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EXAMINATION OF MONETARY POLICY AND FINANCIAL PERFORMANCE OF DEPOSIT MONEY BANK IN NIGERIA

CHAPTER ONE

INTRODUCTION

BACKGROUND TO THE STUDY

Banks play a vital role in a country’s financial system and economy. Banks, like other financial institutions, are organizations that contribute to a nation’s economic growth in particular and national development in general through their activities (such as accepting or accepting and handling customer deposits, making loans available to individuals and organizations based on request, and so on).

Banks, according to Ajayi (2014), are “the linchpin of any country’s economy, occupying a central position in the country’s financial system and serving as an essential agent in the growth process.” Banks mobilize and assist efficient allocation of national saving by mediating between surplus and deficit saving units within an economy, thereby boosting the amount of investment and national production.”

According to Ekpung, Udude, and Hope (2015), every economy requires a functioning banking sector because it generates the essential atmosphere for economic growth and development by intermediating funds from the surplus to the deficit sectors of the economic unit. Banking sectors are financial intermediaries that gather savings and lend money, acting as a link between the ultimate lender and the borrower and matching the lender’s investment needs.

The banking business in Nigeria is made up of deposit money banks, also known as commercial banks, and other financial institutions such as microfinance banks, finance companies, bureau de change, discount houses, and primary mortgage institutions, as regulated by the central bank of Nigeria.

According to Ongore (2013), “internal and external factors that can be classed as bank specific (internal) and macroeconomic variables might affect the performance of commercial banks.” Internal factors are specific bank features that affect bank performance and are influenced by internal management and board decisions; external factors are sector or country-wide elements that are outside the company’s control and affect the bank’s profitability.”

External elements that could effect a bank in Nigeria include the form of government (military or democratic), the environment (society), and other institutions. On this point, as the pinnacle of the banking system, the Central Bank of Nigeria (CBN) impacts or affects the functioning and survival of other banks.

The Nigerian Central Bank (CBN) is recognized as the banking system’s central control institution, whose policies, principles, and actions influence or effect individual banks as well as the country’s economic progress. CBN is a non-profit organization that was founded in 1958 and began operations in 1959. The CBN Act establishes the bank’s principal regulatory objectives, which include maintaining the country’s external reserve, promoting monetary stability and a stable financial environment, and acting as a banker of last resort and financial adviser to the federal government.

The CBN serves as a financial consultant and “banker” to the federal government as well as other financial institutions. The CBN’s instrument of monetary policy in Nigeria, which regulates external reserves, is a major significant influence mechanism.

Changes in monetary policy have an impact on the economy’s overall operations, including the banking sector’s performance, which has an impact on the banking sector’s profitability.

Furthermore, according to David and Lee (1978), commercial banks are the front line troops when it comes to implementing monetary policy, and as a result of this relationship, they are significantly influenced by the nation’s monetary policy maker’s actions. The central bank of a country’s monetary policy refers to the credit control measures it implements. To put it another way, monetary policy allows the central bank to control the quantity of money as a tool for achieving the overall economic policy goal.

Monetary policy, according to Ajayi (2014), entails the regulation of money.

While monetary policy is not the only influence on the interest rate structure, as captured by the level and slope of the yield curve on the soundness of the financial sector, Claudio, Leonardo, and Boris (2015) note that understanding the link between interest rate and bank profitability is important for evaluating the effect of monetary policy stance as captured by the interest rate structure, i.e. the level and slope of the yield curve on the soundness of the financial sector. While monetary policy is not the only influence on the interest rate structure

Claudio et al (2015) cite Demirguc-kunts and Huizinga (1999) as being among the first to link bank profits to macroeconomic indicators like real interest rates.

However, while the bank’s financial intermediation function assumes the requirement to meet the sector’s ultimate goals, the bank has private aims (profitability, liquidity, and solvency) in addition to executing the intermediation function. Even at low interest rates, most financial intermediaries redirect resources to productive investment, which is one of the factors that limits monetary policy’s effectiveness. Expansionary monetary policy, for example, is used to raise the money supply in an economy, but also causes inflation.

The deposit money bank is expected to be aware of those things that affect its financial performance via profitability in order to survive in the long term in relation to the effect of the CBN through the design and execution of various policies.

 STATEMENT OF THE PROBLEM

The basic function of the banking sector as a financial institution is to source funds from the surplus unit of the economy to the deficit unit in order for the institution to survive, grow, and develop. However, like other commercial organizations, banks’ main or principal goal, aims, and or objectives are to survive and remain relevant in a competitive environment by producing a profit. Profitability is vital for financial intermediaries such as banks since it demonstrates the bank’s strength and advancement, as well as generating and radiating confidence in the business.

However, while the bank has some control over its internal factors, it has no or limited control over external factors such as the government and the CBN in terms of policy formulation and implementation, as the bank operates within the framework of the central bank of Nigeria’s monetary policy and banking regulation. The CBN has used a variety of policies to regulate and control the cost, volume, availability, and direction of money creation in order to achieve monetary policy objectives such as price stability, full employment, economic growth, and the reduction of income and wealth inequality.

As a result, using bank deposit liabilities as a proxy for bank performance, this study will determine the elements that influence banking sector performance.

  OBJECTIVE OF THE STUDY

The monetary policy and financial performance of Nigeria’s deposit money bank are examined in this study. As a result, it will

1 Determine whether monetary policy has an impact on the banking industry.

2. Determine the mechanism through which monetary policy affects the performance of Nigeria’s banking industry.

3. Determine what changes in profitability occurred as a result of monetary policy adjustments.

4. Investigate the influence of monetary policy on economic growth.

   RESEARCH HYPOTHESES

In Nigeria, monetary policy has no significant impact on bank deposit liabilities.

H1: In Nigeria, monetary policy has a significant impact on bank deposit liabilities.

 SIGNIFICANCE OF THE STUDY

The influence of monetary policy on deposit money bank financial performance has piqued the interest of regulators, bank management, researchers, and educational institutions in determining whether monetary policy has a detrimental or positive impact on commercial bank financial performance.

This research will have a social impact. This study provided critical knowledge on how monetary policy affects the financial performance of deposit money banks in Nigeria, which would assist the staff and customers of the selected deposit money banks in Nigeria. More importantly, it will contribute to knowledge frontiers by serving as a supplement to existing literature.

 SCOPE OF THE STUDY

The researcher’s work will be both empirical and theoretical and will be limited to Nigeria. On the empirical side, the researcher will use the Ordinary Least Square method to do an econometric regression. The focus will be on the years 2006-2012.

Theoretically, the focus will be on examining the scope and influence of monetary policy on the financial performance of DMBs.

The study will focus on the banking industry in order to capture the essence of the subject, which is the impact of monetary policy on DMB financial performance, and will examine the activities of the following banks: SKYE BANK, ZENITH BANK, FIRST BANK, FCMB, GTB, WEMA BANK, UNION BANK, and DIAMOND BANK.

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