CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Banks can hardly survive without a positive return on capital invested.

Profitability is therefore the driven factor for activities of commercial banks.

Consequently, banks engage in a variety of products and services for the

achievement of this profit or to be profitable. The commonest and most

important of these activities is the given out of loans to borrowers seeking

financial accommodation. In doing this, it is expected that the borrower pays

back the principal and interest. This interest in all bank services forms the

bedrock of profitability in the banking sector. Banks are the intermediaries

through which the surplus and deficit units in any economy interact to exchange

financial value indirectly. When the surplus units make deposits in the banks,

they are given out to loan seeking customers or investors preparing to embark

on viable projects with an interest charge on the loan. Consequent on the vital

role of intermediation played by banks, the banking sector is highly regulated

by the government. To carry out this regulation effectively, government

employs monetary policies as the primary tool to regulate

the banking sector. Embedded in these monetary policies are the different types

of instruments that are used to regulate the operations of banks in the economy.

Being an external factor to the banks, the tools could act as a militating or

mitigating factor in boosting banks profitability. The way and manner these

1
factors are applied to banks vary from one country to the other and has traceable

relationship to the state of the particular country’s economy. In stable

economies, these tools are spared of frequent manipulations and vice versa.

Economic activities, to a large extent, depend on these tools especially in

countries where the capital market is still in its primordial stages of

development.

1.2 Statement of the problem

The deposit money banks in Nigeria are in problem to perform profitably well

under the central bank (CBN) monetary policy regulation. The reported growth

in banks’ profits has not been a sustainable and commensurate reward of

enterprise as there is the evidence of increasing rate of bank distress,

liquidation, merging, total take-over and mass retrenchment of workers due to

very poor profit performance in the banking sector of the Nigerian economy. As

a result, the problem this study is looking into is the very low, non-steady, non-

continuous and non-sustainable profits being realized in the banking sector of

Nigeria. this serious problem of poor profit performance has effected badly on

the financial sector as follows: Several banks are already distressed, some have

merged while some have been bought by bigger banks and the banking sector is

presently experiencing massive retrenchment of their workers.

This problem of poor profit performance is traceable to over-regulation by the

central bank of Nigeria. to guide against this poor profit making in the banking

sector, monetary authorities formulated policy guidelines geared toward

2
enhancing and making effective the policy of regulation to ensure optimal profit

performance of the banking sector but his has not yielded positive results.

Certain problems are encountered in the implementation of the policy of

regulation in the banking sector, these problems, include the following: ability

of the banks to comply with the various monetary policy guidelines, for

instance, a change in the required reserve ratio is to alter the magnitude of

money supply, credit expansion and hence the ability of the banks to make

profit. Similarly, the use of interest rate policy, credit ceiling and discount rate

policy are meant to alter the level of profits being make by the entire banking

sector. Furthermore, in every fiscal year the monetary authority, that is, the

Central Bank of Nigeria (CBN) formulates guidelines geared towards enhancing

and developing policy variables designed to ensure optimal

performance of the banking industry and advance the macroeconomic

objectives. In the implementation of such policy instruments certain conflicting

issues should be addressed, this includes the ability of the banks to comply with

various monetary policy guidelines and the ability of the banks to satisfy

depositors, shareholders and other stakeholders invested interest in the business.

In fact, banks are reluctant in their responsibility to comply with the rules and

regulations set by the central bank such as the open market operation, required

reserve ratio, bank rate, liquidity ratio, exchange rate, bank interest rate

selective credit control and moral suasion.

3
1.3 Objectives of the study

The general objective of this study is to examine the effect of monetary policy

on the performance of commercial banks in Nigeria (2000-2020) using Zenith

Bank. However, the specific objectives are:

i. To ascertain if Cash Reserve Rate (CRR) has significant effect on the

Profit Before Tax of Zenith Bank Plc from 2000-2020

ii. To determine if Liquidity Rate (LR) has significant effect on the Profit

Before Tax of Zenith Bank Plc from 2000-2020

iii. To examine if Interest Rate (IR) has significant effect on the Profit Before

Tax of Zenith Bank Plc from 2000-2020

iv. To ascertain if Minimum Rediscount Rate (MRR) has significant effect

on the Profit Before Tax of Zenith Bank Plc from 2000-2020

1.4 Research Questions

i. Does Cash Reserve Ratio have significant effect on Profit Before Tax of

Zenith Bank Plc?

ii. Does Liquidity Ratio have significant effect on the Profit Before Tax of

Zenith Bank Plc?

iii. Does Interest Rate have significant effect on the Profit Before Tax of

Zenith Bank Plc?

iv. Does Minimum Rediscount Rate have significant effect on the Profit

before Tax of Zenith Bank Plc?

1.5 Research Hypotheses

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Ho1: The Cash Reserve Ratio does not have significant effect on the Profit

before Tax of Zenith Bank Plc

Ho2: The Liquidity Ratio does not have significant effect on the Profit before

Tax of Zenith Bank Plc

Ho3: The Interest Rate does not have significant effect on the Profit before Tax

of Zenith Bank Plc

Ho4: The Minimum Rediscount Rate does not have significant effect on the

Profit before Tax of Zenith Bank Plc

1.6 Significance of the Study

This study is extracted to explain the effect of monetary policy on the

performance of commercial banks in Nigeria (2000-2020) using Zenith Bank,

the result and recommendation from this study will be beneficial to policy

maker on the type of policy to be introduced. The result will also be relevant to

entrepreneurs, future investors and the entire public; it will help researchers in

other fields to carry out further research on the subject matter in the future. This

research work being an appraisal of the effect of monetary policies on the

performance of Deposit Money Banks in Nigeria precisely will enable the apex

bank restructure and relax the assumed stringent measure in order to make it

possible for necessary assistance from banks. The primary motive for any

corporate business is profit optimization and the maximization of shareholders’

wealth, banks are no exception. Form this research, they will realize that proper

implementation of monetary policies can ensure higher profitability of the

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banking industry. To borrowing customers, they will deduce that some act

inherent in loan defaulting are the causes of high Interest Rates and their

remedies. This implies that if they continue borrowing funds without paying

back, the banking industry may in future become liquid which will result in high

Interest Rates 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 write on this topic as well as exposing them to monetary

policies available to Deposit Money Banks in Nigeria.

1.7 Scope of Study

This study covers various monetary policy instruments and policy options as

they affect banking operations. It is however delimited to Deposit Money Bank

institutions in Nigeria. The monetary policy tools that would be involved in this

study are Cash Reserve Ratio (CRR), Maximum Lending Rate (MLR),

Liquidity Ratio (LR) and Monetary Policy Rate (MPR).Emphasis is clearly laid

on applications and not on process of formulation of monetary policy. The study

spans for a period of fifteen years, 2000-2020.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Conceptual Review

2.1.1 Concept of Profitability

Profitability as defined by Rose (1999) refers to the net income of the

commercial bank where company’s income exceeds its expenses. Income is

earned from the activities of the commercial banks and expense is the cost of

resources which are used to earn profit. Profitability is the main objective of the

commercial banks. Deposit Money Banks cannot survive in the market for the

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long run without adequate profitability. Therefore evaluating past and current

profitability and the factors affecting it is paramount.

