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ABSTRACT
The study looks at the impact of deregulation of monetary policy on Nigerian commercial banks; A case study of some selected commercial banks in Oghara, Delta State. The monetary policies pursued prior to 1985 made the Nigeria economy price distortions created by a highly over-valued currency and inappropriate pricing of loan interest and other rates in the bank activities. The control measure introduced prior to deregulation of the monetary policy were unable to improve the banks positively. Instead, that period was characterized by short-supply of industrial inputs, plant closure, large retrenchment of workers, and shortage of goods and price inflation coupled with unfavorable interest rate. Data were gathered from some selected commercial banks in Oghara, Delta State Nigeria through issuing of questionnaires and from some secondary sources such as CBN statistical bulletin, Publications and other relevant materials. The major deregulation policies were deregulation of interest rates structure, introduction of second tier foreign exchange market. Since the Federal Government is contemplating deregulation as the only paramount solution to distorted economic structure. The study therefore recommends that banking industry (commercial banks) needs to reposition itself to take full advantage of the gains which might arise from such deregulation. Commercial banks should equally anticipate and sensitize themselves with the challenges of a deregulated economy.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Monetary Policy refers to the specific actions taken by the Central Bank (Monetary Authority) to regulate the value, supply and cost of money in the economy with a view to achieving predetermine macroeconomic goals. The Central Bank of Nigeria, like other central banks in developing countries, seeks to achieve price stability through the management of money supply. Money supply comprises narrow and broad money. The economy of Nigeria had a lot of structural distortions in the 1980’s. The economy monetary policies pursued prior to 1985 made the economy of Nigeria vulnerable to external shocks. Consequently the 1986 budget sought to deemphasize controls and adopted policy aimed at expanding the economy resources base. To attain this goal in 1986 budget at a time in the structural adjustment program which was launched in July 1980 with the introduction of structural adjustment program came to deregulation of the Nigerian economy. Monetary policy is the process by which the monetary authority of a country, like the central bank or currency board, controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency. Economic policy refers to the actions that governments take in the economic field. It covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labor market, national ownership, and many other areas of government interventions into the economy.Monetary Policy is one of the important tools of economic policy governments apply in their aim of achieving general economic wellbeing of the citizenry. It is geared towards controlling the quality, cost and direction of money in the economy. The economic system has over the years proved to be unstable and misdirected if left on its own. In order to avoid alterations between periods of boom and depression, the use of monetary policy becomes necessary. Monetary Policy could be aimed at stimulating or restraining the economy depending on what the authorities interpret changes in certain economic indices to be. The mechanism through which the impact of monetary policy is felt by the whole economy is the financial system. The financial system has the all-important of financial intermediation which in summary is that of channeling funds from surplus sectors to deficit sectors in the economy. It consists of a framework of laws, regulations and financial practices determining the flow of financial resources. The deregulation policy which the structural adjustment called for is the process by which government removes unnecessary control which tends to inhabit or prevent the effective and efficient program of economic and business activities. It can also be said to be reduction or elimination of laws and regulations that hinder free competition in supply of goods and services, thus allowing market forces to drive the economy. Deregulation to the economy will bring about a raised level of competitiveness, therefore higher productivity, more efficiency and lower price of overall goods and services. Deregulation policy was designed to restructure and diversify the productivity of the economy in order to reduce dependency on the oil sector and also to achieve fiscal and balance of payment viability. In addition is to lay basis for sustainable non-inflationary or minimal inflationary growth rate. The financial system comprises of a variety of institutions and institutional arrangements. At the apex of the system, are the financial authorities made up of the Ministry of Finance and the Central Bank of Nigeria. These institutions provide the regulatory framework for the functioning of the system. Other institutions in the financial system include the banking institutions such as commercial banks, merchant banks, community banks and mortgage banks. There are also non-financial institutions like insurance companies. Finance companies provident institutions, etc. There are also the special financial institutions comprising of development banks. ‘The institutional arrangement that facilitates the functions of the system comprises of the Capital and the Money Markets. Finally, is to reduce or lessen the dominance of unproductive investment in the economy, improve the sectors efficiency and intensify the growth potential of the private sector. Besides these listed aims, the banking sector which is a major instrument through which government execute their policies need to appropriately reposition itself to take full advantage of the gains that might arise from deregulation as well as face the challenges.
1.2 STATEMENT OF THE PROBLEM
As a result of the underdeveloped nature of Nigerian banking system, it is sometimes said that banks have not met the standard expected from them in the process of economic development especially with the introduction of deregulation policy. There are many problems the economy faced as a result of the introduction of deregulation and the commercial banks are not excluded. One major problem is that commercial banks lack ability to cope with the high demand for bank loans with lending rate. Also, the level of expertise in investment banking and corporate finance is very low given the newly advocated banking policy called universal banking coupled with lack of ability to effectively manage risk. The reluctant competition between commercial banks as a result of the deregulatory policy and the possibility of bank failure which prompted the Federal Government to establish the Nigeria Deposit Insurance Corporation. The purpose of this study is to examine the performance of commercial banks under a deregulated economy with a view of assessing the effect, challenges and benefits as well as achievement such deregulation will pose on commercial banks. From the above argument, the main objective is to critically identify and analyze the impact of government deregulation of the economy on commercial banks with the aim of making useful recommendations on how to improve commercial banks performance.
1.3 OBJECTIVES OF STUDY
This study lay emphasis will also be made on the current banking practices and habit as means of bathing with the challenges and the treats deregulation has brought with it. In addition is to identify the various achievements made with the inception of the policy as to examine how effective commercial banks have been since the inception of the policy. Finally, this study will try to compare the activities of commercial banks under the system of regulation and deregulation in order to know if the aim objective of the policy is being achieved or not. Recommendation that will enhance the efficiency of banks operations will equally be made.
1.4 SIGNIFICANCE OF THE STUDY
This study is significant on two counts. First, with the recent monetary policy measures, the central bank has been issuing series of policies through which she tries to stabilize price in the country. The central bank of Nigeria which came to operation since 1959, has introduced monetary measures for the achievement of the national economic objectives which range from the maintenance of a healthy balance of payment control or moderation of inflation through the acceleration of the peace of the economic development to the stabilization of the exchange rate of naira with foreign currencies. In essence, the regulations and deregulation in the banking sector/industry have favoured some while other banks could not stand the weird of constant change in the monetary and banking policies. However, deregulation has it merits and demerits. The merit include the removal of inhabiting controls on economic activities, encouragement on investment and assurance of efficient allocation of resources.
First hypothesis
Null hypothesis: there will be no significant relationship between deregulation of the monetary policy and increase in commercial banks profitability
Alternative hypothesis: there will be a significant relationship between deregulation of the monetary policy and increase in commercial banks profitability
Second hypothesis
Null hypothesis: there will be no significant relationship between deregulation of the economic monetary policy and increase in banks’ bad and doubtful debt Alternative hypothesis: there will be a significant relationship between deregulation of the monetary policy and increase in commercial banks profitability
Third hypothesis
Null hypothesis: there is no significant relationship between deregulation of the economy and increase in the number of commercial banks in the country. Alternative hypothesis: there is a significant relationship between deregulation of the economy and increase in the number of commercial banks in the country.