EFFECT OF OPEN MARKET OPERATIONS AS TOOL OF MONETARY POLICY OF THE CENTRAL BANK OF NIGERIA IN CONTROLLING THE ECONOMY (A case study of the central bank of Nigeria with a special reference to the period of 2005 – 2010)
TABLE OF CONTENTS
TITLE PAGE i
TABLE OF CONTENTS v
1.1 OBJECTIVES OF THE STUDY 4 1.2 SIGNIFICANT OF THE STUDY 4
1.3 RESEACH METHODOLOGY 6
1.4 RESEACH QUESTION 8
1.5 STATEMENT OF THE PROBLEM 6
1.6 SCOPE OF THE STUDY 8
1.7 DEFINITION OF TERMS 8
1.8 ORGANIZATION OF THE STUDY 11
2.0 LITERATURE REVIEW 13
3.0 RESEARCH METHODOLOGY 21
3.1 SOURCES OF DATA 21
3.2 METHOD OF DATA COLLECTION 23
3.3 ANALYSIS OF DATA COLLECTION 23
3.4 DATA PRESENTATION AND ANALYSIS 24
3.5 FINDINGS OF THE STUDY 33
4.0 THE HISTORY OF MONETARY POLICY 35
4.1 OBJECTIVES OF THE STUDY 40
4.2 INSTRUMENT USED IN MONETARY POLICY 41
5.0 SUMMARY, CONCLUSION, RECOMMENDATIONS
5.1 SUMMARY 47
5.2 CONCLUTION 49
5.3 RECOMMENDATION 51
In the past year, the Nigeria economy has witness serious micro economy problem, characterized by show in the economic activities, how capacity utilization growing unemployment level debt burden, accelerated inflation intensify exchange rate separation as well as higher perfect receiving of interest rate persistently high and government deficit financing has been identified as the major factors in the observed micro economy problems.
When we talk of micro economy policies, this deals with monetary and physical policies, but this concerned mainly on monetary policies.
Therefore, monetary policies comprises of those policies desired to influence the behavious of micro economy preferably the basic aim of the monetary policy are not the monetary aggregate themselves, but the aggregate in the real sector of the economy such as level of output, stabilization and the economy development.
The policies are designed in an items to charge the trend of some monetary variable in particular direction so as to infuse the desire behavioral change in the monetary policies the bank role is to conduct appropriate monetary policies that is consistence with the main economy objective of achieving real growth in gross domestic product, low inflation rate and satiable balance of payment position. This irrespective of whether the direct of indirect approach is put in place to control money and crudity.
In this regard, the CBN clatter the amount of monetary supply that is consistent with the country micro economy objective and manipulated the monetary instrument at his disposal in order to achieve the state objectives.
Monetary policy is use to influence the macro economic objective because there is a believe that this occur in relationship between the trace variable at the monetary variables.
From the above explanation monetary policy could therefore be define as a delicate action taken by monetary authorities to change the domestic stock of money supply while fiscal policy variable teamain constant.
Monetary policy influences the level of aggregate income and spending in the economy by influence money supply and the cost of borrowing money from the bank. It could also be defined as a policy employing the central bank. It could also be defined as an instrument for achieving the objective of a general economic policy or as a tool use by the monetary authority in other to achieve state economic objectives.
1.1 AIMS AND OBJECTIVES OF THE STUDY
The main objective of the study is to identify the source of monetary policy and its impact on Nigeria financial institution.
1. It is to examine different instrument of monetary policy and how the central bank uses the instrument in control the financial institution in Nigeria.
2. We can Endeavour to discuss the tacit and document of the policy in the Nigeria financial institution and the economic as a whole.
3. To appraise the performance money policy in Nigeria.
4. We end up the work by making adequate conclusion and recommendation on our findings on better ways by which this policy can be properly implemented.
1.2 SIGNIFICANT OF THE STUDY
Presently, the business environment economy as well as banking industry as experience massive benefits from the introduction of monetary policy at an appropriate level to ensure sustainable economy growth and maintain internal and external stability.
The following people will be benefited from the significant of monetary policy in an economy.
TO THE GOVERNMENT: it enables government to control monetary supply because it rate of growth has an effect on inflation.
i. It helps government for dictating course of economy.
ii. Its an action which aimed at achieving a certain set of economy objective also an attempt to control money
TO THE PUBLIC: it brings sustainable economy growth and maintains both internal and external stability growth.
i. It gives aggregate supply of money in calculation and census interest rate.
ii. Discouragement inflation with an increase in the along the bank policy guide line.
iii. It control the supply of money in circulation whereby too much money used to purchase few goods
TO THE INVESTORS: it an encouragement to the investors as the supply of money is been control core with increase in the volume of purchasing power.
