THE IMPACT OF MONETARY AND FISCAL POLICIES ON THE PERFORMANCE OF COMMERCIAL BANKS

THE IMPACT OF MONETARY AND FISCAL POLICIES ON THE PERFORMANCE OF COMMERCIAL BANKS

 (A CASE STUDY OF FIRST BANK OF NIGERIA PLC ABUJA)

ABSTRACT

This project work is focused on the impact of monetary and fiscal policies on the performance of commercial banks, First Bank of Nigeria Plc Abuja was the case study, in carrying out this study, the instruments employed in obtaining the data used for the study was the questionnaire, a total of 50 questionnaires were issued out which 45 were returned fully and completed and 5 were declared void. These questionnaire responses were analyzed using percentages and chi-square. The hypothesis formed in chapter one was tested using 5% confidence with chi-square. The question used to test the hypothesis is question 9 of the research for hypothesis. The null hypothesis was accepted for the hypothesis. The summary of the finding revealed that, the monetary policy instrument was statistically insignificant. There is no relationship between the profit of the commercial bank. Based on the analysis, the researcher proffered the following in commendation. The central bank of Nigeria should be independent. The problem of excess liquidity in the banking industry should be addressed through liquidity map up exercise.

CHAPTER ONE

1.0 INTRODUCTION

Every successful nation and its activities is a function of fine tuning the necessary policy measures geared towards the achievement of the stated objective. In this context monetary and fiscal policy measure shall be critically discussed as regards its impact on the activities of commercial banks. This impact is of two way traffic since it can lead to economic recession on economic boom, for instance when the policy measure is to withdraw the volume availability, direction of money and credit in the economy, this could negatively influence the credit advance to the profit making ability of the commercial banks and this could force liquidation on the bank.

Fiscal policy measure which as a matter of that is the use of government expenditure and taxation to influence the country’s economic activities. If not well fine tuned can still spell doom for the commercial banks. The aim of this research project is to review some of the key policy measures which could be expansionary or concretionary adopted over the focus. Their impact on commercial banks activities and suggestion of area where further policies should be focused to enhance commercial activities. The subject matter has been arranged in a way it will be readily understood and also provided some basis for useful lesson which will serve as a guide for future policy design.

1.1 BACKGROUND OF THE STUDY

The central bank of Nigeria (CBN) started with effect from 2002 fiscal year, adopt a medium term perspective monetary policy framework. Unlike earlier program which were designed for one year period beginning January 2002 to December 2003. The shift is in recognition of the fact that monetary action affects the ultimate objectives of policy with a substantial lag. Thus, the current shift will free monetary policy implementation from the problem of time inconsistency and minimize over reaction due to temporary shock.

This circular outlines the monetary, credit, foreign trade and exchange policy guideline applicable to bank and other financial institution in Nigeria in 2002/2003. In particular, monetary and credit policy will be implemented within the framework of the medium term programme. the guidelines will be subjected to fine turning in the light of development in monetary and financial market conditions, as well as the performance of the economy, which could be conveyed to the relevant institutions in supplementary circulars as necessary . the circular contains four major sections and four appendices following the in production, which is section 1, section 2 review the development in the economy and policy environment in 201 and thus 2002/2003. Section 3 outlines the monetary and credit policy financial institutions in fiscal 2002, while the foreign trade and exchange policy measures are highlighted in section 4. The appendices contain prudential guidelines for licensed banks and reporting format.

1.2 STATEMENT OF THE PROBLEM

Among the factors responsible for the ineffectiveness of fiscal and monetary policy measure, has been the lack of co-ordination between monetary and fiscal authority on compliance with the fiscal and monetary policy directives coupled with the ambiguity of the policy objectives which has made it difficult for the policy implementation to grasp the crux of the policy.

Perhaps the monetary serious restrain on the impact of fiscal and monetary policies on commercial banks activities are:

• Shortage of access liquidity problem
• Inadequate capital
• Problem of shortage of excess cash
• Inconsistent discount and interest rate policy
• Uncontrolled extension of credit to different sector
• Inadequate means of mopping excess liquidity
• Poor reserve ratio with CBN.

