Appraisal Of Monetary Policy Implementation In Nigerian Banks (A Case Study Of Cbn)

To analyze various monetary policy instrument that have been previously used and the extent to which this have contributed to the development of banking sector in Nigeria.

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Title page                                                         i

Certification                                                     ii

Dedication                                                       iii

Acknowledgement                                            iv-v

Table of contents                                             v


1.0   Introduction                                             1

1.1   Statement of the Problem                        3

1.2   Objectives of the Study                            4

1.3   Significance of The Study                         4

1.4   Definition of Terms.                                 5

1.5   Limitation of The Study                           7

1.6   Plan of The Study                                    7


2.0   Literature Review                                     9

2.1   Conceptual Definition                              9

2.2   Monetary Policy in Nigeria                               14

2.3   Framework For Monetary Target In Nigeria               21

2.4   Inflation Targeting                                           24

2.5   The Rationale For Inflation Targeting               25

2.6   Requirment For Inflation Targeting                  26


3.0   Research Methodology                                     30

3.1   Sources of Data                                               30

3.2   Population of The Study                                  31

3.3   The Sampling Techniques                                       31


4.0   Data Presentation And Analysis                       32

4.1   Data Presentation                                            32

4.2   Data Analysis                                                   33


5.0   Summary Conclusion and Recommendations 39

5.1   Summary                                                         39

5.2   Conclusion                                                      41

5.3   Recommendations                                           42

References                                                       44



An appraisal of the banking industry show that the industry is determined by several factors, but the most influencing of all is director factor of regulatory frame work, under which the industry operator. This framework can be divided into two broad aspects of monetary and banking.

In all economics, the conduct of both policies are normally. Originated through banking institution who play an international process, the role of bringing lender and borrows together. Though in this process, the central bank play a crucial role in determine the price of money therefore monetary policy is important by its own right from the past view of monetary economics and policy maker and in term of its impact on the economy.

Of all the tools available to the government for directing the course of economy, monetary policy has proven to be the most feasible instrument for achieving medium term stabilization objectives (CBN guideline 2003) monetary policy formulation and implement emerge on a critical government responsibility if the economy is not to be a strayed. Policy are not made for their own sake, they are directed toward achieving a desired goal over a period of time

Generally the primary objective of monetary policies concern with the discretionary control of monetary supply by the monetary authority in order to achieve the stated economy goals. The government uses the macroeconomic stabilization policy which is broad term that embraces a target family of economic policies.

These polices are designed in an attempt to change the trend of some monetary valuable in particular direction so as to include the desired behavioral change in monetary policy. The banks role is to conduct appropriate monetary policy that is consistent with the main economic objective of achieving real growth in gross domestic product low inflation rate and a stable balance of payment position. This is irrespective of whether the direct or indirect approach is put in place to control money and credit.

In this regard the CBN determine the amount of money supply that is consistent and manipulates the monetary instruments, instrument at its disposal in order to achieve the stated objective because there is a belief that there is a relationship between the variable and monetary variable.


       What rule did draconian sent into banking sector

–       What roll did monetary authorities play in formulate policy guideline.

–       How can economy grow without the banking sector?

–       Why some policies been implemented by the commercial banks as stated by the CBN.


  1. To analyze various monetary policy instrument that have been previously used and the extent to which this have contributed to the development of banking sector in Nigeria.
  2. To examine the operation of commercial bank and find out if they have strictly adhere to regulation of monetary authorities (CBN).
  3. To draw conclusion and make policy recommendation base of finding from the study.


This study will be of great benefit to bankers policy makers, investment analyst and the private and public sector, Moreover it will be useful to policy make in an attempt to fashion out dynamic and reliable monetary policy measure for controlling commercial banks in their ability to create money there y influence the performance of the economy.

Also, this work will also add to the existing knowledge in banking professional.


        Brief definitions of the terms relevant to this highlighted below.

  1. Monetary policy: This is concerned with the use of money supply and credit control to change macro-economic activities.
  2. Discount Rate: This is the rate of interest paid by banks to CBN when they borrow from them.
  3. Research requirement: This is the function of commercial banks demand and time deposit that must be kept with the CBN.
  4. Open Market operations: It is the selling and buying of government and other eligible security by CBN in open market.
  5. Special deposit: This means supplementary revenue that are used by CBN to reduce the volume of commercial banks liquidity.
  6. Moral Suasion: This involve the employment of persuasion or public pronouncement or outright appeals on the part of monetary authorities to the bank regulating to operate in a particular direction for the realization of specified objective.
  7. Direct credit control: This involves imposition of quantitative ceiling on the overall commercial banks credit y the CBN.
  8. Monetary target: this is value that the monetary authorities shoot at in determining their appropriate policies.
  9. Monetary People: It simply the money stock of any moment in the economy on the other hand, it is defined as currency with the public and demand deposit with commercial bank.
  10. Gross Domestic Products: This measure the output produced factors of production in the domestic economy regardless it who own these factors within the nation.


