1.0 Introduction
1.1 Background of the Study
The central Bank as the apex monetary authority has the duty of ensuring that policies are set in motion to regulate the financial sector so as to operate in the same direction with the real sector in order to realize national economic objectives.
Section 2 (c) of CBN decree 24 of 1991 as amended stated that one of the principles “objectives” of bank (CBN) shall be “to promote monetary stability and a sound financial system in Nigeria”.
While section 3 (A) of the same decree provides that “The banking shall power to carryout Open Market Operation (OMO) for the purpose of maintaining monetary stability in the economy of the country and without prejudice to the generality of the forgoing”. The bank may also for that reason issue sell, repurchase, amortize or redeem securities to be known as “stabilization securities (which shall constitute its obligations) and the securities shall be issued at such rate of interest and under such conditions of maturity, authorization negotiability and redemption as the bank may deem appropriate”.
1.2 Statement of Problem
One area of interest to many researchers is the relationship between banks performance and macro economic policies. The impact of interest rate or monetary changes on commercial banks liquidity and profitability has increasingly concerned economics and policy matters as financial market conditions have become more volatile in recent years.
The general opinion that banks and other financial institutions borrow money on short-term and lend on long-term brings about mismatch of funds and this create problem in banking sector like recent distress in Nigerian banking sector.
Some specific problems include the following:
- Reviewing the range of monetary policy used within the period of 1993-1997.
- Is there need to continue to use the current monetary policy measure to direct funds in the economy?
- The limitations or constraints to the effective implementation of monetary policy measure in use within period under review.
Are there some policy measures that have not been useful in the regulation of the activities of economy and hence, the need for a change.
The researcher here has observed that Nigeria as a nation has been characterized by chronic unemployment, galloping inflation, filling inventories, fluctuation in exchange rates, daily depreciation of the value of naira and various cycle to poultry among the Nigerian masses especially in rural areas.
The researchers further observed that although the policies makers may have been trying in designing.
1.3 Objectives of the Study
The following are the objectives:
- Ensuring the credit is directed to the productivity sector.
- Ensuring that there is equitable and fair allocation of credit between the private and public sectors of the economy.
- Ensuring that there is economic growth that is sustainable over a long term.
- Ensuring generally, that adequate credit goes to the productive sectors to expand production as a cure against inflation, to curb consumption an hereby dampen the pressure on price increases.
The monetary policy circulars are powerful instruments by which the monetary authorities steer the economic slip of the nation and great importance is attached to their strict observance by attending the objectives which are in contrast to the banks objectives of profitability and liquidity has great impact on the banks performance (ADE T. OJO and WOLE ADEWUMI 1982).
1.4 Research Questions
- Does the impact of monetary policy on the liquidity and profitability of commercial banks play any role in the development of a country?
- Does economic instability influences the country financial sector?
- What could be the outcome of commercial banks when they are unable to meet the liquidity ratio or power of the worthy customers?
1.5 Significance of the Study
- It has open my knowledge on how to carryout research problem.
- It is important to everybody especially those who are into banking business that is the customers and bankers.
- Helps in adding to the stock of existing literatures in banking and the adequate survival of commercial banks.
- Aid government in the regulator policy and control of money, credit in the economy.
1.6 Scope of the Study
For a meaningful and through research work on impact of monetary policy on the liquidity and profitability of the banks, the study is restricted to commercial banks in the Nigeria financial system. Here, banks liquidity and profitability indices were identified and defend to test against policy instruments.
1.7 Limitations of the Study
Several factors posed constraints to this research work during the conduct of my research:
- I was not satisfied with the behaviour and uncooperative attitudes of staff of CBN in supplying the needed materials.
- Due to financial constraints which as a student I am facing, I was unable to travel to other places in search of materials.
- Some of the printed questions were misplaced or not returned to me .it is also worthy to mention that the school library lacks the needed secondary data on this topic which made me to resort to the internet and private textbooks, of which are very costly.
- I did not find it easily getting the bank officers to listen to my interviews and those willing to give me audience were not going deep to considering the implication of revealing banks secrets.
1.8 Definition of Terms
The following terms have been precisely defined as rates to the context of this research work:
Monetary Policy:
An economic stabilization weapon used by the monetary authority to regulate the volume, cost, availability and direction of money and credit in the economy.
Monetary Circulars:
Are guidelines the country used to direct the affairs in the allocation of credit within the economy.
Regulation:
This is system where the activities of the commercial banks like interest rates are controlled by the central government (CBN).
Profitability:
The ability of the bank to make a maximum returns to satisfy the interest of its customers.
Liquidity:
The availability of money to meet current or maturing obligations.
OMO:
Open market operation: Ability of the CBN to go into market to buy securities when the economy is tight and sell when inflated (i.e. one of the quantitative tools of the CBN).
Securities:
Refers to various promissory documents adopted as evidence of claim in the Market.
Bank Discount Rate:
The rate that the CBN allows commercial bank to borrow short-term in order to meet liquidity positions or loan demand.
Prime Lending Rate:
The rate allow to worthy credit customers on borrowing.
Quantitative Instruments:
Those instrument that deal with the volume and quantity of money.