   1.3 OBJECTIVES OF THE STUDY

1. If monetary and fiscal policy have had any influence on the profit of Central Bank of Nigeria and also on its loans and advances, over the study period.
2. To make necessary recommendation that could improve monetary and fiscal policy in Nigeria.
3. To determine the instrument of monetary and fiscal policy and their individual roles as a control measure on commercial banks.
4. Finally, to determine the effect of monetary and fiscal policies on commercial bank.

  1.4 SIGNIFICANCE OF THE STUDY

Today, it is great important in the study of the impact of monetary and fiscal policies on commercial banks to different sector of our economy. This time banking activities have occupied an enviable role in the economic and social development of our nation.

The study has wealth of fiscal, statistical and discursive information on the meaning of monetary and fiscal policies and its effect on commercial banks. The banking industry will benefit from the study since it is set out to demonstrate to CBN and commercial houses, the consequence and implication of these policies. This is used to demonstrate to the investing public, the effect of various instrument of monetary and fiscal policies on commercial banks and how the government uses them to encourage or discourage economic and social activity.

The solution to the identified problem will be significant to monetary and fiscal policy that will render their policies objective unrealizable. It will also be significant to banks, finance houses and the industrialist who are affected by government policies.

1.5 RESEARCH QUESTION

• How can monetary and fiscal policies have influence on the profit of first bank plc Nigeria Abuja?
• When is it necessary to make recommendation that could improve monetary and fiscal policy in Nigeria?
• How can one determine the instrument of monetary and fiscal policy and their individual roles as a control measure on commercial banks?
• To what extent can monetary and fiscal policies influence the performance of commercial banks?

1.6   RESEARCH HYPOTHESIS

This section would include some hypothesis which would be tested during the course of research there will be two main hypothesis. Assume negative statement to be the Null hypothesis (H0), while the positive statement to be the alternative hypothesis (Hi) they are as follows:

H0: Cash reserves ratio, interest rate policy and minimum rediscount rate do not have any influence on the loans and advance on commercial banks in Nigeria.

Hi: Cash reserves ratio, interest rate policy and minimum rediscount rate have any influence on the loans and advance on commercial banks in Nigeria.

1.7    SCOPE OF THE STUDY

This research centre on the impact of monetary and fiscal policies on commercial banks. It is based on monetary and fiscal policy as it obtainable only in our Nigeria context the object of the study is the commercial banking system in Nigeria.

As the say “There is no raise without thorn” this study is not without some problem.

1. Time constrains: This work not exhaustive as there was no time to travel to different branches to collect data.
2. Unfriendly attitude of respondent: Some employee of CBN to who question were asked declined interest shunned every attempt to persuade them.

  1.8 LIMITATION OF THE STUDY

This research will face a lot of constraint in the course of the research. Firstly, the inadequate time is the most constraint encountered. Considering other academic work which the research have to attend to as well as other pressure.

1.9 DEFINITION OF RELEVANT TERMS

FISCAL POLICY: Broadly defined as the use of government expenditure and taxation to influence the country’s economic activities.

Monetary Policy: According to Uzoaga, it is the expansion and contraction of the value of the money in emulation for the specific purpose of achieving therefore aims at influencing the cost and availability of credit or alternatively at controlling the supply of money with a view to counter act undesirable trend in the economy.

Taxation: It is a compulsory level by the government (Federal, state or local) on the income, profit, wealth or consumption (through the trustee or execution) and corporate organizations. (registered under company and allied matters) Act 1990.

Open Market Operation(OMO): This refer to the purchase or sale of securities in the stock exchange or money market by the central banks to expand or contract the volume of credit with the objective of increasing (reducing) the cost and availability of credit.

Federal Fund Rate: This is the rate that commercial banks charge each other when the loan excess reserve usually on day basis.

Liquidity Traps: This is de
fined as a case of where the interest rate fall so low that individual and business wish to hold any new money created in the banking system as speculative balances.