The Impact Of Monetary And Fiscal Policies Of Central Bank Of Nigeria On The Profitability Of Bank


The development of banking and banking institution dates back to the ancient days although its focus, scope and functions underwent changes and with time evolved to what is referred to as banks and banking industry today.

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The ways in which commercial banks operate can be traced back to the merchants, goldsmiths who were the money lender of those  days in the form of promissory notes having their values on gold in reserves of coins and other  precious metals Onuigbo (1992:138).


The need for a commercial bank cannot arise in a barter economy. A barter economy is an economy that is characterized by exchange goods for goods. it was therefore through evolution to metallic money and to coins that there becomes what is the exchanges today, have the need for cash transaction that brought about banking operations. One of the comprehensive definitions of commercial banking regulation act of India 1949. the act defines it as the accepting for the purposed of lending or investment deposit of money from the public repayable on demand or otherwise and withdrawal by cheque, draft, order or  otherwise.

Commercial banking in Nigeria predates the central Banking and laid down the foundation of the Nigeria financial system as far as the late nineteenth century. Consequently, commercial banks played a significant role in the development of the system by creating awareness for saving. From beginning of banking in Nigeria in 1892 tile 1952 there was no regulation of banks. The failure of many banks during the “Banking Boom” era resulted in a significant loss to depositors the collapse of one banks after the other caused considerable concern within government circles.


As a result of these government felt that there was need for a code of banking conduct in order to control the banks in Nigeria and to protect their depositors from suffering further losses. In view of this the colonial government appointed the paten   commission to look into  the existing state of banking in the country and make recommendations on the extent as well as the form of control that was required in the country. Although the commission was set up in September 1948, it was based on its recommendations that the first banking regulation was passed in Nigeria in 1952 (Anyanwokoro 1999: 55).

An ordinance to the regulation of the business of banks which was passed in May 1956. this ordinance of 1952 stipulated the requirement for the entry into banking business. These requirement include the minimum paid up capital. After the enactment of 1952 banking ordinance, banks that were  mainly dominated by  foreigners but were still indulging in some malpractice which the act could not effectively control. This ugly trend therefore called for the establishment of a body that would supervisor and control the operations of these commercial banks.

This generated or triggered off two  opposing camps. The nationalist who were of the view that central bank was needed to perform this and the other traditional central banking functions.

The colonialist on the other hand believe that it was premature to introduce a central bank in a country where there was no financial system. To resolve these opposing views, three studies were commissioned. Fischer J.L report of 1953, IBRD mission report 1955 and J.B loyne’s report of 1957. It was the J.B loyne’s report of  1957 that favoured the establishment of central bank in Nigeria and by 17th March 1958, the CBN ordinance was promulgated became fully operational on the 1st July 1957. through this act the conditions for establish shinny new banks were doubled for E200,000 to N400.000 under the act.

The central bank started mobilizing the resources of the nation through the introduction of financial instrument like Treasury bills, Treasury Certificate, Bank unit fund, stabilization securities and development stocks. The operations of the  commercial banks are presently being guided by the banks decree No 1 of February 1969 amended in 1970 and banking and other financial institution decree 1990 (BOFID). The law, which comprehensive in scope replaced innovations in the business of commercial banking. According to this decree the minimum paid up capital for foreign owned banks raised from E0.5m to E1.5m and for indigenous banks was increase to E1.6m (Anyanwaokoro 1999:68).

Commercial banking business in the country has maintained a steady growth following the promulgation of the banking 1969 and the companies decree 1969 which made it compulsory for all foreign companies conducting business in Nigeria to b indigenized in the country. This indigenization policy adopted in 1972 and 1977 changed the ownership structure of the banking industry.

Under the policy foreign ownership of banking business was put not to be above 40% structure of ownership of commercial banks at 1983 after the indigenization policy.



Interest rate in Nigeria has always been a problem because of the banks sources of fund which is the public sector. It is the same source all banks are chasing. For instance Bank “A” will chase a deposit from a parastatal, put a spread on it and bring it to the inter Bank market and other banks will take it at a  higher cost. This is the cause of the high interest rate in the country. The small banks some time are at the mercy of the big banks to et funds in the inter-bank market. But when these banks merge and become bigger funds and deposits that came into the industry, no matter how small will blend thereby bringing rate down.

Banks need deposit to grow and if there is no deposit, they cannot grow fro now public sector funds accounts for substantial deposit in the industry. After consolidation, this public sector funds will not be an issue because there will only be a far number of banks and available public sector funds would be able to go round. The banks will also be big enough to attract savings and deposit from the public.

Though bank could segregate into small medium and big banks the minimum capitalization for any bank remains N25 billion. This policy however, exclude community  banks which will continue to operate as before, providing services for the rural communities.


There are so many positive effect which the recent n capitalization of banks by the central bank of Nigeria (CBN) to N25 billion has on the Nigeria economy, to mention but a few;

  1. It helps in nudging the banks into developing the real sector and to stop their penchant for feeding fat on the foreign exchange market. The main thing with banks in Nigeria Is that they are trading on government funds. They are the people that are responsible for the fall in the naira value, because they are all hanging around government money.
  2. It will make Nigeria banks stronger and compete impressively with other African banks on the stock exchange. In fact, numerous financial analysis have consistently argued that the capital base should be increased to match that of South African banks of & 500 million capitalization, this they maintain will firm up the economic and as a result move the nation forward.
  3. It would help in protecting depositors and shareholders against incidence of distress in the industry. Enhanced capitalization would address the issue of distress in the industry and banks would be in a position to finance the real sector of the economy instead of the current funding of importation of goods.
  4. It would also helps the Nigeria banks to embrace mergers and acquisitions so that they could be buy and gain the confidence of customers both in Nigeria and outside Nigeria. When these banks and become bigger, funds and deposits that come (2) into the industry, no matter how small, will blend, thereby bringing interest rate down.
  5. Consolidation will enable banks build capacity to invest in the real sector and also have bigger capacity to address foreign partnership.
  6. With several small banks in the economy, people are even confused about where to put their money, as soon as salaries are paid, people go and withdrawal everything because they do not know what will happen tomorrow. But afar consolidation, changes are that confidence of people will return to the banking industry and many decide to withdrawal their salaries two or three times and by leaving part of their salaries in the system, no matter how small it may be for weeks, it will help the economy.
  7. Mergers and acquisitions will have significant impact on the Nigeria stock exchange. Private Banks are likely to go to the stock exchange for listing while already quoted once will seek its assistance to raise fresh funds among others.

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