EFFECTIVENESS OF CREDIT GUIDELINES AS AN INSTRUMENT OF MONETARY POLICY IN NIGERIA

EFFECTIVENESS OF CREDIT GUIDELINES AS AN INSTRUMENT OF MONETARY POLICY IN NIGERIA

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ABSTRACT

The credit guidelines are those monetary policy instruments used by the monetary authorities particularly the Central Bank to influence the supply, allocation and cost of credit with view to attaining specific macro-economic objectives in the country. It is a deliberate measures aimed at controlling the qualitative supply of money. Some of the goals are directed towards steering and maintaining the economy at its full potential output to attain full employment, to achieve a balance of payment equilibrium and to moderate inflationary pressures.

The objectives of the study includes the examination of credit guidelines, to identify factors militating against the realization of the guidelines, to evaluate the Central Bank’s method of compliances, to identify areas of frictions (if any) between the CBN and the government and to make recommendation for the effective improvement of the policy guidelines.

Using the correlation analysts and chi-square distribution, four hypothesis listed below were tested.

  1. The effectiveness of monetary and credit policy in credit guidelines in Nigeria economy
  2. CBN is autonomous in the real sense of it.
  • Some banks violate some of the guidelines in preference to paying fines.
  1. CBN encounter problems while ensuring compliances by banks and other financial institutions.

Source of data used included primary and secondary sources. Primary data involved interviews and use of questionnaires while the secondary data were sourced from the CBN library, literature in the field of economics, banking and finance.

Recommendation and conclusion were based on find lasting solution to improve the operation of the credit guidelines in Nigeria.

 

 

 

 

 

LIST OF TABLE

  1. Banking System Credit to the Economy (1993 – 2000)
  2. Sectoral Allocation of Commercial Banks Loan and Advances (1993 – 2000)
  • Money Supply in Nigeria (1993 – 2000)
  1. Price Stability (1993 – 2000)
  2. Economic Growth (1993 – 2000)
  3. Nigeria Balance of Payment Positions (1993 – 2000)

 

 

TABLE OF CONTENTS

CHAPTER ONE

INTRODUCTION                                                                     1

  • Background of Study 1
  • Statement of the Study 3
  • Objectives of the Study 4
  • Significance of the Study                                         5
  • Statement of Hypothesis 5
  • Scope and Limitation 6
  • Definition of Terms 7

CHAPTER TWO

Review of related literature                                                          12

  • Literature Review 12
  • Objectives of Credit Guidelines Policy 16
  • Instrument of Credit Guidelines 20
  • The Credit Guidelines Historical Perspective 22
  • Banking System Credit to the Economy 28
  • Sectoral Allocation of Commercial

Banks Loan and Advances                                                29

  • Money Supply in Nigeria 31
  • Price Stability 32
  • Economic Growth 33
  • Balance of Payment 35
  • The Financial Institution, the CBN

and Some of their Operations                                            36

  • Analysis of the 2000 Credit and

Monetary Policy Instruments                                             42

CHAPTER THREE

RESEARCH DESIGN AND METHODOLOGY           47

  • Source of Data 47
  • Questionnaire Design 48
  • Method of Investigation 49
  • Sampling Population and Sample Size 49
  • Determination of Sample Size 49
  • Method of Questionnaire Distribution 51

CHAPTER FOUR

DATA ANALYSIS                                                                    

  • Data Presentation and Analysis 52
  • Testing of Hypothesis                     60

CHAPTER FIVE                    

SUMMARY OF FINDINGS,

RECOMMENDATION AND CONCLUSION                        73

  • Summary of Findings 73
  • Recommendation 78
  • Conclusion 83

Bibliography                                                                      85

Appendix                                                                           88

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

The level of economic, activities in any economy has to be monitored always because there are some factors that are affecting it. And one important factor affecting the level of economic activities in every economy is changes in supply of money. These changes affect directly the rate of spending by the citizens of the country. However, it is because of the economic importance of money that the monetary authorities had devoted time and resources towards the management of money.

The credit guideline, which is my topic of study, has formed the apex instrument used by monetary authorities in Nigeria to influence the economic activities. These guidelines are inform of Central bank of Nigeria monetary policy circulars prescribing sectoral and aggregate increase and decrease in credits by the commercial and merchant banks.

These guidelines are used in regulating the pace and contents of economic development in an economy. However, it involves the authority’s interference with the volume and direction of credit by the commercial and merchant banks to those sectors of the economy they believe that are of crucial important to the economic development. And because of this, the government has divided the economy into two major sectors, namely the preferred or high priority sectors and less preferred or other sectors.

The preferred sectors comprise, agriculture, industrial or manufacturing enterprises, residential building construction, exports and essential services. Moreover, since the introduction of the credit guideline in 1964, the government has urged banks to grant more credit facilities to these sectors in order to boost the rate of economic development in the country.

The less preferred sector of the economy comprises general commerce, government agencies and others. Government also urges banks to allocate less fund or exercise restraint in granting loans and advances to this sectors because of the effect it would have on the general price level.

However, credit guidelines, could be regarded as an anti-inflationary technique preventing the flow of funds to those sectors of economy that are very sensitive to inflationary pressures.

1.2     STATEMENT OF THE STUDY

Despite the efforts of the monetary authorities in order to achieve the objectives of the credit guidelines, performance has fallen far below the projected level. Several factors could be identified to account for the failure to achieve these sets of objectives. The factors form the basis of the statement of the study and includes:

  1. Some of the credit guideline measures are ineffective to tackle the economic problems.
  2. Lack of complete autonomy on the part of the CBN to discharge its monetary functions effectively.
  3. Inadequate coordination in major problems and government activities thereby fueling inflationary pressures in the economy.

The problem of taxing and

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