Impact Of Quantitative Tools Of Monetary Policy On The Performance Of Deposit Of Commercial Banks
(A Case Study Of First Bank Of Nigeria Plc And First Inland Bank Plc)
The impact of quantitative tools of monetary policy on the performance of deposit-taking commercial banks is significant and multifaceted. Central banks employ various quantitative tools, such as interest rates and reserve requirements, to regulate the money supply and control inflation. Changes in these monetary policy tools directly influence the interest rates offered by commercial banks on deposits. For instance, an increase in the central bank’s policy interest rate tends to raise the cost of funds for banks, leading to higher deposit interest rates. Conversely, a decrease in interest rates may encourage borrowing and spending but can compress banks’ net interest margins. Additionally, adjustments in reserve requirements can affect the liquidity positions of commercial banks, impacting their ability to attract and retain deposits. The effectiveness of these quantitative tools in shaping the deposit performance of commercial banks depends on various economic factors, including inflation rates, economic growth, and market expectations. Overall, the intricate interplay between monetary policy tools and deposit performance underscores the importance of a well-calibrated monetary policy framework for maintaining financial stability and fostering a conducive environment for banking activities.
This research work will be based on the impact of quantitative tools of policies on the performance of deposit of commercial banks in Nigeria, first bank of Nigeria plc and first inland bank plc.
In trying to steer the economy towards the desired direction, monetary policy among other economic policies is employed by the government authorities or government. Banks are the medium through which the government implements monetary policies and during the process of implementation banks are influenced.
This research will sougth to find if monetary policy actually influences the performance of commercial banks over the study period of time and to what extent it actually did, if it did.
Hence, the research will also seek to discover if monetary policy influenced the loans and advances including the profit of first banks of Nigeria plc and first inland bank plc. Uses of simple percentage for analysis of data and chi-square for hypothesis will be use.
The monetary policy instrument that I will like to use are interest rate, cash reserve ratio, minimum rediscount rate, liquidity ratio and foreign exchange rate.
In conclusion, monetary policy has impacted positively in the performance of deposit of commercial banks in stabilizing economy.
Title page
Certification page
Dedication
Acknowledgement
Abstract
Tables of contents
CHAPTER ONE
1.0 Introduction
1.1 General Overview of the Study
1.2 Statements of Problems
1.3 Objective of the Study
1.4 Statement of Hypothesis
1.5 Significance Of the Study
1.6 Scope of Study
1.7 Limitation of the Study
1.8 Definitions of Terms
CHAPTER TWO
2.0 Literature Review
2.1 Objective of Monetary Policy on the Operation
of First Bank And First Inland Bank
2.2 Impact of monetary policy on the operation of
First bank of Nigeria & First Inland bank Plc
2.3 Operational Performances of First Bank And First
Inland Bank of Nigeria Plc Using Balance Sheet.
2.4 Financial Sector Performance
2.5 First Bank and First Inland Bank Policy on
Small and Medium Scale Investment Scheme
2.6 Challenges Facing Monetary Policy Effectiveness
2.7 Monetary and Credit Policy Measures in
2005/2006 Objective and Strategies of Policy.
2.8 Relevant Models or Issues to Monetary Policy
CHAPTER THREE
3.0 Research Methodology
3.1 Research Design
3.2. Population of the Study
3.3 Sources of Data
3.4 Instrument of Data Collection
3.5 Method and Techniques of Data Analysis
CHAPTER FOUR
4.0 Presentation and Analysis of Data
4.1 Data Presentation
4.2 Data Analysis
4.3 Test of Hypothesis
CHAPTER FIVE
5.0 Summary, Conclusion and Recommendation
5.1 Summary
5.2 Conclusions
5.3 Recommendations
Bibliography
Appendix I
Appendix II
INTRODUCTION
1.1 GENERAL OVERVIEW OF THE STUDY
Government polices are used to pursue development objectives of government that bothers on meeting the welfare of the citizens, they could be socially, politically, economically, religious wise, environmentally population and so on. These policies are used to pursue these goals through the use of economic policy. They are open market operation (OMO), moral suasion, special deposit, credit control and discount rate. The banks are one of the financial institutions that formulate the policy objectives and achievement of these goals.
This research involves the case study, first bank of Nigerian plc and first inland bank plc.
