This research examined the impact of monetary policies on the liquidity and profitability of commercial banks in Nigeria in Nigeria. Specifically, the study establishes the effect of Central Bank Rate (CBR) on the liquidity and profitability of commercial banks, it also establishes the effect of Reserve Ratio Requirement on the liquidity and profitability of commercial banks. The methodology used for data collection was mainly from primary source which included questionnaire and personal interview in order to have knowledge of Monetary Policy on the financial performance in Union Bank Plc. Information was also gathered from the secondary source which includes literature review of previous research, consultation of textbooks and internet. Simple percentage and Chi-square statistical method were used to analyse the data collected before reaching conclusion. The findings of the research indicated that deposit money bank policy affect banking operations in its bid to regulate money supply in the economy with particular reference to deposit and credit creation. The recommendation is that while bank size was found to lead to better financial performance, it is important that banks understand the source of its funds and the costs associated with the funds.




1.1   Background of the Study

The financial sector is mainly significant to formal activities that are relevant to the economic activities in Nigeria. This has made it mandatory for monetary policy instruments to become crucial in driving the activities of the Nigeria economy. It has therefore been well observed in Nigeria as well as all other developing countries that prudent monetary policies are the key stone to effective regulations as well as supervision for the growth of any country’s banking Industry. By effective manipulation of monetary instruments, the growth rate in the supply of money can be influenced by the Central bank in many ways, namely, availability of credit interest rate level and availability of liquidity from the banking sector. All these can affect the investment, production, consumption of individual as well as government spending. Omankhanlen (2014). Business cycle evenness, financial crisis prevention, rate of interest stabilization in the long run, the rate of exchange in real terms has recently been identified as objectives supplementary to monetary policies due to global financial crisis weaving which overwhelmed both emerging and developed economies of the world (Mishra and Pradhan, 2013). Nigerian banks generally believe that there is great risk in lending to the manufacturing and agricultural sectors of the economy, hence, their apathy in giving credit to these sectors of the economy, though these sectors hold the key to the development of the economy especially in employment and foreign exchange generation.

A solid and stable financial sector is essential to make a well-functioning national economy and ensure balance liquidity within the economy. Appropriate liquidity management is essential to foster economic growth. Though, to achieve economic stability proper uses of fiscal and monetary policies are required. Despite establishing regulatory agencies and monetary policy committees, Nigerian banks have actually been deterred in creating adequate liquidity and additional credit for the sustenance of the entire economy.

The Central Bank of Nigeria (CBN) over the years, have instituted various monetary policies to regulate and develop the financial system in order to achieve major macroeconomic objectives which often conflict and result to distortion in the economy. Although, some monetary policy tools like cash reserve and capital requirements have been used to buffer the liquidity creation process of deposit money banks through deposit base and credit facilities to the public.

Monetary policy remains a critical tool in stimulating the growth and stability of financial institution in most developing economics. In Nigeria, the objectives usually include promoting monetary stability. Strengthening the external sector performance and generating a sound financial system that will support increased output and employment. Monetary policy is a major economic stabilization weapon which involves measures designed to regulate and control the volume, cost, availability and direction of money and credit in an economy to achieve some specific macro-economic policy objectives (Ndugbu and Okere, 2015).

Monetary policy according to Anyanwu (2009) involves a deliberate effort by the monetary authorities (the Central Bank of Nigeria) to control the money supply and credit conditions for the purpose of achieving certain broad economic objectives.

Central bank also determines certain targets on monetary variables. Although, some objectives are consistent with each other’s, others are not, for example, the objectives of price stability often conflicts with the objectives of interest rate stability and high short run employment. The role of the banking industry in development process cannot be over-emphasized as they play so many functions. The most important banking industry in Nigeria is the deposit money banks. In order to make profit, deposit money banks invest customer deposits in various short term and long term investment outlet, however core of such deposits are used for loans. Hence, the more loans and advances they extend to borrowers, the more the profit they make (Solomon, 2012). Prior to 1986 direct monetary instruments such as selective credit controls administered interest and exchange rates, credit ceilings, cash reserve requirements and special deposits to regulate the banking system were employed. The fixing of interest rates at relatively low levels was done mainly to promote investment and growth. Occasionally, special deposits were imposed to reduce the amount of excess reserves and credit creating capacity of the banks.

The banking sector is largely dominated by commercial banks and by far the most important in any developing countries like Nigeria. Globally, the unique role of banks as the engine of growth in any economy has been widely acknowledged (Adegbaju and Olokojo, 2013; Kolapo, Ayeni and Oke, 2017; Mohammed, 2017). In fact, the intermediation role of banks can be said to be a catalyst for economic growth and development as investment funds are mobilized from the surplus units in the economy and made available to the deficit units. In doing this, banks provide and array of financial services to their customers. It can therefore be said that the effective and efficient performance of the banking industry is an important foundation for the financial stability of any nation. The extent to which banks extend credit to the public for productive activities accelerates the pace of a nation’s economic growth as well as the long-term sustainability of the banking industry (Kolapo, Ayeni, and Oke, 2017; Mohammed, 2017).