2.2.2 Cash Reserve Ratio (CRR)

Cash Reserve Ratio is the percentage of total deposits that DBMs are required

to keep with central bank. Fama (1980) defined CRRs as taxes on the return on

deposits both foreign and domestic on a bank balance sheet since other

resources that have similar risks and returns do not have cash required reserves.

Cash Reserve Ratio is a central bank regulation employed by most, but not all,

of the world’s central banks, to set the required reserve percentage on specific

customer deposits and each bank must keep money in vault cash with CBN. In

Nigerian context, Cash Reserve Requirement (CRR) are set at different

percentage between the private and public sector fund from 2013-2014 and was

harmonized in 2015 (Central Bank of Nigeria press release through

Communique No. 98 & 101).

This is so in order to stimulate banks to be more proactive in performing their

role of financial intermediation rather than depending much on government

fund as their main source of deposit. In most countries (as in Nigeria), the

central bank is responsible for watching over the Cash Reserve Ratio

2.2.3 Liquidity Ratio (LR)

Liquidity Ratios are a class of financial metrics used to determine a debtor’s

ability to pay off current debt obligations without raising external capital.

Liquidity ratios measure a company’s ability to pay debt obligations and its

8
margin of safety through the calculation of metrics including the current ratio,

quick ratio and operating cash flow ratio.

2.2.4 Monetary Policy Rate (MPR)

This is also known as discount rate. It is the rate at which Central Bank offer

financial assistance to financial institutions through loans or discounting bills.

The rediscount rate is the rate at which the central bank stands ready to provide

loan accommodation to commercial banks (CBN, 2013).

The Central Bank lends to financially sound Deposit Money Banks at a most

favourable rate of interest, called the Monetary Policy Rate (MRR). The MRR

sets the floor for the Interest Rate regime in the money market (the nominal

anchor rate) and thereby affects the supply of credit, the supply of savings

(which affects the supply of reserves and monetary aggregate) and the supply of

investment (which affects full employment and GDP) according to Obidike,

Ejeh & Ugwuegbe (2015).

As a lender of last resort, such lending by the central bank is usually at panel

rates. By making appropriate changes in the rate, the central bank controls the

volume of total credits indirectly. This has the purpose of influencing the

lending capacity of the commercial banks. During the periods of inflation, the

central bank may raise the rediscount rate making obtaining of funds from the

central bank more expensive. In this way, credit is made tighter. Similarly, in

depression, when it is necessary to encourage banks to create ore credits, the

central bank will lower the rediscount rate.

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2.2.5 Maximum Lending Rate (MLR)

Maximum Lending Rate is the amount of interest due per period, as a

proportion of the amount lent or borrowed (called the principal sum). The total

interest on an amount lent or borrowed depends on the principal sum, the

Interest Rate, the compounding frequency and the length of time over which it

is lent or borrowed.

It is defined as the proportion of an amount loaned which a lender charges as

interest to the borrower, normally expressed as an annual percentage. It is the

rate a bank or other lender charges to borrow its money, or the rate a bank pays

its savers for keeping money in an account. This is the cost of, or price charged

for using someone’s money which is normally expressed as a percentage of the

amount borrowed.

2.2.6 Other Monetary Policy Instruments:

The instruments of monetary policy can be categorized into two namely:

1. Direct or quantitative instruments

2. Indirect or qualitative instruments

Direct Instruments or Quantitative Instruments of Monetary Policy Tools

Though there is an avalanche of instruments available for money and credit

control, the instrument mix to be employed at any time depends on the goals to

be achieved and the effectiveness of such instrument to a large extent hinges on

the economic fortunes of the country.

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 Special Deposits: The central bank has the power to issue directories from

time to time requiring all banks to maintain with it as special deposits an

amount equal to the percentages of the institution’s deposits, liabilities or

the absolute increase in its deposit liabilities over an amount outstanding at

a certain date.

 Moral Suasion: Moral suasion simply means the employment by the

monetary authority of friendly persuasive statement, public pronouncement,

and outright appeal. The monetary authority sometimes uses the less

tangible technique to influence the lending policies of commercial banks.

Consequences to the banking system and the economy as a whole, the

Central Bank of Nigeria holds periodic meetings with the bankers

committees and on other occasion meets formally or informally with the

leaders in the banking community (CBN, 2013). With the leaders in the

banking community – such contracts are geared towards the development of

confidence between the central bank and other banks. It affords the central

bank opportunity to discuss the improvement in standards and conducts in

the banking industry.

 Selective Credit Control: According to Nnanna (2001), this instrument is

used to distinguish among the sectors of the economy into preferred and less

preferred sectors. This is usually designed to influence the direction of

credits in the economy so as to ensure that credits go to those sectors

designed “preferred”.
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 It is very useful where a country operates development plans like Nigeria.

When plans are drawn up these credit controls will be integrated in the

budget. In course of the government’s programme to revitalize agricultural

production which is the most favoured sector, credits to the favoured sector

is at a lower Interest Rate while least favoured sector pays the highest rate

of interest.

 Direct Credit Control: According to CBN (2013), the Central Bank can

direct Deposit Money Banks on the maximum percentage or amount of

loans (credit ceilings) to different economic sectors or activities, Interest

Rate caps, liquid asset rate and issue credit guarantee to preferred loans. In

this way the available savings is allocated and investment directed in

particular directions.

 Prudential Guidelines: The Central Bank may in writing require the

Deposit Money Banks to exercise particular care in their operations in order

that specified outcomes are realized (CBN, 2013). Key elements of

prudential guidelines remove some discretion from bank management and

replace it with rules in decision making.

Indirect Instruments or Qualitative Instruments of Monetary Policy

Fiduciary or paper money is issued by the Central Bank on the basis of

computation of estimated demand for cash. To conduct monetary policy, some

monetary variables which the Central Bank controls are adjusted – a monetary

aggregate, an Interest Rate or the exchange rate – in order to affect the goals
12
which it does not control. The instruments of monetary policy used by the

Central Bank depend on the level of development of the economy, especially its

banking sector. The commonly used instruments are discussed below (CBN,

2011):

 Open Market Operations: The Central Bank buys or sells (on behalf of

the Fiscal Authorities (the treasury) securities to the banking and non-

banking public (that is in the

Open market). One such is Treasury Bills. When the Central Bank sells

securities, it reduces the supply of reserves and when it buys (back)

securities-by redeeming them-it increases the supply of reserves to the

Deposit Money Banks, thus affecting the supply of money (CBN, 2013;

Ibeabuchi, 2007; Ojo, 1993; & Solomon, 2013).

 Exchange Rate: The balance of payments can be in deficit or in surplus

and each of these affect the monetary base, and hence the money supply in

one direction or the other. By selling or buying foreign exchange, the

Central Bank ensures that the exchange rate is at levels that do not affect

domestic money supply in undesired direction, through the balance of

payments and the real exchange rate. The real exchange rate when

misaligned affects the current account balance because of its impact on

external competitiveness (Akpan, 2008: Imoisi, Olatunji &Ekpenyong,

2013; Ibeabuchi, 2007; & Sanusi, 2004).

