THE IMPACT OF MONETARY AND FISCAL POLICIES OF CENTRAL BANK OF NIGERIA ON THE PROFITABILITY OF BANK
(A CASE STUDY OF ZENITH BANK P.L.C, ENUGU)
ABSTRACT
The economic policies or interpretation of such policies has always left a key question unanswered, how much authorities do such policies allow the banks to use their powers to lend, to made remarkable impact in the overall economic situation in the country. Like in banks in most developing economic (Nigeria inclusive) the role of providing advice and issuing financial directives lies in the ministry of finance, the Nigeria deposit insurance corporation and the central bank of Nigeria. The federal government relies on these institution for the proper functioning of banks through their monetary and fiscal policies, which could be concretionary or expansionary. This invariably affects the profitability of commercial banks etc. hence the need for this study. The Zenith Bank Plc has been chosen in this regard and except where specified individually, banks becomes the terminology. In this study in depth study is made on how the Apex Banks, the CBN’s financial policies monetary and fiscal affect the profitability of banks and it’s effect and the general influences it has on the economy. Chapter one of the study deals on the back ground, study of the problems. Statement of hypothesis and what significant of the study is. Second chapter studies the literature used. The chapter three emphasis on the techniques and sample collection and questionnaire chapter four presentation of data analysis of the data and the interpretation of finding the last chapter five elucidates on the findings and solutions were proffered. Hence given rise to conclusion.
CHAPTER ONE – INTRODUCTION
- Background of the Study 1
- Statement of Problems 4
- Objective of the Study 7
- Research Questions 9
- Hypothesis 10
- Significance of the Study 11
- Scope of the Study 13
- Limitation of the Study 15
- Definition of Terms 17
CHAPTER TWO – LITERATURE REVIEW
- 2004 monetary policy and the introduction
of N25 billion capital base 21
- Monetary and credit policy measure in 2002/2003 31
- Frame work for determine bank cost of funds 33
- National saving certificate 34
- Federal government development stocks 34
- Minimum balance on loan saving account 34
- Money Transfer 36
- Policy on SMES 36
- CBN rediscounting and refinancing 37
- Characteristics of promissory note 38
- Paid up capital requirement 39
- Moral suasion 39
- Improvement in the payment system 39
- Universal banking practice 40
- Basic principles of commercial banks credit 40
- Credit policies of commercial banks 43
- Factors that determine credit policies in Nigeria 45
- Capital position of the banks 47
- Liquidity and profitability 48
- Impact of CBN monetary policy on banks profit. 53
CHAPTER THREE – RESEARCH DESIGN AND METHODOLOGY
- Research Design 61
- Area of the Study 62
- Population of the Study 62
- Sampling 63
- Source of Data 64
- Research Instrument 64
- Analytical Techniques 65
CHAPTER FOUR – PRESENTATION AND ANALYSIS OF DATA
- Data Analysis, Interpretation 67
- Test of Hypothesis 72
CHAPTER FIVE – SUMMARY, FINDING, CONCLUSION
AND RECOMMENDATION
- Findings 80
- Conclusion 81
- Recommendations 83
Bibliography 87
Appendix 89
CHAPTER ONE
INTRODUCTION
Most banking activities are directed towards lending as credit has remained the backbone of banking operations. It is due to the fact that it provide the bulk profits. Today, its vital role in commercial banking activities lie in the direct it has on total economic growth and business development. Every year the (CBN) central bank of Nigeria being the monetary authority that is solely responsible for the insurance of guidelines policies and the interpretation of such, comes up with economic measure roles and regulation under which the bank in the country operate. Such policies direct the use of funds from depositors, stockholders, and creditors in order to control the size of loan portfolio thereby determining the general circumstances under which it is appropriate to make an advance. The economic policies (fiscal and monetary) also aim at aiding the banks to maintain a sound financial and banking system promote confidence in sustenance of reasonable banking services for public as well as ensuring a high standard of conduct and professionalism in banking industry. These rules and regulations are contained in monetary and fiscal policy circular being issued by the central bank at the beginning of every year. The techniques of monetary policies could be broadly divided into two namely:
Direct and Indirect, while the direct approach has been used very extensively in the more developed market economic, the indirect approach predominate in the less developed economics such as Nigeria. Nonetheless, both technology aim at influence the cost and availability of banking system’s credit. The direct system techniques involves fixing of credit ceiling and interest weight rates the Apex Bank (CBN) for compliance by banks, while the direct approach achieves the same objective through the financial market. The most potent instrument of the indirect monetary policy technique is the open market operation (OMO). It is worthy of note that effort aimed at introducing incorrect monetary and credit-control anchored on the use of OMO are themselves a parts of the given receipts which they would present to the gold smith on withdrawal.
