Relationship Between Monetary Policy Instruments and Financial Performance of Commercial Banks in Nigeria

Abstract

Monetary policy instruments used by Central Banks aim at controlling inflation in addition to promoting monetary stability and sound financial system. The conduct of monetary policy in Nigeria since 2008 has been designed to influence growth of money supply, ensure financial stability, and maintain a stable and competitive exchange rate. Monetary policy emphasis have over time changed from direct monetary controls to policies that rely on market mechanisms. Changes in monetary policy instruments have been carried out in Sub-Sahara Africa countries such as Nigeria to ensure high profitability of the banking system. However, each time monetary policy instruments are altered commercial banks profitability is affected in Nigeria. For instance Open Market Operations increased between 1999 and 2017 but experienced fluctuations especially in 2012 and 2015. Despite these efforts made by monetary authorities in Nigeria, financial performance of commercial banks has experienced fluctuations and a downward trend. For instance financial performance as measured by Net Interest Margin dropped from 32.7% in 2012 to 11% in 2017. This has become an issue of concern and has led some banks retrenching their employees as a way of reducing costs, loss of depositors’ holdings, some banks were acquired e.g. Eco Bank Nigeria PLC acquired Oceanic Bank Nigeria PLC in 2010 while some banks were liquidated such as AfriBank Plc in 2011, thereby generating unemployment and adverse effect on the economy. Hence, the study sought to investigate the significant effect of open market operations; central bank reserve requirement and monetary policy rates on financial performance of commercial banks in Nigeria and also sought to investigate the intervening effect of monetary policy reforms. This study was anchored on Keynesian theory. The study employed positivism research approach of philosophy and causal research design. The Nigerian banking populace is 21 commercial banks thus, census approach was adopted. Panel data was utilized. Descriptive and inferential statistical methods were used to in analyze data Diagnostic tests such as Hausman Test, Correlation Test, Multicollinearity Test, Normality Test, Heteroscedasticity, unit root Test were conducted. The results of regression analysis showed that open market operation and central bank reserve requirement had a coefficient of β=4.851167, p=0.000 and β=76.57011, p=0.000 implying that both had positive and significant effect on the earning performance of commercial banks in Nigeria. Whereas, Monetary policy rate was found to have a coefficient of β=187.7015, p=0.921 which implied Monetary Policy Rate had positive and insignificant influence on profitability of commercial banks in Nigeria. The results show that monetary policy reform had positively and significantly intervened on the relationship between open market operations, bank reserve requirement and financial performance of commercial banks in Nigeria a most distinctive findings of the study. The intervening effect of monetary policy reforms on the relationship between central bank rate and the profitability of banking sector in Nigeria was positive insignificant which had a coefficient of β=50.19354, p=0.964. The study concluded that monetary policies instruments as adopted by Central Bank of Nigeria are critical and heavily influenced the performance of banking sector players in Nigeria The study recommends that Central Bank of Nigeria should be meticulous and involve management of commercial banks when designing policy instruments to enhance the earnings of the banks in Nigeria.