1.3 RESEACH METHODOLOGY
This research was carried out mainly on Central Bank of Nigeria plc. the study were conducted basically through personal interview to acquire some needed information from the staff and management of the bank(CBN).the research student academic, personal experience central bank annual resorts and statement of account, various issue was also put to use from the research work. All these will enable the bank and researchers to carry on this write up, if the need arises.
1.4 RESEACH QUESTION
Q.1.Does your bank grants loan and advances to their customers?
Q.2.What is the type of loan given out mostly?
Q.3.Who is responsible for giving out of loan?
Q.4.Do you think that granting of loan and advances to customers have any positive effect on the economy?
Q.5.Do you think increasing the rate of granting credit facilities help in improving the economy?
Q.6.Do your bank have credit control and management?
Q.7.How efficient is the credit management and control department?
1.5 STATEMENT OF THE PROBLEM
Despite the impact which monetary policy has played in the Nigeria financial institution, a lot of problems still control the monetary policy and their client and this study therefore carried out to investigate such problem like:
1. Expansion of more commercial bank and liquidation of most financial institution in Nigeria.
2. Monetary supply is not controlled in line with the demand in the real sector which heads to a situation of disequilibrium.
3. This is adverse effect on recent banking regulation of the liquidity and profitability objective of banking too low of money supply which leads to hinder of investment.
4. There is a large non-monetized sector which hinders the success of monetary policy in such countries – people mostly live in rural areas where barter is practiced.
5. Monetary policy is also not successful in such countries because bank money comprises a small proportion of the total money supply in the country.
1.6 SCOPE OF THE STUDY
This project work is confined to reaction period of year which would enable us to analyzed the data collected properly their project is also limited to use your case study for properly understand and problem solution of Nigeria monetary policy and the impact on Nigeria institution.
1.7 DEFINITION OF TERMS
Financial Institution can be defined as a cooperate financial bodies that provide financial assistant to all private and public sector for development and capitalization of the business also to embark on long term capital project.
Monetary policy is a policy document designed to reputation and controls the volume cost available and directors of money and credit in economics policy objectives.
Monetary policy refers to the combination of measures designed to regulate the values, supply and cost of money in an economy.
Central bank of Nigeria (CBN) may be defined as the only financial institution established and charged with the day to day management and control of national monetary affairs, the supervision and coordination of banking and financial activities of the country.
Central banking refers to the role of central monetary authority or an apex financial institution with one entire financial structure in promoting monetary stability and financial system through the use of monetary instrument
QUANTITATIVE: this is the direct control which comprises of open market operation, reserve requirement and bank rate. These are meant to regulate the level of credit.
QUALITATIVE: this is the indirect control which includes selective credit control and moral suasion. These also aimed at controlling specific types of credit and interest rate.
OPEN MARKET OPEN: open market operation means the purchase or sale government securities. It buys government securities in markets in order to increase the money supply on the other hand when it sells government securities to mop up excess liquidity in the banking system.
RESERVE REQUIREMENT: In Nigeria all banks are required to maintain two major reserve ratios, a cash and liquid assets reserves otherwise known as liquidity ratio.
SELECTIVE CREDIT CONTROL: the central bank of Nigeria instruct banks on a sectored allocation of credit and ….. Ability and bank are expected to comply.
BANK RATE: Bank rate is the rate of interest charged by the control bank for discounting bill. It is a penal rate in the sense that it is always above t he rate at which the bill are discounted.
MORAL SUASION: Refer to a whole series of action that the Central Bank may take to influence the lending practitioners of commercial bank and sometimes other lenders.
INTEREST RATE: This is the rate which bank charge on loan or advance given to the customers, its determine by the bank rate.
1.8 ORGANIZATION OF THE STUDY
This research work of this study will be divided into five chapters.
Chapter one, includes introd1uction, aim and objection, significant of the important, statement of the problem, scope and limitation, definition of term and finally plan of the study.
Chapter two is based on avoidance of literature relating to the topic question (monetary policy and its impact of Nigeria Financial Institution).
Chapter three clearly examines research methodology, source of date, method of data collection, analysis of data collection and finding of the study.
Chapter four, this vividly takes a look at the history of monetary policy and the objective of the policy also the instrument used in monetary policy and finally effect of monetary policy on financial institution.
Chapter five, this chapter contains summary, recommendation and conclusion.