2.2.7 Monetary Policy in Nigeria

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The primary goal of monetary policy in Nigeria has been the maintenance of

domestic price and exchange rate stability since it is critical for the attainment

of sustainable economic growth and external sector viability, Sanusi, (2012)

The ability of the CBN to pursue an effective monetary policy in a globalized

and rapidly integrated financial market environment depends on several factors

which include, instituting appropriate legal framework, institutional structure

and conducive political environment which allows the Bank to operate with

reference to exercising its instrument and operational autonomy in decision-

making, the degree of coordination between monetary and fiscal policies to

ensure consistency and complementarily, the overall macroeconomic

environment, including the stage of development, depth and stability of the

financial markets as well as the efficiency of the payments and settlement

systems, the level and adequacy of information and communication facilities

and the availability of consistent, adequate, reliable, high quality and timely

information to Central Bank of Nigeria Sanusi, (2012). The central bank tries to

maintain price stability through controlling the level of money supply.

Examining the evolution of monetary policy in Nigeria in the past four decades,

Nnanna, (2010) observes that though, the monetary management in Nigeria has

been relatively more successful during the period of financial sector reform

which is characterized by the use of indirect rather than direct monetary policy

tools yet, the effectiveness of monetary policy has been undermined by the

effects of fiscal dominance, political interference and the legal environment in

14
which the Central Bank operates. Busari, (2002) states that monetary policy

stabilizes the economy better under a flexible exchange rate system than a fixed

exchange rate system and it stimulates growth better under a flexible rate

regime but is accompanied by severe depreciation, which could destabilize the

economy meaning that monetary policy would better stabilize the economy if it

is used to target inflation directly than be used to directly stimulate growth.

They advised that other policy measures and instruments are needed to

complement monetary policy in macroeconomic stabilization. In the same

stride, Batini, (2004) stresses that in the 1980s and 1990s monetary policy was

often constrained by fiscal indiscipline.

Monetary policies financed large fiscal deficit, which averaged 5.6 percent of

annual GDP and though the situation moderated in the later part of the 1990s it

was short lived as Batini described the monetary policy subsequently as too

loose which resulted to poor inflation and exchange rates record. Folawewo and

Osinubi, (2006) investigates how monetary policy objective of controlling

inflation rate and intervention in the financing of fiscal deficits affect the

variability of inflation and real exchange rate. The analysis is done using a

rational expectation framework that incorporates the fiscal role of exchange

rate. The paper reflects that the effort of themonetary authority to influence the

finance of government fiscal deficit through the determination of the inflation-

tax rate affects both the rate of inflation and the real exchange rate, thereby

causing volatility in their rates. The paper reveals that inflation affects volatility

15
of its own rate as well as the rate of real exchange. The policy implication of

the paper is that monetary policy should be set in such a way that the objective

it is to achieve is well defined Jelilov, Gylych; Kachallah Ibrahim, Fatima;

Onder, Evren, (2016).

2.2.8 Objectives of monetary policy in Nigeria

Monetary policies, as adopted in Nigeria, have four broad objectives.

■ To maintain a high level of employment (full employment): Full

employment means employment of labour, plant and capital at a tolerable

capacity to achieve the set goals of national economic policy aimed at

combating recession and economic depression.

■ To maintain stable price level: Price level stability goal is related in an

important sense to the control of inflation refers to a situation of sustained

and rapid increase in the general level of prices, however, generated

(Nnanna, 2001). According to Ibeabuchi (2007), inflation reduces real

disposable income and consequently the purchasing power of money.

■ To maintain the highest sustainable rate of economic growth: This

means both quantitative and qualitative, increase in the total quantity of

goods and services produced in the economy annually. Nnanna (2001)

opined that economic growth is said to be achieved in a country in a

situation where there is an increase in the income position of the citizens of

the country and also a corresponding increase in the amount of goods and

services which a given quantity of money can buy.

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■To maintain the highest equilibrium in the balance of payments: A

country's balance of payment may be in total equilibrium of there exists

between total payments and total receipts, that is. Kahn, (2010) observes that

monetary policy objectives are concerned with the management of multiple

monetary targets among them price stability, promotion of growth,

achieving full employment, smoothing the business cycle, preventing

financial crises, stabilizing long-term Interest Rate s and the real exchange

rate. Through the control of monetary policy targets such as the price of

money (Interest Rate -both short term and long term), the quantity of

money and reserve money amongst others; monetary authorities directly and

indirectly control the demand for money, money supply, or the availability

of money (overall liquidity), and hence affect output and private sector

investment.

2.3 Theoretical Framework

2.3.1 Classical Theory

Adam Smith's 'The Wealth of Nations' in 1776 is usually considered to mark the

beginning of classical economics. The classical school evolved through concerted

efforts and contribution of economists like Jean Baptist Say, Adam Smith, David

Richardo, Pigu and others who shared the same beliefs. The classical economists

decided upon the quantity theory of money as the determinant of the general price

level. Most were of the opinion that the quantity of money determines the aggregate

demand which in term determine the price level as posited by Amacher & Ulbrich

17
(1986). If the quantity of money is doubled, the price level will also double and the

value of money will be one half. Fisher's theory also known as equation of exchange

is stated thus;

MV=PT .............................................................. (1)

Where:

M- actual money stock or money

supply

V= the transaction velocity of

circulation of money. P= the average

price level

T= the real volume of all market transactions made during a period of time.

Fisher posited that the quantity of money (M) times the velocity (V), must

equal average price level (P) times the aggregate transaction (T). The equation

equates the demand for money (PT) to the supply of money (MV). In the

equation, T is better replaced with Q "quantity of goods involved" hence the

Fisherian equation can be written as MV = PQ (2)

Fisher further stated that the average price in the economy (P) multiplied by the

amount of transaction (T) when divided by the money stock (M) gives us a

volitional element called the average turnover of money or money velocity (V).

I.e. PT/M = V. Doubling the money stock will lead to a doubling of the price

level since T and V do not change. Velocity is seen as constant because factors

that would necessitate a faster movement in the velocity of money evolve

18
slowly. Such factors include among others, population density, mode of

payment (weekly/monthly), availability of credit sources, nearness of stores to

individuals etc. Thus it is seen that there exists a direct and proportional

relationship between money stock and price level. The theory is based on the

assumption of neutrality of money according to Ajudua, Davis, & Osmond

(2015).

2.3.2 Keynesian Theory

In 1936, John Maynard Keynes published his "General Theory of Employment,

Interest and Money" and initiated the Keynesian Revolution. However, the role

of money in an economy gotfurther elucidation from (Keynes, 1930 P. 90) and

other Cambridge economists who proposed that money has indirect effect on

other economic variables by influencing the Interest Rate which affects

investment and cash holding of economic agents. Keynes maintained that

monetary policy alone is ineffective in stimulating economic activity because it

works through indirect Interest Rate mechanism. From the Keynesian

mechanism, monetary policy works by influencing Interest Rate which

influences investment decisions of financial institutions such as banks and the

public and consequently, output and income via the multiplies process as

contained in the works of Amacher & Ulbrich (1989) and Gertler & Gilchrist

(1991) Okpara, 2010; & Solomon (2013). Keynes posits that government had

the responsibility to undertake actions to stabilize the economy and maintain

full employment and economic growth, using fiscal policies. He therefore

19
recommends a proper blend of monetary and fiscal policies as at some

occasions, monetary policy could fail to achieve its objective (Onyemaechi,

2005).

