- BACKGROUND OF THE STUDY
The importance of monetary policy in the economic development of developing countries has attracted a lot of attention in recent years. The perverse effect of interest rate controls, overvalued exchange rates, controlled lending and other control variables have led to a large volume of research relating to monetary policy. An open and well unregulated monetary policy promotes economic growth and stability. In the current setting with a rapidly globalizing world economy, efficient monetary policy are essential for productive gains from the world market and to protect the domestic economy against foreign shocks.
In attempt to create and provide better living conditions for the populace, various government have embarked in the use of policies (fiscal and monetary) to control economic variables that facilitate growth and development. The focus of this study shall be to examine the impact of monetary policy on commercial bank lending in Nigeria.
Monetary policy in the art of controlling the direction and movement of money and credit facilities in pursuance of stable price and economic growth in an economy (CBN 1998). It is the major economic stabilization weapon, which involve measures designed to regulate and control the volume, cost, availability and direction of money and credit in an economy to achieve some specified macro-economic policy objective. That is, it is a deliberate effort by the monetary authorities (the Central Bank) to control the money supply and credit condition for the purpose of achieving certain broad economic objective. The Central Bank of Nigeria has an important role to play by regulating the stock of money in such a way as to promote the social welfare (Ajayi 1999).
Monetary policy in Nigeria over years has been the combination of measures taken by this monetary authority to influence directly or indirectly or both, the supply of money and credit to the economy and the structure of interest rates with a view to achieving a sustainable rate of economic growth, price stability and balance of payment equilibrium. Although Monetary Policy has been conducted under wide ranging economic environments, the strategy has remained the same. However, the relevant target monetary policy has changed following rapid institution changes in the financial environment. Until the late 1980’s, narrow money stock was the focus of Central Bank of Nigeria Monetary Policy.
In the light of this, the assessment of the banks system (particularly in the area of loans and advances) can be evaluated through the performance of Monetary Policy tools, which can be broadly classified into two categories; the portfolio control approach and market intervention. Under the system of direct monetary control, the monetary authorities use some criteria to determine monetary and credit targets and interest rates which are the intermediate targets to attempt to achieve the ultimate objectives of the policy. In the regime of indirect monetary control, because the intermediate variables are not under the control of Central Bank of Nigeria, only the operating variables (Open Market Operation, Reserve Requirement and Discount Rate), which are related are to the path of intermediate variables in a predictable way are controlled and are the major techniques of influencing the monetary base.
By and large, the main purpose of this research work is to examine the impact of monetary policy on commercial bank lending in Nigeria.