CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

Most banking activities are directed towards lending as credit has remained the backbone of banking operations. It is due to the fact that it provides the bulk profits. Today, its vital role in commercial banking activities lie in the direct it has on total economic growth and business development. Every year the (CBN) central bank of Nigeria being the monetary authority that is solely responsible for the insurance of guidelines policies and the interpretation of such, comes up with economic measure roles and regulation under which the bank in the country operate. Such policies direct the use of funds from depositors, stockholders, and creditors in order to control the size of loan portfolio thereby determining the general circumstances under which it is appropriate to make an advance. The economic policies (fiscal and monetary) also aim at aiding the banks to maintain a sound financial and banking system promote confidence in sustenance of reasonable banking services for public as well as ensuring a high standard of conduct and professionalism in banking industry.

These rules and regulations are contained in monetary and fiscal policy circular being issued by the central bank at the beginning of every year. The techniques of monetary policies could be broadly divided into two namely: Direct and Indirect. While the direct approach has been used very extensively in the more developed market economic, the indirect approach predominate in the less developed economics such as Nigeria. Nonetheless, both technology aim at influence the cost and availability of banking system’s credit. The direct system techniques involves fixing of credit ceiling and interest weight rates the Apex Bank (CBN) for compliance by banks, while the direct approach achieves the same objective through the financial market. The most potent instrument of the indirect monetary policy technique is the open market operation (OMO). It is worthy of note that effort aimed at introducing incorrect monetary and credit-control anchored on the use of OMO are themselves a parts of the given receipts which they would present to the gold smith on withdrawal.

According to Paul Sammuelson, (1990-20) money has an anonymous quality making are dollar just as good as another. In relation to the above the goldsmiths recognized that not all depositors of gold when they come back at the same time to collect them. These receipts signified time to collect them. These receipts signified debt and were transferable. Out of the gold deposited, the goldsmith started to lend out part of them and charge a fee for these services. Hence the evolution of our bank lending. As development continued to surface in the society it become possible for financial institution to emerge and act as bank where people go to deposit their money and other precious metals for future withdrawals and most importantly lending money to the users of fund. Bank lending has ever since then been on the increase with different hierarchy of operations.

1.2   STATEMENT OF THE PROBLEM

Monetary and fiscal policies are organized and established system of administration of loan, and its disbursement have so many loopholes which undermine its base exercise and guidance. It is a statement that need not be overemphasis. These policies being one out of measure used by that nation ability to mobilize and  channel its scare resources to different sectors of the economy. Therefore when these economic policies are seemingly deficient, it poses a big question which needs to be answered. How much authority do such policies allow the banks to use their powers to lend to make remarkable. Impact on the overall economic positions on themselves (hence profit). A major conclusion has been that effective implementation through the financial intermediation will serve a machinery for economic progress and profit enhance ability.   Apart from the explicit policies which are extremely imposed by the CBN implicit rules and regulations are also developed by the bank to guide their internals operations. But these guidelines are developed from the mature of banking industry. Generally, these policies have three implications. One to the banks to the borrowers and to the economy.

Emphasis is laid here on the implication  it has on the banks. Banks lending dates bank to the days when the hold smiths accepted deposits from the merchants, mostly gold and valuable for safe keeping. At first such establishment were simply like ware house. Depositors were central bank of Nigeria towards the maintenances of prudent banking have fare reading effects on banking and the Zenith bank Plc in particular. The question therefore arises what effect do these policies have on the banking industry and their profitability, customers and the economy? Are these policies and conditions too strength as to constitute a problem to lending? Do commercial banks ensure full compliance to the monetary and fiscal policies circular?  Are there government objective for introducing these rules  and regulations being achieved? The CBN’s guidelines, rules and regulation normally contained in the monetary policy circular have always been aimed at achieving targeted goals. The commercial banks which are expected to operated to operate under the guidance of the regulations of the CBN have also their own internal lending policies objectives to achieve. All these pose a lot of problems to the bank’s credit decisions worthy of note is the CBN directive that lending should not exceed and foreign transfer to individual should not exceed N500.000 and corporate bodies n2000.000. this has made of possible for banks to have loan or credit dispersal and control money laundering. Based on the above a performance evaluation of the effect of these policies is inevitable to finding out the resultant effect on banks activities using the 2002 and 2003 monetary policies.

1.3   OBJECTIVES OF THE STUDY

The purpose of this research work is to undertake an in depth analysis of the effect of the various guidelines introduced for banking operations by the Apex monitoring authority on the profitability of banks using Zenith bank Plc as case study. Other objective include:
i.       Assessment of the extent to which commercial banks have been able to comply with statutory allocation of credit to the different sectors of the economy through the CBN credit to the different sectors of the economy through the CBN guidelines.
ii.      Whether the commercial banks have been able to maintain the  credit ceiling and how far interest rate deregulation contain in policy has been able to affect the volume of banks lending and profitability.
iii.     To test the rigidity of the policies and its effects on the borrowing customers.
iv.     To  draw outlines of credit offered by these banks and their appraisal process highlighting the environmental influence that impinge on the monetary policy and fiscal policy practices in Nigeria.
v.      Lending is of paramount importance in the economy hence the research work will investigate lending policies and practical of the banks system in the country funding out how realistic they are in line with the nations economic settings.  Making recommendation where necessary and suggesting ways to ensure effective implementations of these policies to achieve the desired objectives.