The original Keynesian view that emerged from the Great Depression was

challenged on two fronts. First, the early view that money and monetary policy

were relatively unimportant was judged incorrect. Second, the basic premise of

the Keynesian model was the inherent instability of the market system and the

right and responsibility of the government to conduct an activestabilization

policy. Some economists such as Friedman (1956), Modigliani (1963)Richard

(1979) questioned this premise and argued that efforts to stabilize the economy

through active monetary and fiscal policies were not likely to generate long-run

improvement in the real performance of the economy, but were more likely to

generate instability.

In simple terms, the monetary mechanism of Keynesians emphasizes the role of

money, but involves an indirect linkage of money with aggregate demand via

the Interest Rate as symbolically shown below:

↓OMO→↓ R→↑MS→↓r →

I→↓GNP

Where, OMO = Open Market

Operating R = Commercial Bank

Reserve

MS = Stock of Money

20
r = Interest Rate

I = Investment

GNP = Gross National Product

On a more analytical note, if the economy is initially at equilibrium and there is

open market purchase of government securities by the Central Bank of Nigeria

(CBN), this open Market Operating (OMO) will increase the commercial banks

reserve (R) and raise the bank reserves. The bank then operates to restore their

desired rate by extending new loans or by expanding bank credit in other ways.

Such new loans create new demand deposits, thus increasing the money supply

(MS). A rising money supply causes the general level of Interest Rate (r) to

fall. The falling Interest Rates affects commercial bank performance and in turn

stimulate investment given businessmen expected profit. The induced

investment expenditure causes successive rounds of final demand spending by

GNP to rise by a multiple of the initial change in investment. On the other

hand, a fall in money supply according to Jhingan (2005).causes the general

level of Interest Rate (R) to rise or increase thereby increasing the commercial

banks profitability.

2.3.3 Monetarism/Neo-Classical Theory

Owing to the criticism that bedeviled the Keynesian theory, the monetarist

theory was propounded by Milton Friedman in 1956. The role of monetary

policy which is of course influencing the volume, cost and direction of money

supply was effectively conversed by Friedman (1968: 1-17), whose position is

21
that inflation is always and everywhere a monetaryphenomenon. He recognizes

that in the short run increase in money supply can reduce unemployment but

can also create inflation and so the monetary authorities should increase money

supply with caution Onyemaechi (2005). The monetarist essentially the

quantity theorist adopted Fisher's equation of exchange to illustrate their

theory, as a theory of demand for money and not a theory of output, price and

money income, by making a functional relationship between the quantities of

real balances demanded a limited number of variables Essia (1997).

Monetarists like Friedman (1956, 1963) emphasized money supply as the key

factor affecting the wellbeing of the economy. Thus, in order to promote steady

of growth rate, the money supply should grow at a fixed rate, instead of being

regulated and altered by the monetary authority (ies). Friedman equally argued

that since money supply is substitutive not just for bonds but also for many

goods and services, changes in money supply will therefore have both direct

and indirect effects on spending and investment respectively. The monetarist

introduces an additional factor in the determination of Interest Rate, which is

price expectation; an increase in supply of money has a liquidity effect on

income effect and price effect. Also in the monetarist thinking, is that they felt

it more important of money in explaining macro-economic behaviour

monetarist important of money and therefore monetary policy was given

attention in the neoclassical school as stated in the works of Onouorah et al

(2011).

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Symbolically, the monetarist conception of money transmission mechanism can

be summarized below:

↑OMO →↑MS→ Spending→↑GNP

The monetarist argument centers on the old quantity theory of money. If

velocity of money in circulation is constant, variation in money supply will

directly affect prices and output or income (GNP), M. L. Jhingan, Monetary

Economics 6th Edition, P. 418 - 419).The monetarist postulates that change in

the money supply leads directly to a change in the real magnitude of money.

Describing this transmission mechanism, Friedman & Schwartz (1963) say an

expansive open market operating by the Central Bank, increases stock of

money, which also leads to an increase in commercial bank reserves and ability

to create credit and hence increase money supply through the multiplier effect.

In order to reduce the quantity of money in their portfolios, the bank and non-

bank organizations purchase securities with characteristics of the type sold by

the Central Bank, thus stimulating activities in the real sector. This view is

supported by Tobin (1978) who examines transmission effect in terms of assets

portfolio choice in that monetary policy triggers asset switching between

equity, bonds, commercial paper and bank deposits. He says that tight monetary

policy affects liquidity and banks’ ability to lend which therefore restricts loan

to prime borrowers and business firms to the exclusion of mortgages and

consumption spending thereby contracting effective demand and investment.

Conversely, the Keynesians posit that change in money stock facilitates

23
activities in the financial market affecting Interest Rate, investment, output and

employment Keynes (1930, p.90). Modigliani (1963) supports this view but

introduced the concept of capital rationing and said willingness of banks to lend

affects monetary policy transmission. In their analysis of use of bank and non-

bank funds in response to tight monetary policy, Oliner and Rudebush (1995)

observe that there is no significant change in the use of either but rather larger

firms crowd out small firms in such times and in like manner.

Gertler Gilchrist (1991) supports the view that small businesses experience

decline in loan facilities during tight monetary policy and they are affected

more adversely by changes in bank related aggregates like broad money supply.

Further investigation by Borio (1995) who investigated the structure of credit to

non-government borrowers in fourteen industrialised

Countries observe that it has been influenced by factors such as terms of loan as

Interest Rates, collateral requirement and willingness to lend. Researchers

found varying results on the effect of monetary policy on banks performance

using banks assets portfolio and credit creation such asAmacher & Ulbrich

(1989) Gertler& Gilchrist (1991).

2.4 Empirical literature review

Ajisafe and Folorunso (2002) examine the relative effectiveness of

monetary and fiscal policy on economic activity in Nigeria using co-

integration and error correction modeling techniques and annual series

24
for the period 1970 to 1998. The study revealed that monetary rather

than fiscal policy exerts a greater impact on economic activity in Nigeria

and concluded that emphasis on fiscal action by the government has led

to greater distortion in the Nigerian economy.

Gambacorta and Lannoti (2005) investigate the velocity and asymmetry in

response of bank Interest Rates (lending, deposit, and inter-bank) to

monetary policy changes from 1985-2002 using an Auto-regressive Vector

Correction Model (AVECM) that allows for different behaviours in both the

short-run and long run. The study shows that the speed of adjustment of

bank Interest Rate to monetary policy changes increased significantly after

the introduction of the 1993 Banking Law, Interest Rate adjustment in

response to positive and negative shocks is asymmetric in the short run, with

the idea that in the long- run the equilibrium is restored. Theyalso found that

banks adjust their loan (deposit) prices at a faster rate during period of

monetary tightening in Italy.

Heuvel (2005) argues that monetary policy affects bank lending through two

channels. They argued that by lowering bank reserves, monetary policy reduces

the extent to which banks can accept receivable deposits, if reserve

requirements are binding. The decrease in reservable liabilities will, in turn,

lead banks to reduce lending, if they cannot easily switch to alternative forms of

finance or liquidate assets other than loans.

25
Folawewo and Osinubi (2006) examine the efficacy of monetary policy in

controlling inflation rate and exchange instability. The analysis performed was

based on a rational expectation framework that incorporates the fiscal role of

exchange rate. Using quarterly data spanning over 1980:1 to 2000:4 and

applying times series test on the data used, the study showed that the effects of

monetary policy at influencing the finance of government fiscal deficit through

the determination of the inflation-tax rate affects both the rate of inflation and

exchange rate, thereby causing volatility in their rates. The study revealed that

inflation affects volatility in its own rate, as well as the rate of real exchange.

