Interest-Investment’’ channel with ‘’Real Cash Balance’’. He noted that when wealth rises due to rise in money stock, people tend to reduce their cash balances by purchasing goods and service. Since the velocity (v) and output (y) in Fisher’s equation of exchange (MVPT) is fixed, the risen money stock (M) cannot lead to increased holding of goods and services but will lead to decline in prices level (P).

Keynes (1936) accepted the change in money supply relative has both substitution and effect and considered investment to be quite responsive to interest rates. Keynes recommended price induce wealth effects, (i.e. change in wealth due to change in yields). There are ranging accounts by his interpreters about the extent he integrate them in his general theory. Hence subsequent write to Keynes (i.e. Keynesian or post Keynesian regards the cost of capital (interest rate) as the main process by which changes in money stock influence the economy. Thus the change in volume of money alters the rate of interest. Usually approximated by the long-term government bound rate, which affects investment and consumption. Thus, the link between wealth of private sector and real sectors and consumption was analyzed by Piguo (1974) and Patikin (1951) in form of ‘’real cash balance effect’’ According to them changes in quantities of money would affect aggregate demand even if they did not alter interest rate. On the other hand, credit rationing channel of monetary influence explained how financial interdiction, would be controlled by the market forces so as to ration the supply of credit by non-price mechanism.

Thus, an expansionary monetary policy would raise the force of equity (i.e. reduce the yield on equities). The margin between the market evaluation and cost of reproducing the existing capital goods will stimulate new investment over those goods.  The non-monetarist argued that monetary policy is as effective as fiscal policy as to determine total spending in the economy in spite of their differences. It holds the following views:

1.   Movement in quantity of money is the most reliable measure of monetary value.

2.   Monetary authority can detect the movement in the stock of money over time and business cycle.

3.   Changes in stock of money are the primary determination of total spending as emphasized on owen’s economic stabilization program.

4.   Monetary impulse are transmitted to real economy through an active price process or profit adjustment process which affect many financial and real antes.

1.2 STATEMENT OF THE PROBLEM

Despite the establishment of Central Bank of Nigeria (CBN) in 1958, banking industry remained both poor, inadequate in terms of number, quality and variety of service rendered. The establishment of CBN paved way for adoption of monetary management by the banking industry. Just in case any analyst is waiting in the wings to strike CBN for its poor monetary policy performance. Ogwuma (1994:362) offers a defense which says “A less than objective appraisal of the CBN role in the Nigerian economy could interpret the adverse macro-economic.

1.3 OBJECTIVE OF THE STUDY

The objectives of the study are;

1.   To ascertain the impact of monetary policy on inflation in Nigeria

2.   To ascertain the impact of monetary policy on Nigeria economy

3.   To ascertain the relation between monetary policy and Nigeria economy

4.   To ascertain whether monetary policy effect financial institution in Nigeria

1.4 RESEARCH HYPOTHESES

For the successful completion of the study, the following research hypotheses were formulated by the researcher; 

H0: there is no impact of monetary policy on Nigeria economy

H1: there is impact of monetary policy on Nigeria economy

H02: there is no relation between monetary policy and Nigeria economy.

H2: there is relation between monetary policy and Nigeria economy

1.5 SIGNIFICANCE OF THE STUDY

This study, which is primarily aimed at explaining the critical evaluation of monetary policy in Nigeria economy, will provide an insight into the problems associated with monetary policy. This report would be of great benefit for government of Nigeria especially financial institution, to expose them to the impact of monetary policy on Nigeria economy. The findings will be useful for researchers to further generate knowledge in the field

1.6 SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers critical evaluation of monetary policy in Nigeria economy. The researcher encounters some constrain which limited the scope of the study;

 a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study   

b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.

 1.7 DEFINITION OF TERMS

MONETARY POLICY: Monetary policy is the process by which the monetary authority of a country, like the central bank or currency board, controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

ECONOMY OF NIGERIA: Nigeria is a middle-income, mixed economy and emerging market, with expanding manufacturing, financial, service, communications, technology and entertainment sectors. It is ranked as the 21st-largest economy in the world in terms of nominal GDP, and the 20th-largest in terms of purchasing power parity. It is the largest

1.8 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study. 

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