CHAPTER ONE

1.0 INTRODUCTION

The concept of monetary policy has not received any single

definition from various scholars, who had attempted to do that over

the year. The authors and scholars were considering their various

definitions from the practice and execution of monetary policy by

the relevant authority which could be described as more of

authors.

According to Tawiah (1981), defined monetary policy as

being mainly concerned with varying supply in an economy.

Alafo (1996), defined monetary policy as the policy of

managing the economy by controlling supply of money, income

policy is a government measure designed to influence the growth

in all forms of income and prices.

Anyanwu (1993), defined monetary policy as a deliberate

efforts by the monetary authority (the central bank) to control the

money supply and credit conditions for the purpose of achieving

certain broad economic objectives.

Akatu (1993), noted, monetary policy in the Nigerian context

encompasses action of the central bank that effect the availability

and cost of commercial and merchant banks reserved balance and

thereby the overall monetary and credit condition in the economy.

 Therefore, monetary policy is the management of variable

stock for desired economic objectives. The various studies carried

out the impact of monetary policy instrument and the impact of

banking performances with special attention changing financial

and economic policies.

1.1 STATEMENT OF THE PROBLEM

The monetary policy impact on baking performances need to

be investigated and in the process lighting its constrain and

measures to improve on them as a means of achieving more

positive impact on banking operation and the economy as a whole.

1.2 OBJECTIVES OF THE STUDY

To assess the impact of monetary policy instrument on

banking performances, and also to establish whether monetary

policy will bring the desired growth and stability in banking

industry.

1.3 SCOPE OF THE STUDY

Considering the various studies on monetary policy used

during the period of 1981, to 1996. The scope would be limited to

the used of the traditional tools of monetary policy which is capable

of affecting the volume of loan granted by commercial banks to

prospective borrowers.

1.4 SIGNIFICANCE OF THE STUDY

At the end of this research, the result or answer arrived

would be beneficial to the younger economist, potential

accountants and students for those who may desire to know if

monetary policy has impact to bank loans customers ability and

willingness to borrows.

1.5 LIMITATION OF THE STUDY

There is some restriction to students during this research the

following are some of the limitations:

i. Inadequate Data: Like in the banking sector non of the

bankers have the time to listen to the student and explain

because of the business atmosphere. Only have access to

secondary data not primary data.

ii. Time Clashing: The time of the project is not content with the

students lecture time students need to pay more attention to

research.
iii. Financial Capability: Not all students are financially buoyant

in traveling to get data or moving from one branch of the

bank to other and also getting the secondary data not easy.

1.6 HISTORICAL BACKGROUND OF THE CASE STUDY

Diamond Bank Plc is a public limited company licensed to

carry on commercial banking business. The bank started formal

operations on March 21, 1991 and currently operated a universal

bank with over 53 branches across the country.

The bank environment continued to grow or change in the

1980’s and 1990’s with north federal saving bank of Chicago

formed a holding called North Bank Shares. North Bank Shares

purchased it stock to the public an over subscribed offering

December 1993. North bank shares about 400 shareholders

mostly members of the community in August of 2004, north bank

shares merged with Diamond Bank and was private on May, 2005,

north federal bank officially changed it name to Diamond Bank.

Over the years, they have recorded tremendous growth

which has put them among the strongest bank in the Nigeria

financial services industry with asset base in excess of N59 billion

in line with their relatives strength and position in the financial

sector, they have developed relationship with various multinational

financial organization such as the U.S exim Bank, the netter lands

F.M.O. and World Bank International Financial Corporation (IFC)

among others.
REFERENCES

Anyanwu, J. C. (1993), The structure of the Nigerian Economy Pp 272

Tawiah, Paul K. (1989), Basic Economy for west Africa 2nd edition

Bended lodo Umeh publisher Pp. 316, 325.

Riyan C. Amacha & Holley A. Ubrich (1986), Principles of economy 3rd

edition, south west published company cinannabi ohio pp. 149.