This work aim at examining the effect of monetary policy on the development of banking sector.

The problem encountered and the way forward. This study is restricted to the operation of monetary policy in Nigeria, between 1992 – 2008.


This research work consist of five chapters. Chapter one of this research works is made up of the introduction the statement of the study the objective of the study, the significance of the study the limitation of the study, the definition of terms and the plan of the study.

Chapter three of this research work also includes research methodology.

Chapter four consists of data presentation and analysis.

Finally Chapter five of this research work includes summary conclusion and recommendation.



The review of literature in this would reveals what is known and what remain to be investigated so the chapter provides an understanding and important frameworks of monetary policy in Nigeria can be organized around five element the legal basis of monetary policy, objective of the policy, the process and its coordination with other policies, policy formation process and its implementation.

Therefore, the existing literature that inflects the view of various scholars and authors are examined and their contribution to the issue under discussion highlighted.


Undigbunam (2004) defined monetary policy and fares searching financial polices that were formulated and executed during this period. A major financial policy was financial deregulation, which involves essential interest rate and exchange rate deregulation.

Sanusi (2005) monetary policy was aimed at inducing the emergence of market – oriented in line with the general philosophy of economic management under structural adjustment programmed.

The conduct of monetary policy relied on direct control measure which involve imposition of selective of sectoral control and credit lending, invest rate control, cash reserve requirement exchange rate control and cells for special deposits. The use of market based instrument was not successful due to the under development of the financial market in the early part of period under review.

Nanna (2006) the general objective of monetary and financial sector policies over the year have been the attainment of internet and external balance as as the creation of sound and stable financial sector.

Monetary policy is defined as the use of monetary instrument for regulating and stabilizing the economy. This are often carried out by the government the agent or the monetary authority.

According to Oveselu (2004) on the other hand, the viewed monetary policy as package of factor designed to arrange the growth of money supply during a period of its optimal target the management of the supply of money in circulation is a very vital issue because its inadequate supply will lead to unemployment and its has the tendency regarding its growth and its extensive supply however the value.

Therefore, it is worthy to comprehend that the area of boom left the economy with unacceptable development that economy stigmatized the macro economic management. Thus heavy dependence on the oil sector as have been metamorphosed into maintaining exchange rate stability, promoting sound financial system, high level of output grounder and development employment generation and to enhance the over all efficient allocation of national  resource to effect rapids economic performances in Nigeria. In pursuit of these monetary objectives, the CBN over the years employed direct and indirect policy measure of instruments. The direct measurement includes, the imposition of ceiling on interest rate and credit expansion on banks deposit ceiling exchange control restriction on the placement of public deposit, special deposit and stabilization securities value the indirect measurement liquidity ration market base interest rate policy minimum rediscount rate open market operation selective credit policy and moral suasion.

As noted earlier direct monetary control techniques were in vique in the 1988.

The main objective of monetary policy ere the maintenance of relative price stability and a healthy balance of payment position.

Then, it was not feasible under the major sources of government revenue and foreign exchange earning and government expenditure.

The implementation of monetary policy using tools to regulate the quality of money supply to achieve its objectives in an economy is based on the premise that there is correlation between the quantity of money supplied and economic activities that is, if money supplied and economic activities that is, if money is not regulated by CBN to match up with the level of productivity it would not produce desirable consequences on the end e,g inflation.



Over the years the objectives of monetary policy have remained the attainment of internet and external balance.

However, emphasis on techniques or instruments to achieve those objectives has changed over the years. There have been two major phases in the pursuit of money policy, namely before 1986 and since 1986. The first phase emphasizes on direct monetary controls, while the second relied on market mechanism.

Before the introduction of structure adjustment programme (SAP) in 1986 the economic environment which  guided by administration  of monetary policy was characterized by the growing importance as the period of which could be termed as the period of boom and most of the expansion role of the public sector in the economy were largely dependent on this sector.

