CHAPTER ONE
INTRODUCTION
- Background of the Study
This study is aimed at understanding the economic importance of monetary policy and its effects on bank credit in the economy between the years 1981 and 2019.Monetary Policy is a measure designed by the Government or Central Bank to control the cost, availability and supply of credit.The goals of monetary policy are basically to control inflation, maintain a favourable balance of payment position in order to safeguard the external value of national currency and promote adequate and sustainable level of economic growth and development. These goals are being achieved by controlling money supply in order to enhance price stability (low and stable inflation) and economic growth.This action is implemented through the apex bank by varying money supply or interest rates with the aim of regulating as well as controlling the quantity of money in the economy. Money play an important role in any economy and this has made policy makers and other relevant stakeholders to accord special attention to the conduct of monetary policy.
There are basically two types of monetary policy, which are expansionary and contractionary. An expansionary monetary policy is used whenever monetary authorities decides to increase the supply of money or reduce the cost of money in the economy so as to stimulate an increase in economic activities and also to overcome depression, recession and deflationary gap. A monetary policy is said to be contractionary or tight when the monetary authorities embark on policies that will reduce the volume of money supply or increase the cost of money in economy, in order to generate a contraction in economic activities. The impact of contractionary policies is to reduce the general price level and curb inflation which will equally lead to a reduction in the level of investment, employment, output and economic growth
The primary instrument of monetary policy under the market-based approach to monetary management in Nigeria is Open Market Operations (OMO), but there are other instruments such as: reserve requirements, discount window operations, foreign exchange market intervention, and movement of public sector deposits in and out of the domestic money banks (DMBs).
Monetary policy has two major regimes in Nigeria which are the period before the introduction of Structural Adjustment Programme (SAP) in 1986, and the period since the introduction of Structural Adjustment Programme SAP. In the first period, the CBN’s monetary policy framework placed emphasis on direct monetary policy control, while in the second period it relied, and is still relying, on indirect approach anchored on the use of market instruments in monetary management.
Formulating and implementing monetary policy in Nigeria has a framework which has overtime, witnessed tremendous transformation in line with the evolving financial environment overtime. The major developments include the change from direct control to market-based approach to monetary management, and the change from short-term to medium-term framework in the conduct of monetary policy.
The monetary transmission mechanism describes how policy induced changes in the nominal money stock or the short-term nominal interest rates impact real variables such as aggregate output and employment (Ireland, 2005).
The objective of stimulating bank credit to the real sector by the monetary authority is to achieve sectoral growth. The real sector is recognized by the monetary policy of the economy. The importance cannot be over emphasized in the economic growth of the country.
- Statement of the Problem
Since the establishment of the Central Bank of Nigeria (CBN) in 1958, it has been saddled with responsibility of ensuring vibrancy and efficiency in monetary policies expected to positively affect the real sector as well as improve the financial system of the country, Nigeria. This objective has driven the Central Bank to reform monetary policy since its establishment, with various monetary policies implemented in Nigeria.
Onotor (2007) observed that one of the most complex issues facing government is identifying the appropriate level and form of intervention in the banking sector. Its efficiency as a regulator is a significant determinant of the overall efficiency of the economy. The extent of regulatory intervention may also determine whether financial markets can develop to their full potential or not. Ultimately, any inefficiency must be funded by higher charges passed on to the community as cost arising from stringent regulation. The more sophisticated the monetary policy, the greater its vulnerability to failure of banks to deliver against its promises. When these failures occur, investment which is an important factor in economic growth is kept low. Consequent upon this, trust and confidence in the financial system may go down and sourcing of funds from banks may face a downward trend due to increase in cost of loan. The increase in cost of capital often deters prospective investors from engaging in new ventures as well as discourages customers of companies from optimal patronage of their products. It therefore, stands to reason that increase in cost of capital results in cyclical effects in the economy. In view of this, any review of monetary policy is often greeted with wide spread apprehension, that cuts across various sectors of the economy. On the other hand, a decrease in the cost of capital tends to stimulate more aggressive investment in any economy. The higher the volume of investment, the greater the competition. Even though consumers of products from various companies stand to benefit from this situation in the short run, it may portend serious danger in the economy if it is allowed to stretch to the extreme. As companies engage in stiff competition, weak ones (especially those that are disadvantaged technologically) may be driven out of business. This may result in monopolies with their obvious consequences in the economy.
- Research Questions
This study will answer the following research questions:
- What is the impact of monetary policy on bank credit in Nigeria?
- What is the causal relationship between monetary policy and bank credit in Nigeria?
- Objectives of the Study
The main objective of the study is to assess the impact of monetary policy on bank credit in Nigeria. To achieve that, the following specific objectives will be pursue:
- Examine the impact of monetary policy on Bank Credit in Nigeria
- To determine the causalrelationship between monetary policy and Bank Credit in Nigeria.
1.5 Statement of Hypothesis
H0: Monetary policy has no impact on bank credit in Nigeria.
H0: Monetary policy has no causal relationship with bank credit in Nigeria.