1.4   SIGNIFICANCE OF THE STUDY

Government over the year have made inspiring calls to all citizens be self reliant and in a bid to achieve this loan to rural borrowers have been increased to 50% and as well sectored allocation (SMES) small scale and medium enterprises as well as according priorities to key sector of the economy. This research work being an appraisal of the effects of CBN monetary and fiscal policy on the profitability of banks (Zenith) precisely will enable the apex bank restructure and relax the assumed stringent measure in order to make it possible for necessary assistance from banks. However, the primary motive for any corporate business is for profit optimization and the maximization of shareholders health banks are no exception. From this research, they will realize that  proper implementation of monetary and fiscal policy can ensure higher profitability of the banking industry. To borrowing customers, they will deduce some act inherent in loan defaulting an what are the causes of high interest rates and their remedies. This implies that of they continue borrowing funds without paying back, this banking industry may in future become liquid which will result in high interest rate and subsequently high cost of borrowing fund. It will also constitute guide towards future design and formulation of lending policies by the monitoring authority through the implementation of recommended measure. Finally, this work will be of immense help to other university undergraduates who will like to writ on this topic as well as exposing to monetary and fiscal policies available to the banking industry.  
1.5   STATEMENT OF HYPOTHESIS
For a sound and valid investigation, the under listed hypothesis have been formulated and the validity will be tested in chapter four using appropriate statistical data.
HYPOTHESIS I
Ho: The implementation of CBN policies have shown adverse effect on the  commercial banks profit.
Hi: The commercial banks have shown fall compliance with CBN guidelines on the allocation of credit to the high priority sector.
HYPOTHESIS II
Ho: The commercial banks have shown fall compliance with CBN guidelines on the allocation of credit to the high priority sector.
Hi: The commercial banks have shown fall compliance with CBN guidelines on the allocation of credit to the high priority sector.  
HYPOTHESIS III
Ho: There is no significant difference between the volume of lending by commercial banks in interest rate regulated economy and one of interest rate deregulation.
Hi: There is no significant difference between the volume of lending by commercial banks in interest rate regulated economy and one of interest rate deregulation.  
1.6   SCOPE AND LIMITATION OF STUDY
As this research work is aimed at finding out the effect  of monetary and fiscal policy on the profitability of banks, looking at the overall policies and effects on profits it cannot be ruled off of limitations, hence during the course of the study, the researcher was constrained by certain tangible and intangible factors which are.
COST: For any researcher work of this nature to be successful and accurate the cost of affording such is high and not just high but to a student. This made the research work to rely much on the banks Annual report. CBN journals and sites Via the internet, Newspapers, magazines, textbooks, and unpublished speeches. TIME: The research work has been carried out within the limits imposed by the time constraints, considering the research work such as the academic and non-academic in spite of the some of the banks staff interviewed complained of heavy work load and his made them indisposed to release the necessary data when needed.
QUESTIONNAIRES: Were not easy to be accepted by some people as they had always complained of one things or the other. These inadequately prolonged the time for the assemblage of data.
PAUCITY OF LITERATURE: Dearth of current financial statements in the banks also made this research work look impossible. The CBN library is not always opened for every body and  every day and lack of good textbook that treat the  current monetary and fiscal policy made the information needed hard.
BIAS: As a human, the researcher may Be not covering bank officials. Interviewed were reluctant to respond as their response could be a violation of the banks code of conduct and eventually when they do, they seek anonymity. Despite the limitation above, the generalization made on the effects of fiscal and monetary policy on banks  profitability was made relying heavily on the financial reports of banks, then press statements and the proper study of the current monetary policy ie  2002/2003 policies and that of the preceding year.  
1.7     DEFINITION OF TERMS
Monetary policy: Is a policy that deals with discretionary control of money supply by the monitoring authorities in order to achieve stated economic goals.
FISCAL POLICY: This is the government policy that deals on how banks organization expend than money through taxes. ANYANWAOKORO (1999:45)
PROFITABILITY This is the excess of  enterprises returns over its expenditure.
LENDING POLICY: The establishment of directives and other use of the funds from stockholders, depositors and other to control the composition and size of the loan portifolio and the circumstances under which it is appropriate to make a loan., specifically, it is designed and is contained in the current monetary policy.  
CENTRAL BANK The Apex bank in Nigeria to which has been entrusted the supervision of issuing guidelines and monitoring of banking operations.
FINANCIAL SYSTEM The Nigeria financial system is made up of the supervisory and regulatory bodies.
i.     The banking system
ii.    Non bank financial institution.
iii.   The financial markets. Anyanwokoro (1999:150)
BANK A bank is a corporate organization that has been licensed by the central body after satisfying the required procedure and demands to work as a bank thereby receiving time deposit. Savings and current to act under the dictates of the constitution.
LENDING A facility offered by a bank to its customers  or non customers on the ground that such a facility will be returned with the principal and interest when due.  
EFFECTIVE LENDING A question of lending which maximizes the banker’s objectives of development.
FINANCIAL INTERMEDIATION This is a process by which financial institution accept deposit from the excess householders and lend some to the deposit deficit sectors.
NDIC Nigeria Deposit Insurance Corporation which was established under decree no 2 of  1998 and commenced operation in March 1989 as a primary corporation responsible for providing insurance cover to the deposit of depositors in a licensed bank and when appropriate grant assistance to such banks when in financial difficulty. The
NDIC is generally in control of distressed banks to ensure that depositors are compensated commensurately.