Richard G. Lipsey & Peter O. Strarner (1877), Economic 6th edition,

New York, Haper and Row Published Pp. 652.

 CHAPTER TWO

2.0 LITERATURE REVIEW

Before proceeding to the main body of the study, the author

review the work of many eminent scholars who have contributed in

the area of study.

The central bank and its agent make use of monetary policy

such as bank rates or interest rates to check and control the ability

of other commercial banks to give out loans or large sum of money

as loan to its customers prospective borrows. This singular

measure is used to regulate the amount or the total stock of money

supply in circulation, which in turned may effect individual items of

their purchasing power and borrowing ability or willing to borrow.

2.1 DEFINATION OF MONETARY POLICY

Tawiah (1989), defined monetary policy as being mainly

concerned with varying money supply in the economy.

Anyafo (1996), defined monetary policy as the policy of

managing the economy by controlling the supply of money, income

policy is a government measures designed to influence the growth

in all forms of income and price.

Anyanwu, (1993), defined monetary policy as a deliberate

efforts by the monetary authorities (the central bank) to control the

money supply and credit conditions for the purpose of achieving

certain broad economic objectives.

William and Blider (1979), defined monetary policy as “the

actions that the federal reserve system in order to change the

equilibrium of the money market that is to alter the money supply,

more interest rates or both”.

Haming (1970), defined monetary policy as the exercise of

the central bank control over the money supply as an instrument

for achieving the objectives of general economic policy.

Amacher and Uibrich (1986), defined monetary policy as

“using changes in money supply to try in influencing level of output

employment and prices”.

Hanson (1977), defined monetary policy as a responsibility of

the central bank which is mainly concerned with varying the money

supply.

2.2 EXPLANATION OF MONETARY POLICY

William and Blider (1979) monetary policies that expand the

money supply normally lower interest rates. Monetary policies that

reduce the money supply normally raise interest.

When the demand for money increases, the federal

government must tolerate either a rise in interest rate, a rise in

money stock, or both. It simply does not have the weapons to

control both the money supply and the interest. If it tries to keep

money stock steady, then interest rate will rise sharply.

Conversely, if it tries to stabilize interest rate, then money supply

will shoot up.

People and business firms hold money primarily to finance

their transactions, therefore, the demand for money increases as

real out put rises or as price rises. However, the quantity of money

demanded decreases as the rate of interest rise because the rate

of interest is the opportunity cost of holding money balances. As

interest rates rise bank normally find it more profitability to expand

and their volume of loans and deposits, thus increasing the supply

of money.

The primary objectives of monetary policy in 2002/2003 is

the achievement of price and exchange rate stability specifically

monetary policy shall seek to subdue inflation to single digit over

the two years period.

Consequently the central focus will include effective control

of anticipated liquidity injection that may rise from excessive

government spending during pre-lection year 2001/2003 in order to

minimize their negative effect domestic price and exchange rate.

The stance of the monetary policy will be non accommodated why

competitive financial environment is to steer to enhance greater

access to credit for the sector.

Furthermore, continued efforts will be made in improving the

payments system in order to further strengthen the effectiveness of

monetary policy. Also can change from time to time depending on

the economic fortunes of a particular country generally such

objectives includes.

2.2.1 MAINTENANCE OF RELATIVE STABILITY IN DOMESTIC

PRICES

This involves avoiding wide duration of price, which are

highly upsetting to the economy. The avoiding inflation and

deflation is desirable since rising and falling price are bad, bringing

unnecessary losses to some and undue necessary to maintain

international competitiveness.

2.2.3 ACHIEVEMENT OF A RAPID AND SUSTAINABLE

Economic growth: This means maximum sustainable high

output, that is most possible extend given the organizational

structure of the society at a given time.

2.2.4 ATTAINMENT OF HIGH RATE OF FULL EMPLOYMENT

This does mean zero employment since there is always a

certain amount of frictional, voluntary or seasonal unemployment.

