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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 STUDYMonetary
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.
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