In the oil boom area, the rapid monetization of foreign exchange earning resulted in large increasing in government expenditure which substantially contributes to monetary instability. In the early 1980s, oil receipts were not adequate to meet increasing level of demand and since resorted to borrowing from the central bank of finances huge deficit. They had adverse implication for monetary managements.

Basically, the objective of monetary policy in Nigeria originated from the CBN act from the act, the bank draw inspiration as to what should constitute its short and long term monetary policy objective.

The long term objectives are always aligned with Nigeria overall development objectives.

The short to medium term objectives complement the federal government budget objectives.

The CBN act if 1958 states the principal objectives of bank as such that includes insurance of legal tender currency promoting monetary stability and s sound financial system in Nigeria and acting as banker and financial adviser to the federal government.

Over the years the principle i.e objective developed nature of the financial market the inadequate supply of the relevant restrain on interest rate.

Sanusi (2002) said that structural adjustment programm (SAP) was adopted in July, 1986 against the collapsed of word oil market and the ugly nature internal and external balance by altering and restructuring the production and consumption patterns of the economy.

The programme was deign to achieve fiscal balance of payment viability by offering and restructuring the production and consumption pattern of the elimination price distortion reducing the heavy dependence in crude oil export and consumer goal imports enhancing the non-oil export base and achieving sustainable growth of economy other aims were to rationalized the role of the public sector and accelerate the growth potential of te private sector. The main strategy of the programme  were the deregulation of external trade and payment arrangement the adoption of a market determined exchange rate for the naira, substantial reduction in complex price and administrative control and more reliance on market force as a major determinant economic activities.

In achieving macro economic stability effort was directed at the management of excess liquidity, this number of measures were introduce to reduce liquidity in the system. These include the reduction in the maximum ceiling on credit growth allowed for bank, the recall to special deposit requirement against outstanding external payment arrears to CBN from banks abolition of the use of foreign guarantees current deposit as collateral for naira loan and the withdrawal of public sector from bank to the CBN.

The rising level of fiscal deficit identified as major source of macro-economic instability consequently, government agreed not only to reduce the size of its deficits but also to synchronize fiscal and encouraging a good measure of flexibility in banks credit operation.

The regulatory environment was improved and the sector specific credit allocation target were comprises four sector.

The central contract continue to be ineffective control framework and the uncertainty credited to the fiscal operation. Some dynamic references have been introduced. For example, the ceiling on bank credit allocation meachnism were abolished. The commercial and merchant banks were subjected to equal treatment, since their operations were found to produce similar effect on the monetary process. In recognition of the fact that well capitalized  bank would strengthen the banking system for effective monetary management the monetary authority (CBN) increased the minimum paid up capital commercial and merchant banks in February 1992, It was increased to N50 million for merchant banks respectively. Furthermore, it was also increased in 1997 to N500 million for both bank and also increased to 25 billion with effect from 2005.

CBN guideline (2007) increase both commercial banks and merchant banks minimum capital base from N25 billion to N100 billion, which would have taken efficient in year 2006 when distressed banks whose capital fell  below existing requirement were expected to comply or face liquidation. The most popular instrument of monetary policy was the issuance which primarily set the rate of change for the component and aggregate commercial bank loan and advantage to the private sector.

The sectoral allocation of bank credit in CBN guideline was the estimation of the productive sector and thereby stems inflationary pressure. The fixing of the interest rate at relatively how level was done mainly to promote investment and growth.

Occasionally, special deposit were imposed to reduce the amount of the free reserve and credit creating for the bank in mid 1976 on the basic of their total deposit liabilities, but since such cash ratio were usually lower than  those voluntarily maintained by the banks they proved less effective as a restraint on their credit operation.

Generally, monetary aggregates government fiscal deficit GDP growth rate, inflation ration and the balance of payment position moved in undesirable direction. The compliance by bank with credit guideline were less than satisfactory.

One effectiveness of the directs monetary tools in controlling money supply as employed in pre-SAR area, was a consensus for shift towards the techniques of indirect control via a market oriented of financial saving and efficient resources allocation.


As noted earlier, Nigeria monetary policy is enhanced on the monetary targeting framework with price stability as the single most important objective of monetary policy.

This monetary targeting framework presuppose the existence of a stable and predictable relationship between monetary aggregated and the other economic variable in the economy.

The monetary framework as operated by CBN entails setting target growth path. For one or more definition monetary stock for year or over medium term prior to fiscal year 2002 had a target growth rate of money set for one year, but effective for 2002 had a set , it means that the CBN has shifted to a medium term perspective which implies that chosen monetary aggregate may not necessarily be achieve within one year of CBN guideline for 2002.