First bank of Nigerian plc was incorporated as a limited liability company on March 31, 1894 with head office in Liverpool by Sir Alfred Jones, a shipping magnate. It started business in the office of elder Dempster and company in Lagos under the corporate name of the bank of British West African (BBWA) with a paid up capital of 12000 pounds sterling, after absorbing it predecessor, the African banking corporation, which was established earlier in 1892. In the early years of operation the bank has an impressive growth. The changing of the bank name occurs in 1979 and 1991 to first bank of Nigeria plc.
First inland bank was incorporated as inland bank (Nigeria) plc on 20th April 1988 as a private limited liability company. It commenced business operation on October 1988 and was converted to a public limited liability company in June 1992.
2005 the bank went into a merger arrangement with former fist Atlantic bank plc. IMB international bank plc and NUB international bank limited to form first inland bank plc. The shares of the new bank, first inland bank plc are quoted on Nigeria stock exchange. The consolidated bank, first inland bank plc.
1.2 STATEMENTS OF PROBLEMS
1. The under-developed nature of the Nigeria financial market.
2. There is very much presented in Nigeria whereby expected revenue fall below expenditure. This occurrence leads to direct injection to aggregate demand and increase pressure on general price level.
3. The issue of non bank financial institution (NBFI), which are graving in numbers and operations. They adopt deposit but up till now, they are not under the central bank of Nigeria CBN.
4. The delay in the conduct of monetary policy in Nigeria.
5. The delay in releasing the federal government annual budget, which cause economic units to suspend their activities.
1.3 OBJECTIVE OF THE STUDY
1. The primary objective of this research is to meet higher national diploma in banking and finance in federal polytechnic nekede Owerri.
2. To determine if monetary policy has had any influence on the profit of the first bank of Nigeria plc and also on its loan deposit and advances, over the study period.
3. Finally to make necessary recommendations that would improve monetary policy in Nigeria.
1.4 STATEMENT OF HYPOTHESIS
This section would outline some hypotheses of this research project.
Hi: monetary policy tools have an influence on the profit of commercial banks in Nigeria.
Ho: there is significant relationship between monetary policy tools and profit deposit and loans of commercial banks in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY.
1. Student would use it for reference purpose when conducting their researche.
2. Practicing bankers would find relevance in this study, this is because, it will help to find out which monetary policy instruments influence bank performance of the most and to them in important matters of decision.
3. It is also vital to central bank and other monetary authorities. Monetary authorities have this work of keeping economic indicators within reasonable limits; this research would definitely be of assistance to the monetary authorities in achieving this aim because it will provide an insight as to which tool would be most appropriate for influencing the economy.
4. An ultimate aim of this study is to bring about stability in the banking system and hence the economy as a whole and this would be of significance to the citizens of the economy.
1.6 SCOPE OF THE STUDY.
As Anyanwu (2000), specified out “A research is not expected to cover a discipline in the cause of this study. In line with this statement this project work would not cover every thing on this study ,it will significantly determine the reliability of its findings. Hence, only two performance indicator would be analysed.
Despite the fact that there are others like “Net income before taxes total assets deposit and income”
The monetary policy tools that would be involved in this study are open market operation (OMO), required reserve ratio (RRR) the cash reserve ratio ( CRR) interest rate policy (IRP), and exchange rate policy (ERP).
The following monetary policy instrument will be excluded such as discount rate policy (DRP) and moral suasion.
It is an experimental study, it is not a full experiment since I would not require a pre-test and post-test analysis neither will it require an experiment and control group analysis.
It is a case study research and will therefore be particular about banks.
First bank of Nigeria plc and first inland bank plc with there size and spread of operations is a representative case study. It has two branches in Owerri, that is first bank and first inland bank plc has two branches in Owerri, and has other branches in the nation.
1.7 LIMITATION OF THE STUDY
In conducting a research work of this nature, certain restrictions are bound to affect the study. These include the following: money, time and effort.
Money being a scarce commodity, a student will not have enough money to meet up all there financial obligations by travelling to many organization which is a pre-requisite for a research project. As a result of this defect, this study will centre on the impact of quantitative tools on the performance of deposit of commercial banks in Nigeria with reference to first bank of Nigeria plc and first inland bank plc.
A research work of this nature can not be accomplished within a short period of time. It requires time if one actually wants to write exhaustively on the topic.
Also some employees of the bank and to who questions were asked declined interest should every attempt to persuade due to their own time schedule being a limitation to a project.
1.8 DEFINITION OF TERMS
LAG: This is the period between the conception of an idea and the time of implementation.
FINANCIAL SYSTEM: This is the conglomeration of market institutions, regulatory authorities, intermediates and the dealers in the economy.
INFLATION TREND: The upward or downward i.e. increase in the rate of inflation.