According to Paul Sammuelson, (1990-20) money has an anonymous quality making are dollar just as good as another. In relation to the above the goldsmiths recognized that not all depositors of gold when they come back at the same time to collect them. These receipts signified time to collect them. These receipts signified debt and were transferable. Out of the gold deposited, the goldsmith started to lend out part of them and charge a fee for these services.
Hence the evolution of our bank lending. As development continued to surface in the society it become possible for financial institution to emerge and act as bank where people go to deposit their money and other precious metals for future withdrawals and most importantly lending money to the users of fund. Bank lending has ever since then been on the increase with different hierarchy of operations.
Monetary and fiscal policies are organized and established system of administration of loan, and its disbursement have so many loopholes which undermine its base exercise and guidance. It is a statement that need not be overemphasis.
These policies being one out of measure used by that nation ability to mobilize and channel its scare resources to different sectors of the economy. Therefore when these economic policies are seemingly deficient, it poses a big question which needs to be answered. How much authority do such policies allow the banks to use their powers to lend to make remarkable. Impact on the overall economic positions on themselves (hence profit). A major conclusion has been that effective implementation through the financial intermediation will serve a machinery for economic progress and profit enhance ability.
Apart from the explicit policies which are extremely imposed by the CBN implicit rules and regulations are also developed by the bank to guide their internals operations.
But these guidelines are developed from the mature of banking industry. Generally, these policies have three implications. One to the banks to the borrowers and to the economy. Emphasis is laid here on the implication it has on the banks.
Banks lending dates bank to the days when the hold smiths accepted deposits from the merchants, mostly gold and valuable for safe keeping. At first such establishment were simply like ware house. Depositors were central bank of Nigeria towards the maintenances of prudent banking have fare reading effects on banking and the Zenith bank Plc in particular. The question therefore arises what effect do these policies have on the banking industry and their profitability, customers and the economy? Are these policies and conditions too strength as to constitute a problem to lending?
Do commercial banks ensure full compliance to the monetary and fiscal policies circular?
Are there government objective for introducing these rules and regulations being achieved?
The CBN’s guidelines, rules and regulation normally contained in the monetary policy circular have always been aimed at achieving targeted goals. The commercial banks which are expected to operated to operate under the guidance of the regulations of the CBN have also their own internal lending policies objectives to achieve. All these pose a lot of problems to the bank’s credit decisions worthy of note is the CBN directive that lending should not exceed and foreign transfer to individual should not exceed N500.000 and corporate bodies n2000.000. this has made of possible for banks to have loan or credit dispersal and control money laundering. Based on the above a performance evaluation of the effect of these policies is inevitable to finding out the resultant effect on banks activities using the 2002 and 2003 monetary policies.
The purpose of this research work is to undertake an in depth analysis of the effect of the various guidelines introduced for banking operations by the Apex monitoring authority on the profitability of banks using Zenith bank Plc as case study. Other objective includes:
- Assessment of the extent to which commercial banks have been able to comply with statutory allocation of credit to the different sectors of the economy through the CBN credit to the different sectors of the economy through the CBN guidelines.
- Whether the commercial banks have been able to maintain the credit ceiling and how far interest rate deregulation contain in policy has been able to affect the volume of banks lending and profitability.
iii. To test the rigidity of the policies and its effects on the borrowing customers.