2.2.5 EXCHANGE RATE STABILITY

This involves given or avoiding wide duration or swings

(undue and unnecessary fluctuation) in the currency exchange

rate. This help in promoting and protecting foreign trade.

2.3 TOOLS AND INSTRUMENTS OF MONETARY POLICY

In the discharge of it obligations, the central bank has its

disposal a number of control mechanisms usually classify as tools

of monetary policy. These tools are the techniques of monetary

control used by the monetary authorities to influence the supply

allocation and cost of credit in an economy. These tools could also

be referred to as quantitative control tools.

The quantitative control tools could be grouped into

traditional and modern quantitative tools.

1. Traditional Tools: These are tools of monetary policy that

was used in the olden days and includes:

a. Open Market Operation (OMO)

b. Legal Reserve Ratio or Cash Reservation (CRR)

 c. Bank Rates.

2. Modern Tools: These are tools of monetary policy which

were recently added to previously existing tools and they

include:

a. Special deposit

b. Mural suasion

c. Directives

2.3.1 OPEN MARKET OPERATION (OMO)

These involves sales or purchase of government securities in

the open market depending on whether the economy is inflationary

or deflationary, respectively, the effect is that when the monetary

authorities sells securities to the market, bank reserve decline, and

when they buy bank reserves increases, it can be important

weapon of monetary control in an economy with development and

capital market. Open market operation as a monetary policy, has

impact on the aggregate demand, national income and other

economic parameters. Apart from the fact that it helps to boost

money market activities for other wise idle funds.

However, the problem with open market operation is that

treasury bill are part of national debt and where the size of the

national debt is controlled, the sales of treasury bills to drain

liquidity may not be allowed and that restricts the use of open

market operation as policy instrument.

The present organization for open market OMO (FOMC)

federal open market committee is the focal point for policy market

within the federal reserve system.

2.3.2 LEGAL RESERVE RATIO

This could also be referred to as cash reserve ratio (CRR)

which is the amount of money step at a bank disposal so as to

meet the withdrawal needs of customers.

Traditionally, the aim of this instrument is to ensure that

banks have sufficient funds, cash or liquid assets to meet a daily

demand for currency or withdrawal of central bank of Nigeria raise

the (CRR) to 100% from previous 8% in April it further raised the

requirement to 12% in June. It recently decided to pay 4% interest

on dust 40% of the 12% reserve, leaving the balance of 8%

interest.

2.3.3 BANK RATES

This instrument arises from the services of the bank as

charges for lending money to bank as a “lender of last resort”. It is

the rate that the central bank changing lending money to discount

houses and other financial institutions.

Since this lending rate is through the rediscounting of bills, it

is called “the rediscount rate”. The use of bank rate usually meant

to influence all other rates in the economy such as rates charged

to discount houses rate charge on advantage of customers and

rate charges.

Banking performance, it is a cost of borrowing and it is

expected that high cost of borrowing will discourage bank from

borrowing from central bank because of banking performance tools

will have pass the higher rate of customers. The use of bank rate

is to reduce the quantity of credit or to increase it as the need may

be through upward and downward adjustment.

2.3.4 SPECIAL DEPOSITS

Sometimes banking performance are required by law to hold

special deposit balance (sometimes non-interest rate bearing) with

the central bank in addition to those which they normally hold as

part of their cash reserves. This is used to put pressure on the

reserve position of banking performances in terms of excess

liquidity.
2.3.5 MORAL SUASION

Moral suasion is simply a process which the monetary

authorities (eg. The central bank) make known to banking

performances officiates through informal discussions, the direction

in which monetary policy to proceed and contribution which is

expected to the part of the banking performance. Such discussion

may lead to agreement and commitment on the part of banking

performance but there is no legal basis for forcing the banking

performance to meet the commitment. However, the main

objectives of banks to maintain solvency, liquidity and profitability,

for this reasons, most banking performance would be quite

unwilling to pursue any action that will be inimical to be fulfillment

of those objectives especially if such action is not compulsory for

moral suasion to work well, the banks that are expected to morally

suasion must be taken in the formulation and implementation.