2.0 LITERATURE REVIEW
This project will however sense not complete without revealing the view of some writers on the topic the central bank of Nigeria its able to the supply of money through it monetary policy the conduct of monetary and banking policies by the central bank of Nigeria economic and financial review.
There is a vast literature on the traditional macro-economic tasks of stabilization of the economic cycle and achievement of price stability, but the literature on macro economic policies to encourage growth re-balancing is still quite limited.
According to V.A Odoji (1990) defined monetary policy as control of money stock in the order of influence other broad objective which include price stability high level of employment, sustainable economic growth and balance of payment there objectives are achieved through the use of appropriate instrument or tools depending on the level of development of the economy in which monetary policy is being implemented.
According to Falegan (1997) monetary policy deals with the discretionary in order to achieve stated in desired economic objective.
In addition to credit contortion Bootle (1998) monetary policy is aimed macro goals of full employment price stability growth and the balance of payment equilibrium with income distribution as a subsidiary objective.
Michael P.T (1999) in his view, he argues that monetary policy work on two economic variables. The aggregates and the supply in circulation with the level of interest rates, the supply of money (basically currency in circulation plus commercial bank post is though to be directly in circulation plus commercial banks post) is though to be directly related to the level of economic activities I the sense that a greater money supply… expanded activities by calling people to purchase more goods and services.
Adekanye F. (2003) it was suggested that the reason why government attempts to controls the money supply is because of it belief that it rates has an effect on the rate of inflation.
Afolabi (1995) defined monetary policy as measure between taken by the monetary authorities to control the cost gravity and direct of credit to achieve national objectives.
Nwankwog O. (2003) defined monetary as the activities by governments which are ailment at achievement of certain set of economics objectives.
Mawa (2002) defined monetary policy as a tools available to the government for directing of course of economy monarchy has a proved to be the most feasible instrument for achieving medium stabilization objective (CBN) guideline 2003 internal monetary policy formulation and implementation amended as a critical government responsibility if the economy is not to go astray.
Monetary policy this was issued for the liquidity first time year 2001 to mop up excess for the liquidity generated by the rapid monetization of the windful gains from crude oil receipts. It would be issued as the need arises to compliment traditional monarch pooling tools to contain growth liquidity to desired level.
Ojo M.O (2003) said use of indirect administrative control of interest rates credit ceiling and sectored have been found the world over to inhibit efficiency in resolves allocation as well as innovative ideas and development in individual institution, the adoption of a market based mechanism, which is now grade a both develop and developing countries has charted the efficiency and responsiveness of the monetary activities in responding to macro-economic stock.
Nnanna O.J (2004) the general objective of monetary and financial sectors policies over the year have been the attainment of internal and external balances as well as the creation of sound and stable financial sector. Specifically, monetary policy aim at maintaining prices stability and non inflationary growth, the central focus of monetary policy in Nigeria has been the management of excess liquidity. These concern arrears from the recognition of the negative effect which expansively fiscal policy and monetary policy has domestic price level and the exchange rate prior to the structural adjustment programme.
(SAP) in 1996 monetary management derived on the use of direct monetary control in order to influence banks tensify behaviour.
Afolabi (2003) assumed monetary policy as a measure taken by the monetary authorities to control cost authorities and direction of credit to achieve national objective.
Ahmed (2005) emphasized that he wish to update the current state of proposed by the federal government to shift techniques of monetary and credit management from the imposition of credit ceiling on bank to one which relies on the use of market based instrument commodity referred to as the direct monetary control.
Campbell R. Harmey (2006) monetary policy is an action taken by the board of governors of the Federal Reserve System to influence the money supply or interest rates.
According to David L. Scott (2003) see monetary policy as the Federal Reserve action that is designed to influence the availability and cost of money.
Specific policy includes changing the discount rate altering bank reserve requirement and open-market operation. In general, a policy to restrict monetary growth results in tightened credit condition and at least temporarily, higher rate of interest. This situation can be expected to have a negative impact on the security markets in the short-run, although the long run effects may be positive because of refused inflationary pressures.
Farlex Financial dictionary (2009) monetary policy as the actions and inactions a central bank of Nigeria takes to control a country’s money supply. Generally speaking, monetary policy refers to the setting of interest rates, if the central bank sets low interest rates, it increase the supply of money by easing the availability of credit. This promotes economic growth but in the long term can cause inflation on the other hand, the central bank may adopt a restrictive monetary policy by setting high interest rates, which constricts credits and slows or eliminates growth while reducing inflation.
Monetary policy may also refers to the printing of money, especially to repay government debt; this always causes inflation and is used as a last resort..