Punita and Somaiya (2006) investigate the impact of monetary policy on the

profitability of banks in India between 1995 and 2000. The monetary variables

are bank rate, lending rates, Cash Reserve Ratio and statutory rate, and each

regressed on banks profitability independently. Lending rate was found to exact

positive and significant influence on banks profitability, which indicates a fall

in lending rates will reduce the profitability of the banks. Also bank Cash

Reserve Ratio and statutory rate were found to have significantly affected

profitability of banks negatively. Their findings were the same when lending

rate, bank Cash Reserve Ratio, andstatutory rate were pooled to explain the

relationship between bank profitability and monetary policy instrument in the

private sector.

Amidu and Wolfe (2008) examine the constrained implication of monetary

policy on bank lending in Ghana between 1998 and 2004. Their study revealed

26
that Ghanaian banks" lending behavior is affected significantly by the country's

economic support and change in money supply. Their findings also support the

finding of previous studies that the Central Bank prime rate and inflation rate

negatively affect bank lending. Prime rate was found statistically significant

while inflation was insignificant. Based on the firm level characteristics, their

study revealed that bank size and liquidity significantly influence bank's ability

to extend credit when demanded.

Okoye and Udeh (2009) examine the effect of monetary policy on corporate

profitability in the banking sector with a reflection on the Nigerian economy.

The study employed regression analysis to carry out the investigations. The

data for the study were secondary data. The study developed four models which

are expected to serve the purpose of forecasting the future profit of the banks

examined. The result of the findings indicated that monetary policy has

constrained corporate profitability of banks in Nigeria. Owing to this, it

recommended, among others, that the monetary authorities should adopt strict

adherence to deregulation.

Abdurrahman (2010) empirically examines the role of monetary policy on

economic activity in Sudan for the period which spanned between 1990 and

2004 found that monetary policy hadlittle impact on economic activity during

the period under consideration.

The study of Chimobi and Uche (2010) focuses on the relationship between

Money, Inflation and Output in Nigeria. The study adopted co-integration and
27
granger-causality test analysis. The co- integrating result of the study showed

that the variables used in the model exhibited no long run relationship among

each other. Nevertheless money supply was seen to granger cause bothoutput

and inflation. The result of the study suggested that monetary stability can

contribute towards price stability in the Nigerian economy since the variation in

price level is mainly caused by money supply and concluded that inflation in

Nigeria is to an extent a monetary phenomenon.

The Error Correction Mechanism and Co integration technique was employed

by Adefeso and Mobolaji (2010) estimate the relative effectiveness of fiscal

and monetary policy on economic growth in Nigeria using annual data from

1970-2007. The empirical result showed that the effect of monetary policy is

stronger than fiscal policy and the exclusion of the degree of openness did not

weak this conclusion.

Iganiga (2010) assesses the effects of these reforms on the effectiveness and

efficiency of the Nigerian financial institutions with emphasis on the banking

sub-sector. The results show that the performance of the financial sector has

been greatly influenced over time by these reforms that began in 1986. The

adoption of market determined cash reserve requirement caused cash intensity

and domestic savings to increase by 5.54 and 5.00 percent respectively. The

gradual increase in the capital base of these firms has rekindled the public

confidence in the sector by increasing savings by 3.6, percent. Also, as

government reduce her ownership of financial institutions, most financial

28
development indicators perform better including; financial deepening.

However, Interest Rate deregulation in Nigeria has been accompanied with

decline banks credits due to negative (or very high) lending rate with its

attendant crowding out effect. The policy implication therefore, is that,

monetary authority should direct their efforts towards achieving a positive

Interest Rate regime, increase the scope of financial reforms and these reforms

should be seen as a process rather than event to consolidate the emerging

confidence in these institutions.

Amassoma, Wosa and Olaiya (2011) appraise monetary policy development in

Nigeria and also examined the effect of monetary policy on macroeconomic

variables in Nigeria for the period 1986 to 2009. Using the simplified Ordinary

Least Squared technique conducted with the unit root and co-integration tests,

they found that monetary policy have witnessed the implementation of various

policy initiatives and has therefore experienced sustained improvement over the

years. They also showed that monetary policy had a significant effect on

exchange rate and money supply while monetary policy was observed to have

an insignificant influence on price instability. They concluded that for monetary

policy to achieve its other macroeconomic objective such as economy growth;

there was the need to reduce the excessive expenditure of the government and

align fiscal policy along with monetary policy measure.

29
Mangani (2011) assesses the effects of monetary policy in Malawi by tracing

the channels of its transmission mechanism, while recognizing several factors

that characterize the economy such as market imperfections, fiscal dominance

and vulnerability to external shocks. Using vector autoregressive modeling,

Granger-causality, and innovation accounting analyses to describe the dynamic

interrelationship among monetary policy, financial variables and prices The

study established the lack of unequivocal evidence in support of a conventional

channel of the monetary policy transmission mechanism, and found that the

exchange rate was the most important variable in predicting prices.

Okpara (2011) examines the effectiveness of banking reforms on the

performance of the sector and found that of all reforms adopted so far since

1959, only the financial liberalization (of 1987- 1993) impacted much on most

of the banking sector variables and the financial deepening. The reform era

1999-2003 which saw the return to liberalization of financial sector

accompanied with the adoption of distress resolution program and universal

banking impacted significantly on fewvariables like Cash Reserve Ratio and

loan to deposit rate. The rest of the reforms made little or no significant impacts

on the performance variables but could however impact significantly on

financial deepening. Particularly, the recapitalization exercise of 2004 besides

exercising a significant decreasing effect on return on equity did not impact

significantly on any other banks performance indicator. The reform as well

exerted insignificant influence on the financial deepening.

30
Ajayi and Atanda (2012) examine the effect of monetary policy instruments on

banks performance with the view to determine the existence of long-run

relation between 1978 and 2008. Using the Engle-granger two step co

integration approach their empirical estimates indicated that bank rate, inflation

rate and exchange rate are total credit enhancing, while Liquidity Ratio and

cash reserves rate exert negative effect on banks total credit. Although, it is

only Cash Reserve Ratio and exchange rate found to be significant at 5%

critical value. However, the co-integration test indicated that the null hypothesis

of no co integration was accepted. They concluded that monetary policy

instruments are not effective to stimulate credit in the long-run, while banks

total credit is more responsive to Cash Reserve Ratio and thus proffered that the

monetary authority should moderate the minimum policy rate as a tool for

regulating commercial banksoperations and facilitating investment in the

economy.