LENDING RATE: This is a rate at which banks make advance to their customers.
MONEY SUPPLY: This is summation or total amount or stock of many in circulation.
CONTROL: This is the process of insuring that firm activities confirm to as planed in ensuring that objectives are achieved.
OBJECTIVES: These are goals on enterprise seek to achieve by its existence and operation.
TOOLS: These are instrument used for a particular kind of work.
OPEN MARKET OPERATION: This is defined as the selling or buying of government securities in the financial markets by the central bank.
MONETARY POLICY: This can be defined as the major economic stabilization weapon which involves measure designed to regulate the volume, cost availability and direction of money and credit in the economy.
LIQUIDITY TRAPS: This is defined as a case where the interest rate falls so low that individuals and business wish to hold any new money created in the banking system as speculative balance.
HYPOTHESIS: This is an educated guess which the researcher made ahead of time which will be put to test for acceptances or rejection.
STABILIZATION SECURITY: These are securities specifically issued by the central bank at time it deems fit for the purpose of moping up excess liquidity in the banking system.
INTEREST RATE: This is a price of capital to the borrower and a return on capital to the saver or lender.
DISCOUNT RATE: This is also known as minimum rediscount rate or bank rate is a rate at which central bank offer financial assistance to financial institutions through loans or discounting bills.
DEPOSIT ACCOUNT: This is an account in which a person keeps a specific sum of money for an agreed period of time.
CASH BUDGET: This is a type of budget prepared by an organization based on the availability of cash.
BALANCE SHEET: This is a financial statement that shows the activities of an organization within a specified period.
QUASI MONEY: These are money that are not cash or paper-money but are also used for transaction purpose and also regarded as money.
SHARE PROJECT MATERIALS ON:
Impact Of Quantitative Tools Of Monetary Policy On The Performance Of Deposit Of Commercial Banks:
Quantitative tools of monetary policy are implemented by central banks to manage the money supply, interest rates, and overall economic conditions within a country. These tools can have a significant impact on the performance of deposits held by commercial banks. Here’s how:
- Interest Rates:
- Policy Rate Changes: Central banks use tools like the federal funds rate in the United States or the repo rate in India to influence short-term interest rates. When the central bank lowers interest rates, it becomes cheaper for commercial banks to borrow money from the central bank. As a result, commercial banks may lower interest rates on deposits, reducing the returns for depositors.
- Effect on Deposit Rates: Lower interest rates tend to reduce the interest rates on savings accounts, certificates of deposit (CDs), and other interest-bearing deposits. This can impact the performance of deposits by lowering the income earned on these deposits, which may discourage individuals and businesses from holding larger balances in these accounts.
- Reserve Requirements:
- Central banks can change reserve requirements, which dictate how much commercial banks must hold in reserves. When reserve requirements are increased, it reduces the funds that banks can lend or invest, potentially affecting their ability to offer competitive deposit rates.
- Open Market Operations (OMOs):
- Central banks conduct OMOs to buy or sell government securities. When central banks engage in large-scale purchases, they inject money into the banking system, which can lead to an increase in the money supply. This excess liquidity may prompt commercial banks to lower deposit interest rates as they have a surplus of funds to lend out.
- Quantitative Easing (QE):
- During periods of economic stress, central banks may implement QE programs, buying long-term securities like government bonds. This has the effect of lowering long-term interest rates, which can lead to lower interest rates on long-term deposit products, such as fixed-rate CDs.
- Inflation Expectations:
- Changes in monetary policy, especially when involving QE or other unconventional measures, can influence inflation expectations. If depositors believe that the central bank’s actions will lead to higher inflation, they may seek higher interest rates on their deposits to compensate for the eroding purchasing power of their money.
- Economic Growth and Loan Demand:
- Monetary policy also affects the overall economic environment. When central banks implement expansionary policies, it can stimulate economic growth and increase loan demand. This may lead to commercial banks allocating more funds to lending rather than holding large reserves, potentially affecting the performance of their deposits.
- Exchange Rates:
- Changes in interest rates can impact exchange rates, which, in turn, can influence capital flows and international investments. This can affect the stability and attractiveness of a country’s banking system, which may indirectly impact deposit performance.
It’s important to note that the relationship between monetary policy and deposit performance is complex and can vary depending on the specific economic conditions, the actions taken by the central bank, and the competitive landscape among commercial banks. Additionally, the impact on deposit performance may not always be negative; for example, lower interest rates can stimulate borrowing and investment, potentially leading to higher returns on certain types of deposits for businesses and individuals.