The Impact of Monetary and Fiscal Policies on the Commercial Banks Activities

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 Central Bank Of Nigeria

Historically prior to the establishment of Central Bank of Nigeria by the CBN Act of 1958 there existed a body known as the West African Currency Board (WACB). This Board which was Established by then British Colonial Government was intended to serve as a central Bank for the Anglophone West African countries. Thus, the board was charged with the primary responsibility of issuing the West African pound which served as the legal tender currency in Ghana, Nigeria, Sierra-Leona and Gambia.

Another function performed by WACB was the management of the reserves held in trust for these colonies, such reserves were invested by the board on behalf of the West African Countries as instrument in the London money market. The weakness of the board for which it was critized is as follows:

1. It carries on commercial banking activities along side other commercial banks.
2. The board lack of basic apparatus to control the supply of money.
3. The board got involved in physical distribution of currency from one point to another.
4. It activities were considered discriminatory against indigenous West African industrialist.
5. It was not on development colonies and most of it activities were based of commerce and trade.

These factors led to the widespread agitation for indigenous central bank in the area.

The Central Bank of Nigeria (CBN) is the apex regulatory authority of the financial system in the country. It was established by the CBN Act of 1958 and commenced operation on July 1st 1959. The promulgation of the CBN decree 24 and banks and other financial institutions (BOFI) decree 25, both in 1991 give the CBN more flexibility in regulation and supervision of the banking sector and licensing finance company which hitherto operated outside any regulatory framework.

Objective

The principal objectives of the bank as stipulated in the CBN Act of 1958 are as follows: −

1. The issuance of legal tender currency in Nigeria
2. To maintain the external reserve and value of the legal tender in order to safeguard the international value of the currency.
3. To promote monetary stability and a sound financial system
4. Bankers to other banks within Nigeria and abroad.

Function

To achieve the above objectives, CBN undertakes the following function performed by CBN can be broadly categorized into two:

1. Regulatory function
2. Development function

Regulatory Function

The regulatory functions of the CBN are mainly directed at the objective of promoting and maintaining the monetary and price stability in the economy. To perform this regulatory function, CBN formulate policies to control the amount of money in circulation, control other banks and major players in the financial market, control rate of bank credit and therefore the supply of money in the economy.

The instrument used by CBN to achieve these function are:

1. Open market operation (OMO)
2. Bank rate
3. Rediscount rate
4. Direct control of banks liquidity
5. Direct control of bank credit
6. Special deposit
7. Moral persuasion
8. Minimum cash ratio

Development Function

The establishment of CBN in 1959 was premised on the need to promote and accelerate the much needed economic growth and development in Nigeria, which would invariably promote the growth of the financial market. This financial market comprises the money and capital market, assistance to development banks and institutions and the formulating and execution of government economic policies. The money market is the market for mobilizing short term funds with instrument such as treasury bill, Treasury certificates, commercial paper, certificate of deposit (CDS), Eligible Development Stocks (EDS) and Bankers Acceptances.

The CBN plays a major role in the capital market which deal with long-term funds by fostering its growth through the annual subvention granted to them. The CBN also helps to promotes and assist the development banks and institution these includes the Nigeria industrial development Bank (NIDB). The Nigerian agriculture insurance company (NAIC) The Federal Mortgage bank of Nigeria (FMBN), Nigeria Export − Import Bank (NEXIM) and the security and exchange commission (SEC).

In addition, the CBN is involved in the formulation and executive of viable economic policies and measure for the government. Also since 1970 the bank has been instrumental in the promotion of wholly owned Nigeria enterprises.

The structural adjustment programme (SAP) brought about the emergency of more banks and other financial intermediary this necessitated the enactment of Decree 24 and 25 of 1991 in other to strengthen on and atten the power of CBN to cover the new institution in order to enhance the effectiveness of monetary policy regulation and supervision of banks as well as non banking financial institution.

The current legal frame work within which the CBN operate is the CBN (Amendment) Decree No 37 of 1998 which repeated the CBN (Amendment decree No 3 of 1997, the Decree provide a measure of operational autonomy for the CBN to carry out its traditional function and enhance it versatility.

1.3 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:

1. Shortage of access liquidity problem
2. Inadequate capital
3. Problem of shortage of excess cash
4. Inconsistent discount and interest rate policy
5. Uncontrolled extension of credit to different sector
6. Inadequate means of mopping excess liquidity
7. Poor reserve ratio with CBN.

1.4 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.

1.5 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.

1.6 Research Question

The following would be the research question for the study.

1. When can monetary policy have influence on the performance of Nigeria commercial bank
2. Which monetary policy instrument influence Nigeria banks the most?
3. What extent can monetary policy influences the activities of commercial banks?
4. Which monetary policy tool is insignificant of negligence.

1.7 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.

1.8 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 with special reference to examine critically the monetary and fiscal policies for a period of four year i.e. from 1994 − 1997.

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

Time constrains:

This work not exhaustive as there was no time to travel to different branches to collect data.

Unfriendly attitude of respondent:

Some employee of CBN to who question were asked declined interest shunned every attempt to persuade them.

1.9 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.

1.10 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 defined 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.