EFFECTS OF MONETARY POLICY ON BANKS ASSET PORT FOLIO BEHAVIOUR: EVIDENCE FROM NIGERIAN ECONOMY UGOCHUKWU

This research study examined the effects of monetary policy on bank's asset portfolio behaviour in the Nigerian economy. The purpose of this study was to investigate the nature of relationship between monetary policy instruments and growth rate in total Bank asset portfolio behaviour. In course of this study, secondary data were sourced from the Central Bank of Nigeria Statistical Bulletin, the granger causality test and the Johansen cointegration test in a Vector Error Correction Model (VECM) setting were employed. The empirical result demonstrate that there exists a long-run equilibrium relationship between monetary policy tools such as Cash Reserves Ratio (CRR), Loan to Deposit Ratio (LDR), Liquidity Ratio (LQR) and Rates (MRR) and Treasury Bill Rates (TBR) have no significant impact on Growth rate in total bank assets portfolio. The study also showed that, there is no granger causality between the dependent variable Growth in total bank asset" portfolio behaviour and the independent variable such as Minimum Rediscount Rates, Cash Reserves Ratio, Loan to Deposit Ratio and Liquidity Ratio within the period under study. It was recommended that monetary policy tools should be used for the purpose of achieving Quality Asset Portfolio Behaviour (QAPB). Keywords; Monetary Policy, Bank Assets Portfolio, