The Impact of Monetary Policy on Commercial Bank Lending in Nigeria

The Impact of Monetary Policy on Commercial Bank Lending in Nigeria.

ABSTRACT  

This study investigated the impact of monetary policy on commercial bank lending in the Nigerian context. The study aimed to test the effectiveness of some monetary policy component and instruments and how it affects commercial bank loans and advances in Nigeria.

The model used is estimated using Nigeria commercial banks loans and advances (CBLA) and other variables such as broad money supply(M2), minimum rediscount rate (MMR), Liquidity ratio of commercial bank (LR), Exchange rate (EXR), and cash reserve ratio of commercial banks for the period of; 1975 – 2009.

The study hypothesizes that the specified independent variables mentioned above, have no significant positive impact on the dependent variable (CBLA). From the regression analysis which was done using SPSS tool, the model was found to be significant though the magnitude is not much. This work has the following findings: 

1. There is nonsignificant positive impact of broad money on commercial bank lending in Nigeria as Broad money coefficient is 0.903, and a t–value of .958.
2. There is non-significant positive impact of exchange rate on commercial bank lending in Nigeria as exchange rate coefficient is 0.340, and a t–value of 1.372.
3. There was positive correlation between minimum rediscount rate and commercial bank lending as the three is non-significant positive impact of minimum rediscount rate on commercial bank lending in Nigeria as minimum rediscount rate coefficient is 1.408, and a t–value of 0.504.
4. There is non-significant positive impact of liquidity ratio of commercial banks on commercial bank lending in Nigeria as liquidity ratio coefficient is 1.074, and a t–value of 0.964.
5. There is non-significant positive impact of cash reserve ratio of commercial banks on commercial bank lending in Nigeria as cash reserve ratio coefficient is 1.300, and a t–value of 0.590.  

TABLE OF CONTENTS

TITLE PAGE …………………………………………………………………. ii
CERTIFICATION ………………………………………………………… iii
APPROVAL PAGE …………………………………………………………. iv
DEDICATION ………………………………………………………… v
ACKNOWLEDGEMENTS ………………………………………………… vi
LIST OF TABLES ………………………………………………………… x
LIST OF FIGURES ………………………………………………………… xi
ABSTRACT ………………………………………………………………… xii

CHAPTER ONE – INTRODUCTION
1.1 Background of the Study ………………………………………… 1
1.2 Statement of the Problem …………………………………………. 2
1.3 Research Questions ………………………………………………… 3
1.4 Objectives of the Study …………………………………………. 3
1.5 Hypotheses of the Study …………………………………………. 4
1.6 Scope of the Study …………………………………………………. 4
1.7 Significance of the Study …………………………………………. 4
1.8 Operational Definition of Terms …………………………………. 6
References …………………………………………………………. 7

CHAPTER TWO – REVIEW OF RELATED LITERATURE
2.1 Overview of Nigeria Financial System …………………………. 8
2.2 Evolution of Nigeria’s Banking System …………………………. 10
2.3 History of Monetary Policy …………………………………………. 14
2.4 Types of Monetary Policy …………………………………………. 15
2.4.1 Inflation Targeting …………………………………………………. 15
2.4.2 Price Level Targeting ………………………………………….. 16
2.4.3 Monetary Aggregates ………………………………………….. 16
2.4.4 Mixed Policy ………………………………………………….. 16
2.4.5 Fixed Exchange Rate ………………………………………….. 16
2.4.6 Gold Standard …………………………………………………… 16
2.5 Trends of Monetary Policy in Nigeria …………………………… 17
2.6 Monetary Policy and the Performance of Banking Institutions …… 22
2.7 Instruments of Monetary Policy …………………………………… 24
2.8 Effects of Monetary Policies on Commercial Banks …………… 26
2.9 Phases of Nigerian’s Monetary Policy …………………………… 32
2.10 Lags of Monetary Policy …………………………………………… 38
2.11 Brief History of First Bank of Nigeria PLC ……………………. 39
References …………………………………………………………… 40

CHAPTER THREE- RESEARCH METHODOLOGY
3.1 Research Design …………………………………………………… 42
3.2 Nature and Sources of Data …………………………………… 42
3.3 Techniques of Analysis …………………………………………… 42
3.4 Specification of Models …………………………………………… 43
3.5 Anticipated Problems and Limitations of the Study ……………. 44
References …………………………………………………………… 45

CHAPTER FOUR – EMPIRICAL ANALYSIS OF DATA
4.1 Presentation and Interpretation of Data ……………………………. 46
4.2 Test of Hypotheses …………………………………………………… 47
4.2.1 Test of Hypothesis One …………………………………………… 47
4.2.2 Test of Hypothesis Two ………………………………………… 48
4.2.3 Test of Hypothesis Three ………………………………………… 49
4.2.4 Test of Hypothesis Four ………………………………………… 50
4.2.5 Test of Hypothesis Five ………………………………………… 51
4.2.6 Robustness Test ………………………………………………… 52
4.3 Implications of Results ………………………………………… 53
References ………………………………………………………… 54

CHAPTER FIVE – SUMMARY OF FINDINGS, CONCLUSION AND
RECOMMENDATIONS
5.1 Summary of Findings ………………………………………… 55
5.2 Conclusion ………………………………………………………… 55
5.3 Recommendations ………………………………………………… 56
Bibliography ………………………………………………… 57

INTRODUCTION 

The importance of monetary policy in the economic development of developing countries has attracted a lot of attention in recent years. The perverse effect of interest rate controls, overvalued exchange rates, controlled lending and other control variables have led to a large volume of research relating to monetary policy. An open and well unregulated monetary policy promotes economic growth and stability.

In the current setting with a rapidly globalizing world economy, efficient monetary policy are essential for productive gains from the world market and to protect the domestic economy against foreign shocks. In attempt to create and provide better living conditions for the populace, various government have embarked in the use of policies (fiscal and monetary) to control economic variables that facilitate growth and development.

The focus of this study shall be to examine the impact of monetary policy on commercial bank lending in Nigeria. Monetary policy in the art of controlling the direction and movement of money and credit facilities in pursuance of stable price and economic growth in an economy (CBN 1998). It is the major economic stabilization weapon, which involve measures designed to regulate and control the volume, cost, availability and direction of money and credit in an economy to achieve some specified macroeconomic policy objective.

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Ajayi, I (1999), “Evolution and functions of Central Banks”. Central Bank of Nigeria Economic and
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StudentsandScholarship Team.