This project has traced the evolution of Nigeria’s monetary policy and its performance since the early1980’s, to provide a background to the reviews; it discussed same theoretical aspects of monetary management. On the theoretical aspect it reviewed the concepts of monetary management, the objective of monetary policy and the instruments of monetary policy.The highlights of the Nigeria economy of the 1970’s were the growing importance of oil, the expending role of the public sector in the economy and the large dependable on the external sector. Despite the family impression economic performance of the period, some economic problem such as growing fiscal pressures, assumed more serious dimensions. In the prevailing circumstances, monetary central framework and the large divergence of fiscal operation from the set monetary and credit targets.The oil boom of the 1970’s come to an end in the early 1980’s. Consequently, the development strategies, which were considered appropriate during that period, became inappropriate under the environment characterized by substantial reduction in oil import earnings and revenue. Rigorous economic controls were mounted to stain the determination in the general framework. Monetary policy applied more vigorously the credit ceiling. Selective credit controls and regulating on interest rates.The currently problem of monetary policy were largely a carryover from the previous decade and these included the apparent inefficiencies of the monetary control framework based on direct instrument and government fiscal operations especially the increased financing of fiscal deficit by the central bank.Monetary policy, though having the same over all objectives as before was employed to play a unique role in restore my economic stability. In order to reduce credit expansion by banks, credit certings were reduced and backed up liquidity mopping measures such as the withdrawal of all deposits on outstanding external payment arrears and public sector deposits from the bank in 1986 and 1989 respectively, the sectional credit flexibility in their credit operation, which in August 1987 all controls on interest rates changed by banks were removed.Despite the good intentions of monetary management domestic liquidity expand substantially during the period, especially in 1988 and the main source of increase in aggregate bank credit to the economy. Similarly, banks performance with regards to credit certings and sectoral credit guidelines was very poor.Full economic recovery could not be achieved within the short span of the SAP, even though its impact in light of the monetary development was to some extent positive in relation terms. Nevertheless, the problems of monetary policy appeared to have persisted in so far as the fundamental causes had not been removed. The monetary targets were not being achieved, been used over time it become more difficult to enforce compliance particularly as frequent changes were made in the composition of credit and timely data were not usually available.Above all, monetary policy did not achieve the type of synchronization with fiscal policy as envisaged in the monetary control framework. When fiscal operations deviated from the targets monetary developments could not uphold the underlying assumptions and hence domestic price stability and external equilibrium, which are important objective of monetary policy could be assured.Under these circumstances, a deliberate attempt would have to be made to improve the efficiency of monetary policy in the 1990’s. Towards this general direction, the plan to shift to the use of indirect monetary tools was formally announced early in 1991.The movement towards market based instruments of monetary management in a developing economy is unique and since financial markets are not fully developed, it is appropriate to ask whether such technique can be effectively applied. However, one of the lessons of recent financial liberation measures worldwide is that such measure do infact foster the development of the financial instrument. The available evidence seems to suggest that the Nigeria financial system possess the critical minimum conditions for effective use of the market based monetary instruments. In arrears where the conditions are not fully met, there is scope for improving the situation.



CHAPTER ONE: INTRODUCTION                                

1.1   Background of the problem

1.2   State of the problem

1.3   Objective of the study

1.4   Research questions

1.5   Research hypothesis

1.6   Significant of the study

1.7   Scope, limitation and delimitation

1.8  Definition of terms


2.1    Objective of monetary policy

2.2   Monetary policy instruments

2.3   Problems of direct monetary policy in Nigeria

2.4   Problems of direct monetary policy in Nigeria

2.5   The shift from direct to indirect approach

2.6   Indication of monetary policy

2.7   Effectiveness of momentary policy in Nigeria



3.0   Research methodology

3.1   Characteristic of the study population

3.2   Limitation of the methodology


4.1   Policy analysis

4.2   Analysis of hypothesis


5.1    Summary and conclusion

5.2   Recommendation

Appendix (Questionnaires)





A policy is a statement of basic principles that provides a framework in which performance is measured. One of the principal responsibilities of the central bank of Nigeria (CBN) is the formulation, monitoring and execution of monetary stability and economic development as well as ensuring sound financial system.

The central bank of Nigeria employs various instruments in caring out these responsibilities. Before 1992, the CBN was under the federal ministry of finance. This has change presently, central bank reports directly to the presidency under the central bank of Nigeria degree. The CBN carries out this responsibilities on behalf of the federal government of Nigeria under the status of the central bank of Nigeria Act of 1958 and banking Act of 1967 which have been replaced with CBN Degree No. 24 of 1991 and Bankers and other financial institutions Decree (BOFID) NO. 25 of 1991.

In formulating executing monetary policy, the government of the CBN is required to make proposals to the president of the federal republic of Nigeria who has the final power to accept or amend such proposals. It is after the presidency has approved it that the CBN is monetary policy proposals are made as an integral part of the federal government annual budget which combines to approve monetary policy.