2.3.6 DIRECTIVES

The central bank uses this method of monetary policy to

control and monitor the economy by giving directives to bank or

priorities to be observed in virtually all areas of their operations.

This are called selective.

1. Credit Ceiling: These control the allocation of credit or

specific sector of the economy the allocation may be on

percentage of a maximum amount of loans to be approved

for a particular sector.

2. Interest Rate Ceiling: Interest may be control to favour

particular sector. In Nigeria, the preferred sectors enjoy

concessioner interest to create consciousness for borrowing

and attract more investors into those sectors.

3. Loan to Rural Borrowing: Is the improving in the rural

areas. The control may specify that specific percentage of

deposits collection in rural areas be invested in such an area.

4. Grace Period on Loan: Special moratorium may be granted

to favour sectors.

2.4 KEYNESIAN AND MONETARY OR MONETARISTS

POLIYCY

The Keynesian and monetarists view of monetary policy are

two fundamental theories with both having a different view of

monetary policy. But in spite of the different in views there is still a

board consensus between the Keynesian and Monetarists.

2.4.1 DIFFERENCE BETWEEN KEYNESIAN AND ARIST VIEW

OF MONETARISTS POLICY

Keynesian View Monetarists View

1 Believe that the federal Believe that the federal

government should focus its government should consider

attention on monetary policy the volume or size of money

controlling to interest rates. supply.

2 Believe that demand for money Believe that for demand for

is sensitive to interest rates. money is insensitive to interest

rates.

3 That velocity of money that is That the velocity of money is

the amount of money in stable.

circulation is unstable.

4 Investment is insensitive to Investment is sensitive to

interest rates. interest rates.

2.4.2 SIMILARITIES BETWEEN KEYNESIAN AND

MONETARIST POLICY

i. They both agree that the demands for money depends on

both income and interest rates although income has a

stronger effect.

ii. Expectation about income, prices and interest rates are

important influence of consumption and investment.

iii. Consumption depends only in current income but also to

some extend on pass and expected future income.

iv. The money supply can affect prices.

v. Both inflation and unemployment are undesirable.

2.5 RELEVANCE AND IMPACT OF MONETARY POLICY

The analysis of banking performance sector data shows a

strong relationship between monetary policy and banking

performance. Hence there is consensus about the capability of

monetary policy to produce impact has been on area of

disagreement.

According to Odizi (1995), used the contribution of banks to

economic performance as a measure of monetary policy impact

while writing on the conduct of monetary and banking policies by

the central bank of Nigeria, he conducted that Nigerian banking

sector witnessed a rapid growth between independence in 1960

and 1985 in terms of its structural development and contribution to

the overall economic performances.

The sector generally provided services that were necessary

for modern economic moreover.

According to Ajayi and Ojo (1981), in their study of impact of

monetary policy on some empirical data in Nigeria noted that

monetary policy influence banking performance deposits rate,

interest rate, banking or bank credits as well as loan advances.

While adducing reasons for investigation, the effect of monetary

policy, Odufalu (1994), said that the knowledge at the possible

impact of the effect of monetary policy on banking profit could be

utilized improving the structure of the industry and guard against

bank failure.

Consequently providing a measure of monetary policy

impact. Ogunleye (1958), studied how monetary policy influence

banking performances and discovered that there is a considerable

link between banking performances and monetary policy variable

were missing in his analysis he was able to provide to empirical

evidence to support Uchedu (1996).

The study Eze Liji (1994), highlighted the channel which

monetary policy affects a performance of banks. The channel

according to him in Nigeria is the link between monetary policy and

banking industry in his words monetary policy influence

commercial banking performance and indirectly as well as direct

through focus bank from the economy. He did not provide

empirical evidence to support his identified channel in related

development. Ahmed observed in his article that the

implementation of monetary policy has been rendered difficult as

banks are known to have used these subsidies as average for

unrecorded objectives.