Akanbi and Ajagbe (2012) investigate analysis of monetary policy on

commercial banks in Nigeria. The employed data run through 1992 to 1999 and

this was collected through various issues of central bank of Nigeria statistical

bulletin and analysed with the use of regression model. The results showed net

profit. Liquidity Ratio, cash rate and Interest Rate on savings which confirms

to the prior expectation. This could be further explained with the regression

estimate whereby an increase in Interest Rate will leads to a decrease in the

lending rate while

31
Liquidity Ratio and cash rate were statistically significant to the profit of the

selected banks. Ogbulu and Torbira (2012) investigate the empirical

relationship between measures of monetary policy and the bank asset (BKA)

channel of the monetary transmission mechanism as well as the direction of

causality between them. Using data for the period 1970-2010 and employing co

integration, error correction mechanism and variance decomposition

techniques, the study found a positive and significant long run relationship

between BKA, money supply (MNS), Cash Reserve Ratio (CRR) and

Minimum Rediscount Rate (MRR) as well as unit-directional Granger causality

from BKA and CRR to MNS respectively. The results of the variance

decomposition of BKA to shock emanating from CRR, MRR and MNS show

that own shocks remain the dominants source of total variations in the forecast

error of variables. The authors recommend that monetary policies should be

properly fashioned to accomplish their target objectives in the economy.

Okwo, Mbajiaku and Ugwunta (2012) examine the effect of bank credit to the

private sector on economic growth in Nigeria using data on Gross Domestic

Product (GDP) and bank credit to private sector (BCPS). Inflation and Interest

Rates were included in the study as control variables. All data were obtained

from Central Bank of Nigeria (CBN) statistical bulletin and span across 1981 to

2010. Data stationary were ensured using the Augmented Dickey Fuller (ADF)

statistic, while the OLS were applied to ascertain the impact of bank credit to

the private sector on economic growth. Results of the analysis showed that
32
bank credit to private sectors has a statistical strong positive relationship with

GDP and that as expected, bank credit to the private sector has statistically

significant effect on economic growth. The paper recommends that the CBN

should lower its Monetary Policy Rate to a moderate level that will enable

banks fix low Interest Rates on their loan able funds.

Olokoyo (2012) analyzes the areas that have been deregulated in the banking

sector and how it has affected bank performance. To realize these objectives,

the study analyzed secondary data collected from CBN statistical bulletin by

employing the Ordinary Least Square (OLS) technique. This study found out

that the deregulation of the banking sector has positive and significant effect on

bank performance. It recommended that bank management should embark on

effective intermediation drive that will bring all the small savers to the purview

of the banks, banks should improve their total asset turnover.

CHAPTER THREE

METHODOLOGY

3.1 Preamble

33
This chapter deals with how the research was conducted in order to achieve the

stated objectives and it presents the research design that was used to carry out

the research. Also, the type of data, sources of data, methods of data analysis

and data collection.

3.2 Research Design

The researcher adopted expofacto research design because of time series data

used in the analysis. This, therefore, ensured a detailed quantitative and

qualitative data for analysis as well as a valid solution.

3.3Types and Sources of Data

The study made use of secondary sources in order to meet the information

requirement, as well as for accuracy and precision of data.

The data used in this study were collected from Central Bank of Nigeria

Statistical Bulletin, 2021. The data covered the period 2000-2020.The period

chosen for the study encompasses the phases of some reforms in Nigeria.

3.4 ModelSpecification

In order to assess the effect to examine the effect of monetary policy on

commercial banks’ credit in Nigeria (2000-2021), Liquidity Ratio (LR),

Treasury Bill Rate (TBR), Monetary Policy Rate (MPR) and Cash Reserve

Ratio (CRR) were used in the model as explanatory variables while Total

Commercial Bank Credit (TBC) represents the dependent variable.

The functional form of the model for estimation is stated thus:

TBCt = f (LRt, TBRt, MPRt, CRRt)

34
In order to capture the effect of the random term ‘ε t’ in a parametric form, the

equation is stated as follows:

TBCt = β0+β1LRt+β2TBRt+β3MPRt+β4CRRt+ εt 3.1

To enhance estimated model using the ordinary least squares, TBC in model 3.1

is transformed into log-linear as follows:

LTBCt = β0+β1LRt+β2TBRt+β3MPRt+β4CRRt+ εt 3.2

Where:

LTBCt = Natural logarithm of Commercial Banks’ Credit (Dependent Variable)

LRt= Liquidity Ratio

TBRt = Treasury Bill Rate

MPRt= Monetary Policy Rate

CRRt= Cash Reserve Ratio

β0 is the intercept and εt is the disturbance term defined by Koutsoyiannis (2003)

as a random (stochastic) variable that has well defined probabilistic properties.

β1, β2,β3 and β4 are coefficient of explanatory variables, t is time period under

investigation

Other things being equal, the theoretical a priori expectation is: β1 < 0, β2 < 0, β3

<0

and β4 <0.

3.5 Method of Data Analysis

In attempt to answer the research questions of the study, the consequent

hypotheses developed were analysed using multiple Regression technique or

35
Method. Also, 5% (0.05) level of significance or 95% confidence level was

chosen for the purpose of this study. In addition, the SPSS Software 20.0 was

used in estimating the models in this study. Regression Analysis Method is used

when two or more variables are thought to be systematically connected by a

linear relationship. The variables being predicted are referred to as dependent

variable. The value is dependent on the values of other variables called

independent or explanatory variables. The model will help to examine the

relationship between the explanatory variables (LR, TBR, MPR and CRR) and

dependent variable (TBC)

3.6 Statistical Tests

3.6.1 Coefficient of Determination (R2)

The R2 is used to determine the explanatory power of the model i.e.,the

goodness of fit of the regression. Put differently, it measures the proportion of

variations in the dependent variable that is explained by the independent

variables. Due to the number of explanatory variables used, the tendency for the

value of R2 to rise is inherent. Therefore, to correct this defect, R 2 is adjusted by

taking into account the degree of freedom which decreases as new variables are

introduced in the function. The adjusted coefficient of determination is

computed thus:

R2 = 1 – n – 1(1 – R2)
n-k

36
As already stated, this measures the total variations in the regress and explained

by the regressors.

3.6.2 The Student t-test

This test is used to test the individual significant value of the variables used in

the model. The student t-test is carried out to determine if the independent

variable contribute to the significance of the linear relationship established.

Decision Rule: If tcal<ttab at α/2 level of significance and n – k – 1 degree of

freedom; accept H0 and do not accept HA. If tcal>ttab at α/2 level of significance

and n – k – 1 degree of freedom; reject H 0 and conclude that the variable is

significant.

Alternatively: If the significant level (prob.) is less than 0.05, reject H 0.

Otherwise, do not reject.

3.6.3 The F test

This test measures the overall level of significance of the variables used in the

model. It shows the overall soundness of the model and its parameter estimates.

If the statistical f-value exceeds the critical value, we reject the null hypothesis

that the true slope coefficients are simultaneously equal to zero. Alternatively, if

the significant level (prob.) as shown in the regression result is less than 0.05,

reject H0. Otherwise, do not reject.

3.6.4 Autocorrelation Test

This test is used to verify the randomness of the error term between members of

the same series of observations. Put differently, it is used to test for serial

37
correlation of the errors corresponding to different observations. The Durbin-

Watson d test will be employed to conduct this test. The Durbin-Watson

statistic is computed as:

t=n
∑t=2 (μt – μt-1 )2
D= ∑t=n 2
t=1 μ t

If the D value is about 2, there is no serial correlation (of the first order) either

positive or negative. But the closer d is to zero (0) the greater the evidence of

positive correlation and the closer d is to 4 the greater the evidence of negative

serial correlation.

38
 CHAPTER FOUR

RESULTS AND DISCUSSION

4.1 Preamble

This chapter deals with the analysis of data collected from various sources and

interpretation of results of the analysis.