The aim of monetary policy may be to check inflation or to stimulate production to aid recovery from a recession. The method adopted to achieve the designed aim is through changes in the monetary supply. A policy aiming at increasing the quantity of money is inflationary, and one that aims at a contradiction of the supply of money is deflationary.

Monetary policy is mainly the concern of the central bank, but the consequences of monetary policy can be so far – reacting for the whole community that no modern government can leave the choice of policy entering to its central bank.

The paper will therefore examine the various instruments of monetary policy measures introduced by CBN since inception in 1959. It will therefore evaluate the effectiveness of the instruments taking into consideration the major constraints the CBN have to grapple with.

The instruments used by the central bank of Nigeria to implement its monetary policy objectives can be classified broadly as direct or portfolio control approach and indirect or market interaction approach (CBN research departments). The direct control instruments place restrictions on the freedom to acquire more assets to insure liabilities. This is employed essentially because of the poor infrastructure based and low development of money (financial) and capital market over the years. The central bank has employs the following direct monetary controls.

The indirect polices are usually market determined as well as use of reward system by the CBN in achieving its polices. They include the following:

Open market operation (OMO)
Moral suasion
Discount rate mechanism

Below is the brief explanation of the instruments:


The central bank of Nigeria also uses the reserve requirements of banks as an instrument of monetary policy. Banks will ordinarily, either from custom or prudence, and to keep a certain percentage of demand deposits in their bank as a reserve. They do this because of the necessary for ensuring that the bank will always have sufficient funds on hand to pay off depositors who would like to withdraw their money in the ordinary course of business.

An increase in the legal reserve requirement will reduce the amount by which member banks can make loans and expand the money supply and a decrease in the legal reserve requirement will increase the amount by which member banks can make loans and expand the money supply.


Sectoral allocation of credit is aimed at ensuring that priority is accorded the growth sectors of the economy such as agriculture and the many acting industry in the allocation of credit with a view to stimulating growth in the non-oil sector.


Interest rate can be defined as the return or guild on equity or opportunity cost of differing current consumption in the future. It can also be identified as the cost of credit. In Nigeria, the interest rate structure is directly managed by the government under the advice of the making authority due to the under – developed nature of the financial market couples with the relative scarcity of capital resources in the economy.

Monetary policy acts through the supply of money, as the name implies, to change interest rates and the planes of businessmen for investment. The idea is that an increase in the supply of money, just as an increase in the supply of any good, is likely to cause a decrease in the price you must pay for it. The shorter, the supply of money for low, the more businessmen who wish to borrow for investment proposed will have to pay for their fund.

If the central bank of Nigeria arranges a contraction in the supply of money, the price of borrowing (the interest rate) will be accepted to rise, and higher rates increase the cost of any investment project. The final result is that planned investment tends to decline.

On the other hand, if the government can increase the supply, this will means more funds available for lending; thus the interest rate declines, and investment is encouraged.


This is a policy measure adopted by central bank or regulates the level of inflation in the economy. By this policy, CBN specifies maximum growth of credit the bank would enter to the economy.


Stabilization securities are issued by the CBN to banks at given interest rates designed to reduce banks excess cash holdings and then credit expansion. This instrument was first employed between 1976 and 1979 (CBN Research department, 1979).


This policy was intended to accelerate the business opportunities of indigenous borrowers especially doing the indigenisation scheme. The guideline stipulate minimum credit that must be entered to indigenous borrowers.


In purpose of the government policy on rural banking, banks, are requires to lend a certain minimum percentage of the deport mobilized in the rural areas to borrowers in the rural areas.



Open market operations involve the central bank discretionary power to purchase or sell securities, in order to influence volume of credit and subsequently interest rates, which subsequently affects money supply. For central banks to use this toll successfully, the financial market must be well developed such that the large volume of government securities in the system will be responsive to the interest rate changes.

The securities are usually short – term securities, which they sell and purchase long – term securities. Thus by altering the relative supplies of securities of difficult maturities, the CBN is able to affect the term structure of interest rate. The open – market purchase or sale of government bounds to gives the central bank of Nigeria flexible tool of monetary control. Transactions can be started, stopped, or received very quickly, and they can be made in any amount designed. Unlike change in reseme requirements, which imply very large changes in the money supply. Open – market transactions can be tailed to fit any size change the central bank of Nigeria think is called for.


This involves the use of the power persuasion to influence the tending operations of the commercial banks in the direction desired by the monetary authorities. It does not involve the issue of official directives. The government of the central bank merely uses his position to persuade and appeal to the banks to enerase restraints in credit expansion, under an inflationary situation for instance, this policy is not hand to understand, when inflation or deflation threat the CBN can use its persuasive powers to see what can be done to avent then the central bank of Nigeria may adopt the following ways:



Pleading and

Phone call


This is the interest rate charged by the central bank on its loans. The rate is set to reflect the banking and credit conditions available in the market. Discount rates are adjusted from time to time in the light of changing market conditions and complement (OMO) and the thrust of monetary policy generally.