Under framework, the CBN strives to maintain equilibrium in the financial market of ensuring that the demand for and supply of money and financial asset like bound, do not diverge significantly to induce upward or downward pressure on interest rate and prices.

Therefore, the bank uses the instrument at its disposal to ensure that the demand for and supply to financial asset including money are consistent with the desire of the public to hold them an the willingness of suppliers to supply them.

The framework is based on the quantity theory of money and the money supply process monetary targeting is predicted on the empirical evidence that inflation basically affects monetary phenomenon and therefore, the monetary authorities must control money supply in order to control inflation (Benj; 1999) the quantity theory of money is stated thus,

Mu = Py

Where M = Money supply

V = Velocity of money (The number of time in turn over in a given period).

R = real aggregate output (Income)

To examine the link between the total quantity of money and the total spending in the final goods and services produced in the economy, the rate of turn over of money, that is the average number of time per year that a unit of naira is spend buying the total amount of goods and services produced in the economy, assuming V and Y is constant then increase in money supply respond proportionally to increase in price level (Edward Shapiro 2004).



Inflation target is a recent monetary policy strategy whose basic rest in the fact that Central Banks adopt explicit numerical target range for inflation and makes achievement of this target is primarily objectives. It is important to bear it in mind that it does not mean the central Bank ignore unemployment or the rate of economic growth CBN guideline 2005 of inflation it simply means that as long as Inflation remain with stated range, the central Bank is free (and expected) to stabilize the economy.

However, if at some point inflation threaten and exceed the permissible ranges then, the CBN must make the Inflation target over ride its objectives and work towards containing it to normal range.

According to Miskin (2005) inflation target involves five main element of;

  1. The public announcement of medium term target of inflation.
  2. Institutional commitment of price stability as the primary goal of monetary policy to which other goal are subordinate.
  3. An Information inclusive strategy in which many variable, and not just monetary aggregate or the exchange rate are used for deciding the setting of policy instrument
  4. Increase transparency of the monetary policy strategy through communication with the public and the market about the plans objective and decision of the monetary authorities.
  5. Increase transparency and accountability of the central bank for attaining its inflation objectives.


As total earlier, macro-economic policy has severed goals above and beyond how inflation, these are high growth rate, how unemployment, financial stability, variable and sustainable current account balance, amongst is that price stability must be the primary long-run goal of monetary policy with some degree of accountability and discipline on the CBN and government tiers.


These are basically two principle requirements that can be me before and inflation targeting framework could be adopted (CBN 2009) these are;

  1. Independent of the Central Bank: for inflation targeting regime to be effective as a framework for the attainment of the objective of price stability the Central Bank must have a high degree of indecency in the conduct of monetary policy. The Central Bank must not be inhibited from Choosing the instrument that will enable it achieve the rate of inflation is claimed appropriate and consistency with price stability. In addition there should be no fiscal dominance in the economy while borrowing from the Central Bank should be lower or at best till fine domestic financial market must be the emphasized on long run price stability in formulating and in communicating policy intention to the public. This is predicted on three main arguments by Odozi (2004) in the following ways.

Firstly, economic and policy markers are now less confident that monetary policy can be used effectively to moderate short-run function i.e business cycled in the economy.

Moreover there are concessions among macro-economic that in the long run the inflation is the only-macro economic variable that monetary policy can affect.

Therefore, when monetary policy make a low rate of inflation as their primary long-run goal to some significant extent they are simply accepting the reality of what monetary policy can not do.

Secondly there is also consensus that even moderate inflation rate can be harmful to economic efficiency and growth and that maintaining a low and stable inflation rate is pre-requisite to attaining other macro economic goal.

Thirdly, it provides a key conception element on the overall framework of policy making to the extent that it helps communication policy instruction to the public and impose sufficiently deep to facilitate the absorption of the placement of government debt instrument while the banking system must be sound and capable of providing the right signs to the monetary authorities and responding to monetary policy action.

  1. Absence of multiple policy objectives: The second requirement for a efficient inflation targeting framework is the absence of other (primary) policy targets other them the rate it inflation targeted. This implies that the monetary authority must be willing and able to abandon targeting other indication such as exchange rate output growth, the level of employment wages e.t.c in this circumstances, the inflation target becomes the one and only target the monetary authorities achieving the inflation target may necessitate a trade off as far as achieving low employment and high output growth rate are concerned.


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