THE EFFECT OF MONETARY POLICY ON THE FINANCIAL PERFORMANCE OFDEPOSIT MONEY BANKS IN NIGERIA

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The financial sector is mainly significant to formal activities that are relevant to the economicactivities in Nigeria. This has made it mandatory for monetary policy instruments to becomecrucial in driving the activities of the Nigeria economy. It has therefore been well observed inNigeria as well as all other developing countries that prudent monetary policies are the key stone

to effective regulations as well as supervision for the growth of any country’s banking Industry.

By effective manipulation of monetary instruments, the growth rate in the supply of money canbe influenced by the Central bank in many ways, namely, availability of credit interest rate leveland availability of liquidity from the banking sector. All these can affect the investment,production, consumption of individual as well as government spending. Omankhanlen (2014).Business cycle evenness, financial crisis prevention, rate of interest stabilization in the long run,the rate of exchange in real terms has recently been identified as objectives supplementary tomonetary policies due to global financial crisis weaving which overwhelmed both emerging anddeveloped economies of the world (Mishra and Pradhan, 2013). Nigerian banks generally believethat there is great risk in lending to the manufacturing and agricultural sectors of the economy,hence, their apathy in giving credit to these sectors of the economy, though these sectors hold thekey to the development of the economy especially in employment and foreign exchangegeneration.A solid and stable financial sector is essential to make a well-functioning national economy andensure balance liquidity within the economy. Appropriate liquidity management is essential tofoster economic growth. Though, to achieve economic stability proper uses of fiscal andmonetary policies are required. Despite establishing regulatory agencies and monetary policy

committees, Nigerian banks have actually been deterred in creating adequate liquidity andadditional credit for the sustenance of the entire economy.The Central Bank of Nigeria (CBN) over the years, have instituted various monetary policies toregulate and develop the financial system in order to achieve major macroeconomic objectiveswhich often conflict and result to distortion in the economy. Although, some monetary policytools like cash reserve and capital requirements have been used to buffer the liquidity creationprocess of deposit money banks through deposit base and credit facilities to the public.Monetary policy remains a critical tool in stimulating the growth and stability of financialinstitution in most developing economics. In Nigeria, the objectives usually include promotingmonetary stability. Strengthening the external sector performance and generating a soundfinancial system that will support increased output and employment. Monetary policy is a majoreconomic stabilization weapon which involves measures designed to regulate and control thevolume, cost, availability and direction of money and credit in an economy to achieve somespecific macro-economic policy objectives (Ndugbu and Okere, 2015).Monetary policy according to Anyanwu (2009) involves a deliberate effort by the monetaryauthorities (the Central Bank of Nigeria) to control the money supply and credit conditions forthe purpose of achieving certain broad economic objectives.Central bank also determines certain targets on monetary variables. Although, some objectives

are consistent with each other’s, others are not, for example, the objectives of price stability

oftenconflicts with the objectives of interest rate stability and high short run employment. The role ofthe banking industry in development process cannot be over-emphasized as they play so manyfunctions. The most important banking industry in Nigeria is the deposit money banks. In orderto make profit, deposit money banks invest customer deposits in various short term and long

term investment outlet, however core of such deposits are used for loans. Hence, the more loansand advances they extend to borrowers, the more the profit they make (Solomon, 2012). Prior to1986 direct monetary instruments such as selective credit controls administered interest andexchange rates, credit ceilings, cash reserve requirements and special deposits to regulate thebanking system were employed. The fixing of interest rates at relatively low levels was donemainly to promote investment and growth. Occasionally, special deposits were imposed toreduce the amount of excess reserves and credit creating capacity of the banks

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