Monetary policy implementation by central bank of Nigeria have some position returns if it is wisely applied, but the monetary policy becomes a problem when it conflits among the objections and instruments of monetary policy and other policies as well as the constraints if faces. The inadequate implementation of the varies policies as well as constraints faces. The inadequate implementation of the various policies as well as constraints if faced.

The inadequate implementation of the various policies are as well as inconsistency in such policies have been the major problems of monetary policy in Nigeria.

Fiscal deficits of the federal government in the recent past have been but out of time with monetary target largely because of improper co – ordination of the fiscal and monetary programme. Fiscal imbalance has adverse consequences on the monetary base and the effective use of indirect tools.


The major objective of this present study is to ensure monetary policy issued and its implementation by the CBN Above the entire major problem encountered in its implementation is a major objective of this study. The study is to pay attention in the following issues:

1.  The monetary policy objectives and philosophy

2.  The various policy instruments called instrumental variables used by CBN in monetary policy.

3.  Constraints in policy formulation and execution

4.  Evaluation of impact of financial policy reforms especially the policy of deregulation of the banking system on the economic performance of the ratio.

5.  Targets and indicatives of monetary policy

6.  Recommendation in improving policy guideline.

Laud banking policy by the central bank of Nigeria and in particularly, the problems encountered in its implementation. It also covers the measures, old and recent, used in its implantation. So far, I have chosen to study on the problems that arise from the monetary policy mentioned above.

For the areas covered, I have been able to expose the progress of the central bank in carrying out monetary policy implementation in Nigeria and also suggested ways to solve the problems that arise from its implementation.

The study does not look at the economic decisions not covered by the monetary policy. This is aimed at ensuring a framework of analysis.

Time factors, which is one of the assets which a student have in his project, is not enough due to many things I have to accomplish with the time limit I have in order to equip myself academically. ……………….. constraint is also a delimiting factor to this project.

Finally, the difficulties involved in the means of getting information from the direct source which was due to lack of trust in each other, has delayed this project and at the same time where it is extremely difficult to has limited thus area so far.


CENTRAL BANK OF NIGERIA: This is the government bank in charge of monetary policy and the supervision of commercial banks in Nigeria.

MONEY: Broad term consisting of coins, paper notes, and demand deposits of commercial banks.

MULTIPLE EXPANSION AND CONTRACTION: This is the phenomenon whereby the money supply is raised or covered by the action of commercial banks who receives deposit and then land these deposits to borrowers.

DISCOUNT RATE: This is the interest rate charged by the central bank on loans made to member banks. A lot of money policy.

EXCESS RESERVES: This is the holding of reserves by the commercial banks over and above the level required by law.

RESERVE REQUIREMENT: This is the situation where banks will ordinarily, either from custom or produce, land to keep a certain percentage of demand deposits in their bank as reserve. The CBN stipulate the rate of this reserve to control inflation and deflation.

OPEN MARKET OPERATION: The weapon must often, and the one capable of being adjusted with the utmost delicacy. This comprise the buying and selling of government securities.

OMO: Open market operation

CBN: Central bank of Nigeria.


Questions that radity comes to kind in this content are:

1.  What is monetary policy implantation?

2.  What is the impact of monetary policy implementation?

3.  What effort has the central bank of Nigeria made towards tacking the problems of this policy implementation?

4.  What is the best monetary policy method or instrument to use?

5.  What factors influence the monetary policy implementation


I have emphasis on the problems, which arises as a result of monetary policy implementation and the ways to tackle these problems.

These project lakes if for grated that:

HO: There are no inherent problems in the implementation of the monetary policy in Nigeria by central bank of Nigeria.

HI: There are inherent problem in the implementation of the monetary policy in Nigeria by central bank of Nigeria.

HO: Central bank monetary implantation has not been effective with the autonomy granted if by the federal government.

HI: Central bank monetary has been effective with the autonomy granted it by the federal government.

HO: The major tool of central bank has not been more of direct policy than indirect policy measure.

HI: The major tool of central bank has been more of direct policy than indirect policy measure.


The significance of this study is geared towards exposing to the populace the instruments used by the central bank of Nigeria in monetary policy implementation.

This study is also to expose what monetary policy is all about and why it should be implemented. This project will also enlighten the reader of the existence of problems associated with the monetary policy implementation by the central bank of Nigeria.Furthermore, after the above analysis we will set a challenging face for the central bank of Nigeria to check if they are improving or not improving.

This study on conclusion will expose suggested ways by which the problems of monetary policy implementation could be solved.

Finally, this project will provide for any student researching on problems of monetary policy implantation by CBN a solid foundation for realization of his/her research purpose.