4.2 Results

This part of the section contains the data collected from the CBN Statistical

Bulletin, 2021.

The table 4.1 below contains:

a. Data covering the period 2000 – 2020.

b. TBC (Dependent Variable).

c. LR, TBR, MPR and CRR (Independent Variables)

Where:

TBC = Total Commercial Banks’ Credit

LR= Liquidity Ratio

TBR = Treasury Bill Rate

MPR= Monetary Policy Rate

CRR= Cash Reserve Ratio

39
4.3: Data Presentation

Table 4.1: Data on Monetary Policy Variables and Total

Commercial Banks’ Credit (2000-2020)
YEAR TBC (₦’Billion) LTBC LR (%) TBR (%) MPR (%) CRR (%)
2000 508.30 2.71 64.1 12.00 14.0 10.8
2001 796.16 2.90 52.9 12.95 20.5 10.8
2002 954.63 2.98 52.5 18.88 16.5 10.6
2003 1,210.03 3.08 50.9 15.02 15.0 10.0
2004 1,519.24 3.18 50.5 14.21 15.0 8.6
2005 1,976.71 3.30 50.2 7.00 13.0 9.7
2006 2,524.30 3.40 55.7 8.80 10.0 4.2
2007 4,813.49 3.68 48.8 6.91 9.5 3.3
2008 7,799.40 3.89 44.3 9.55 9.8 3.0
2009 8,912.14 3.95 30.7 6.13 6.0 1.3
2010 7,706.43 3.89 30.4 12.25 6.3 1.0
2011 7,312.73 3.86 42 20.00 12.0 8.0
2012 8,150.03 3.91 49.7 15.43 12.0 12.0
2013 10,005.59 4.00 63.2 17.50 12.0 12.0
2014 12,889.42 4.11 38.3 10.80 13.0 20.0
2015 13,086.20 4.12 42.3 9.11 11.0 20.0
2016 16,117.20 4.21 46 13.97 14.0 22.5
2017 15,740.59 4.20 49.1 13.01 14.0 22.5
2018 15,417.47 4.19 61.0 10.08 14.0 22.5
2019 15,946.17 4.20 75.8 9.63 13.5 22.5
2020 15,701.41 4.19 61.9 10.91 13.8 23.0
Source:CBN Statistical Bulletin, 2021

4.4 Analysis of Data and Interpretation of Results

In this section, available data on Total Commercial Banks’ Credit, Liquidity

Ratio (LR), Treasury Bill Rate (TBR), Monetary Policy Rate (MPR) and Cash

Reserve Ratio (CRR) were collected and used for the purpose of this analysis.

Multiple regression models were formed to capture the assumed relationship

between these variables and mathematical relationships between the variables

were established. This shows the analysis of variables used in the equation and

their corresponding coefficients as estimated by the SPSS software.

40
4.4.1 Economic Test Results

Table 4.2 The Influence of Monetary Policy Variables on Total Commercial Banks’
Credit (2000-2021)
Coefficientsa

Model Unstandardized Coefficients Standardized t Sig.

Coefficients

B Std. Error Beta

(Constant) -25880.535 5259.061 -4.921 .000

LTBC 8511.293 1079.750 .724 7.883 .000

LR 6.405 27.542 .012 .233 .819

1
TBR -33.133 73.744 -.022 -.449 .660

MPR -103.637 177.296 -.058 -.585 .568

CRR 303.112 75.134 .398 4.034 .001

a. Dependent Variable: TBCBillion

Substituted Coefficients:

LTBC = 8511.293+6.405*LR-33.133*TBR-103.637*MPR+303.112CRR 4.1

The result obtained from the regression of the model is presented in table 4.2.

From the above result, the relationship of the model is:

LTBC = 8511.293+6.405*LR-33.133*TBR-103.637*MPR+303.112CRR
4.1
As the result shows thatLiquidity Ratio (LR)and Cash Reserve Ratio (CRR) had

positive relationship with the dependent variable, Commercial Banks’ Credit.

The coefficients of Liquidity Ratio (LR)and Cash Reserve Ratio (CRR) which

are6.405 and 303.112 respectively indicate that Commercial Banks’ Credit will

increase by 6.405 and 303.112units if Liquidity Ratio (LR)and Cash Reserve

Ratio (CRR) increase by 1 unit respectively, ceteris paribus. However,Treasury

Bill Rate (TBR) and Monetary Policy Rate (MPR) had an inverse relationship

with the dependent variable Commercial Banks’ Credit. The coefficients of -

33.133 and -103.637 indicates that Commercial Banks’ Credit will increase by
41
33.133 and -103.637units if Treasury Bill Rateand Monetary Policy Rate is

reduced by 1 unit, ceteris paribus.The coefficient of this variable, Monetary

Policy Rate (MPR) with its negative sign and Treasury Bill Rate (TBR) with its

negative sign was correctly signed in support of the a priori expectation while

the coefficients of Liquidity Ratio (LR)and Cash Reserve Ratio (CRR) with

their positive signs were wrongly signed in contrary to the a priori expectation.

4.4.2Coefficient of Determination (R2)

Table 4.3: Goodness of Fit

Model Summary

Model R R Square Adjusted R Std. Error of the

Square Estimate
a
1 .987 .974 .965 1094.82145

a. Predictors: (Constant), CRR, TBR, LR, LTBC, MPR

Considering the result in table 4.3 above, the R value of 0.987 shows that the

level of correlation is high and the R 2 value of 0.974 indicates that the power of

our model in explaining variations in relation to dependent variable is

moderately strong. In the same vein, the R2 value of 0.974 implies that the

variables included in the model explained about 97.4% of the changes in the

dependent variable, Commercial Banks’ Credit while 2.6% is explained by

other factors not included in the model. However, the adjusted coefficient of

determination (Adjusted R2), 0.965indicates that the exogenous variables in the

model explained about 96.5% of the total variation or changes inCommercial

Banks’ Creditwhile the remaining 3.5% is accounted for by other factors

unexplained by the model after talking cognizance of the degrees of freedom.

42
4.4.3 Result of joint Significance (ANOVA)

Table 4.4: Result of joint Significance (ANOVA)

ANOVAa

Model Sum of Squares df Mean Square F Sig.

Regression 662672764.277 5 132534552.855 110.571 .000b

1 Residual 17979510.012 15 1198634.001

Total 680652274.289 20

a. Dependent Variable: TBCBillion

b. Predictors: (Constant), CRR, TBR, LR, LTBC, MPR
This test is used to determine the overall significance of the model. It follows

the f-distribution with degree of freedoms k (v1) and n-k-1 (v2).

Where k = Number of independent variables, and n = Number of Observations.

Hypothesis to be tested is

H0: β1 = 0 (the model is statistically insignificant)

HA: β1 ≠ 0 (the model is statistically significant)

At α = 5%

Decision Rule:

Reject H0 if Fcal> F0.05 (v1, v2), otherwise do not reject.

The overall model is measured by the F-statistic test. Considering the result of

the in table 4.4, the F-Statistic values of 110.571at ρ-values of 0.000 indicates

that the model is statistically significant because the ρ-values is less than the 5%

level of significance. Hence, H0 is rejected, and it can be concluded that the

overall model of the included explanatory variables is statistically significant

and therefore can be used in explaining variations in Commercial Banks’ Credit.