- To draw outlines of credit offered by these banks and their appraisal process highlighting the environmental influence that impinge on the monetary policy and fiscal policy practices in Nigeria.
- Lending is of paramount importance in the economy hence the research work will investigate lending policies and practical of the banks system in the country funding out how realistic they are in line with the nations economic settings.
Making recommendation where necessary and suggesting ways to ensure effective implementations of these policies to achieve the desired objectives.
1.4 RESAERH QUESTIONS
One sets of questionnaire was designed for this study as there were used to study on how the CBN policies affects their banking operation and finally their profit.
The questionnaire containing of closed and open-ended questions the need for the open ended questions was to allow the respondents gave a more adequate representation of their particular cases. The banks used were senior management personal.
- Does your bank ensure full compliance to the CBN monetary policies?
- How dos the monetary policies affects the bank?
- Does it effect your bank negatively in terms of profit?
- Do you think that the credit policies have been flexible enough or rigid?
- To what extend have these policies aliened their designed objective with the period?
- Would you prefer deregulation of interest or the pegging of interest rate?
- Do you think that the tax policy has negative effect on the banks use of funds? These are few out of the questions that were asked the banker during the oral interview from which the responses were received.
1.5 HYPOTHESIS
For a sound and valid investigation, the under listed hypothesis have been formulated and the validity will be tested in chapter four using appropriate statistical data.
Hypothesis I
Ho: The implementations of CBN policies have shown adverse effect on the commercial banks profit.
Hi: The commercial banks have shown fall compliance with CBN guidelines on the allocation of credit to the high priority sector.
Hypothesis II
Ho: The commercial banks have shown fall compliance with CBN guidelines on the allocation of credit to the high priority sector.
Hi: The commercial banks have shown fall compliance with CBN guidelines on the allocation of credit to the high priority sector.
Hypothesis III
Ho: There is no significant difference between the volume of lending by commercial banks in interest rate regulated economy and one of interest rate deregulation.
Hi: There is no significant difference between the volume of lending by commercial banks in interest rate regulated economy and one of interest rate deregulation.
1.6 SIGNIFICANCE OF THE STUDY
Government over the year have made inspiring calls to all citizens be self reliant and in a bid to achieve this loan to rural borrowers have been increased to 50% and as well sectored allocation (SMES) small scale and medium enterprises as well as according priorities to key sector of the economy.
This research work being an appraisal of the effects of CBN monetary and fiscal policy on the profitability of banks (Zenith) precisely will enable the apex bank restructure and relax the assumed stringent measure in order to make it possible for necessary assistance from banks.
However, the primary motive for any corporate business is for profit optimization and the maximization of shareholders health banks are no exception. From this research, they will realize that proper implementation of monetary and fiscal policy can ensure higher profitability of the banking industry. To borrowing customers, they will deduce some act inherent in loan defaulting an what are the causes of high interest rates and their remedies. This implies that of they continue borrowing funds without paying back, this banking industry may in future become liquid which will result in high interest rate and subsequently high cost of borrowing fund. It will also constitute guide towards future design and formulation of lending policies by the monitoring authority through the implementation of recommended measure.
Finally, this work will be of immense help to other university undergraduates who will like to writ on this topic as well as exposing to monetary and fiscal policies available to the banking industry.
1.7 SCOPE OF STUDY
As this research work is aimed at finding out the effect of monetary and fiscal policy on the profitability of banks, looking at the overall policies and effects on profits it cannot be ruled off of limitations, hence during the course of the study, the researcher was constrained by certain tangible and intangible factors which are.
COST: For any researcher work of this nature to be successful and accurate the cost of affording such is high and not just high but to a student. This made the research work to rely much on the banks Annual report. CBN journals and sites Via the internet, Newspapers, magazines, textbooks, and unpublished speeches.
TIME: The research work has been carried out within the limits imposed by the time constraints, considering the research work such as the academic and non-academic in spite of the some of the banks staff interviewed complained of heavy work load and his made them indisposed to release the necessary data when needed.
QUESTIONNAIRES: Were not easy to be accepted by some people as they had always complained of one things or the other. These inadequately prolonged the time for the assemblage of data.