Felegun (1985), suggested that modification of money

market and in particular the entire financial system towards

maximizing the positive effort derivation.

2.6 EFFECTS OF MONETARY POLICY ON DIAMOND BANK

The following are effects (impact) on Diamond Bank:

i. It help in improvement of the functioning of the bank by

restraining excess demand and inflationary price increases

from imposing real costs on society.

ii. It helps in prevention of loss, of real output and the cost that

result from the failure to maintain the economy at its potential

output level in the bank.

iii. It help in guiding the bank towards optimum rate growth.

iv. It help in restraining the bank from any tendency of chronic

balance payment disqualify.

REFERENCES

Ahmed A., effects of Devolution and banking performance

Industry.

Ajayi I. & Go, O. (1981), Monetary and banking analysis in Nigeria

Context Macmillan.

Amcher C. & Uibrich Holley H. (1986), Principles of

Microeconomics 3rd edition C. tineineti Olio, south western

Publishing company.

Miles, Fleming (1989), Introduction to Economy Analysis George

Allen and Union Ltd.

Tawiah R. Paul (1989), Basic Economic for West Africa 2nd edition

Idodomech Published Ltd Pp. 316, 325, 327.

William Z. Baumoi & Aian S. Blider (1979), Economic Principles

And Policies Harvest Brace Javane Pp. 226-291.

 CHAPTER THREE: RESEARCH METHODOLOGY

3.0 INTRODUCTION

This chapter consist of the methods adopted by the

researcher in collecting data for the purpose of the research work

which is designed to assess the impact of monetary policy on

commercial bank, which the tool of monetary policy that the

researcher placed more emphasis on the used traditional tools of

monetary policy.

The method used in the collection of data for the study are

classified into primary and secondary data.

3.1 TARGET POPULATION

The target population was randomly selected as represented

by the categories of respondents. The population was drawn from

Diamond Bank of Nigeria Plc ten (10) questionnaires consisting of

seven (7) questionnaires were issued to the bank staff and some

of its customers.

Below is the presentation of the total questionnaire put

together
 CHAPTER FIVE

5.1 INTRODUCTION

This chapter summarized the work of the researcher. It

produces a brief manner of what has been done from the general

introduction to the analysis of the data and the final

recommendation and conclusion.

5.2 SUMMARY OF FINDINGS

The central Bank as the regulator and supervision of

monetary system charged with the responsibility of formulating and

implementing monetary and financial sector. Policies requires

effective and conducts for their transmission to the real sector and

the economy at large. The banks and financial institution by their

function and operation in the system, have the responsibility of

serving as the intermediaries for the transmission of monetary

policy.

In addition, the objective of government economic policy

include such areas like high level of employment, a balance of

payment, stable price surplus and economic growth.

Monetary policy is concerned with the influence of money

upon the behavior of the economy. These influence of money

supply with the level of interest rate.

5.3 CONCLUSION

Monetary policies have the potential to make significant

contributions to the growth and development. Yet we have so far

failed to explore this potential. We had series of sound monetary

policies each being good and pragmatic on their own however,

when deployed in the face of multi-dimensional development

problems of our country, they aggregate the main instrument of

macro-economic policies it will remain imperative for us. To find

means of coordinating them in a way that will remain imperative for

us to find of coordinating them in a way that will strengthen their

effectiveness and minimize their contradiction and thus, conflicts.

Therefore, monetary policy is a means to check the supply

and demand in the economy so that inflation is controlled and the

economic stability is achieved.

5.4 RECOMMENDATION

The effectiveness of monetary policy in recent times has

been due to the lingering problem of excess liquidity in the banking

system.

The financial sector needs reforms that will develop the

financial institution, individuals to be available for development and

moving forward of the economy.

 The observed distress in economical banking sector needs

to be addressed for more positive impact.

5.5 SUGGESTION/NEED FOR FURTHER RESEARCH

The study on the performance of commercial banks and in

the near future when I find myself in a decision making position, I

will able to make policies that will be researchable enough to affect

both the banks and the public positively.