4.4.4The student t-test

43
Hypothesis to be tested are:

H0: the parameters estimated are statistically insignificant.

HA: the parameters estimated are statistically significant.

Decision Rule: Reject H0 if /tcal/ > /t(tab)/ at 5% level of significance. Otherwise,

do not reject. Alternatively, If the significant level (prob.) as shown in the

regression result is less than 0.05, reject H0. Otherwise, do not reject.

Hypotheses Testing

The hypotheses tested here include the following:

Ho1: Liquidity Ratio does not have significant effect on Commercial Banks’

Credit in Nigeria

Ho2: There is no significant relationship between Treasury Bill Rate and

Commercial Banks’ Credit in Nigeria

Ho3: Monetary Policy Rate does not significantly impact on Commercial Banks’

Credit in Nigeria.

Ho4: Cash Reserve Ratio does not have significant effect on Commercial Banks’

Credit in Nigeria

Variable t-cal. Prob. Comments

LR 0.233 0.819 Insignificant
TBR -0.449 0.660 Insignificant
MPR -0.585 0.568 Insignificant
CRR 4.034 0.001 Significant

44
Table 4.5: T-test Result for the Model

Source: Extract from table 4.2

Test of Hypothesis One
Liquidity Ratio does not have significant effect on Commercial Banks’ Credit in

Nigeria t-value = 0.233<2.0 (Rule of thumb); prob. value= 0.819>0.05.

From the results in table 4.5 above, t-value (0.233) is less than 2.0 (rule of

thumb) and prob. value (0.819) is greater than 0.05 level of significance, we

accept the null hypothesis and conclude that Liquidity Ratio does not have

significant effect on Commercial Banks’ Credit in Nigeria.

Test of Hypothesis Two

There is no significant relationship between Treasury Bill Rate and Commercial

Banks’ Credit in Nigeria

t-value = -0.449<2.0 (Rule of thumb); prob. value= 0.660>0.05.

From the results in table 4.4 above, t-value (-0.449) is less than 2.0 (rule of

thumb) and prob. value (0.660) is greater than 0.05 level of significance, we

accept the null hypothesis and conclude that there is no significant relationship

between Treasury Bill Rate and Commercial Banks’ Credit in Nigeria.

Test of Hypothesis Three

Monetary Policy Rate does not significantly impact on Commercial Banks’

Credit in Nigeria.

45
t-value in absolute term=-0.585>2.0 (Rule of thumb); prob. value= 0.568>0.05.

From the results in table 4.5 above, t-value (-0.585) in absolute value is greater

than 2.0 (rule of thumb) and prob. value (0.568) is less than 0.05 level of

significance, we accept the null hypothesis and conclude that Monetary Policy

Rate does not significantly impact on Commercial Banks’ Credit in Nigeria.

Test of Hypothesis Four

Cash Reserve Ratio does not have significant effect on Commercial Banks’

Credit in Nigeria

t-value =4.034>2.0 (Rule of thumb); prob. value= 0.001<0.05.

From the results in table 4.5 above, t-value (4.034) is greater than 2.0 (rule of

thumb) and prob. value (0.001) is less than 0.05 level of significance, we reject

the null hypothesis and conclude that Cash Reserve Ratio has a significant

effect on Commercial Banks’ Credit in Nigeria.

4.5 Discussion of Results

This study assessed the effect to examine the effect of monetary policy on

commercial banks’ credit in Nigeria (2000-2021), Liquidity Ratio (LR),

Treasury Bill Rate (TBR), Monetary Policy Rate (MPR) and Cash Reserve

Ratio (CRR) were used in the model as explanatory variables while Total

Commercial Bank Credit (TBC) represents the dependent variable.

The result of my analysis shows thatLiquidity Ratio (LR)and Cash Reserve

Ratio (CRR) had positive relationship with the dependent variable, Commercial

Banks’ Credit. The coefficients of Liquidity Ratio (LR)and Cash Reserve Ratio

46
(CRR) which are6.405 and 303.112 respectively indicate that Commercial

Banks’ Credit will increase by 6.405 and 303.112 units if Liquidity Ratio

(LR)and Cash Reserve Ratio (CRR) increase by 1 unit respectively, ceteris

paribus. However,Treasury Bill Rate (TBR) and Monetary Policy Rate (MPR)

had an inverse relationship with the dependent variable Commercial Banks’

Credit. The coefficients of -33.133 and -103.637 indicates that Commercial

Banks’ Credit will increase by 33.133 and -103.637 units if Treasury Bill Rate

and Monetary Policy Rate is reduced by 1 unit, ceteris paribus.The coefficient

of this variable, Monetary Policy Rate (MPR) with its negative sign and

Treasury Bill Rate (TBR) with its negative sign was correctly signed in support

of the a priori expectation while the coefficients of Liquidity Ratio (LR)and

Cash Reserve Ratio (CRR) with their positive signs were wrongly signed in

contrary to the a priori expectation.

The R value of 0.987 shows that the level of correlation is high and the R 2 value

of 0.974 indicates that the power of our model in explaining variations in

relation to dependent variable is moderately strong. In the same vein, the R2

value of 0.974 implies that the variables included in the model explained about

97.4% of the changes in the dependent variable, Commercial Banks’ Credit

while 2.6% is explained by other factors not included in the model. However,

the adjusted coefficient of determination (Adjusted R 2), 0.965indicates that the

exogenous variables in the model explained about 96.5% of the total variation

or changes inCommercial Banks’ Creditwhile the remaining 3.5% is accounted

47
for by other factors unexplained by the model after talking cognizance of the

degrees of freedom.

However, the f-statistic value revealed that the overall model of the included

explanatory variables is statistically significant in explaining variations in

Commercial Banks’ Credit in Nigeria.

In addition, only one explanatory variable Cash Reserve Ratio (CRR)

significantly impacted on commercial Banks’ Credit in Nigeria. Whilethe other

three explanatory variablesLiquidity Ratio (LR), Treasury Bill Rate (TBR) and

Monetary Policy Rate (MPR) was insignificant at level of significance during

the period (2000-2020).

CHAPTER FIVE

CONCLUSION AND RECOMMENDATION

5.1 Concluding Remarks

48
This paper investigated the possible effects of monetary policy on Commercial

Banks lending in Nigeria. The analysis was done using the Bank Lending

Channel Mechanism model, Loan Pricing Theory and Multiple Lending theory

as the theoretical framework that incorporates the role of monetary policy. The

paper has shown, using the error correction mechanism of the ordinary least

squares regression technique, that the efforts of monetary policy at influencing

the volume of Commercial Banks loan and Advances in Nigeria through

exchange rate and money supply do not influenced volume of Commercial

Banks loan and advances. The result is in consistent with the findings of

Ogunyomi (2011) which conclude that Monetary Policy are ineffective for

increasing the volume of Commercial Banks loan and Advances in Nigeria and

executed in such a way that the objective it is to achieve is clearly and

transparently defined in response to the dynamics of the domestic economic

developments. Hence, we suggest that monetary authority should make efforts

to develop indirect monetary instruments and exercise appropriate control over

the monetary sector. The use of indirect monetary policy instruments influences

the supply of bank reserves and by implication money supply in the economy

which in turn directly generate price change in financial asset.

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