PAUCTTY OF INTERARTURE: Dearth of current financial statements in the banks also made this research work look impossible. The CBN library is not always opened for every body and every day and lack of good textbook that treat the current monetary and fiscal policy made the information needed hard.
BIAS: As a human, the researcher may
Be not covering bank officials. Interviewed were reluctant to respond as their response could be a violation of the banks code of conduct and eventually when they do, they seek anonymity. Despite the limitation above, the generalization made on the effects of fiscal and monetary policy on banks profitability was made relying heavily on the financial reports of banks, then press statements and the proper study of the current monetary policy ie 2002/2003 policies and that of the preceding year.
1.8 LIMITATION OF THE STUDY
As this research work is aimed at finding out the effect of monetary and fiscal policy on the profitability of banks, looking at the overall policies and effects on profits it cannot be ruled off of limitations, hence during the course of the study, the researcher was constrained by certain tangible and intangible factors which are.
COST: For any researcher work of this nature to be successful and accurate the cost of affording such is high and not just high but to a student. This made the research work to rely much on the banks Annual report. CBN journals and sites Via the internet, Newspapers, magazines, textbooks, and unpublished speeches.
TIME: The research work has been carried out within the limits imposed by the time constraints, considering the research work such as the academic and non-academic in spite of the some of the banks staff interviewed complained of heavy work load and his made them indisposed to release the necessary data when needed.
QUESTIONNAIRES: Were not easy to be accepted by some people as they had always complained of one things or the other. These inadequately prolonged the time for the assemblage of data.
PAUCTTY OF INTERARTURE: Dearth of current financial statements in the banks also made this research work look impossible. The CBN library is not always opened for every body and every day and lack of good textbook that treat the current monetary and fiscal policy made the information needed hard.
BIAS: As a human, the researcher may
Be not covering bank officials. Interviewed were reluctant to respond as their response could be a violation of the banks code of conduct and eventually when they do, they seek anonymity. Despite the limitation above, the generalization made on the effects of fiscal and monetary policy on banks profitability was made relying heavily on the financial reports of banks, then press statements and the proper study of the current monetary policy ie 2002/2003 policies and that of the preceding year.
1.9 DEFINITION OF TERMS
monetary policy:
Is a policy that deals with discretionary control of money supply by the monitoring authorities in order to achieve stated economic goals.
FISCAL POLICY:
This is the government policy that deals on how banks organization expend than money through taxes. Amidu Mohammed and Woife Simon (2008:45)
PROFITABILITY
This is the excess of enterprises returns over its expenditure.
LENDING POLICY:
The establishment of directives and other use of the funds from stockholders, depositors and other to control the composition and size of the loan portifolio and the circumstances under which it is appropriate to make a loan., specifically, it is designed and is contained in the current monetary policy.
CENTRAL BANK
The Apex bank in Nigeria to which has been entrusted the supervision of issuing guidelines and monitoring of banking operations.
FINANCIAL SYSTEM
The Nigeria financial system is made up of the supervisory and regulatory bodies.
- The banking system
- Non bank financial institution.
iii. The financial markets. Amidu Mohammed & Wolfe Simon (2008).
BANK
A bank is a corporate organization that has been licensed by the central body after satisfying the required procedure and demands to work as a bank thereby receiving time deposit. Savings and current to act under the dictates of the constitution.
LENDING
A facility offered by a bank to its customers or non customers on the ground that such a facility will be returned with the principal and interest when due.
EFFECTIVE LENDING
A question of lending which maximizes the banker’s objectives of development.
FINANCIAL INTERMEDIATION
This is a process by which financial institution accept deposit from the excess householders and lend some to the deposit deficit sectors.
NDIC
Nigeria Deposit Insurance Corporation which was established under decree no 2 of 1998 and commenced operation in March 1989 as a primary corporation responsible for providing insurance cover to the deposit of depositors in a licensed bank and when appropriate grant assistance to such banks when in financial difficulty. The NDIC is generally in control of distressed banks to ensure that depositors are compensated commensurately.
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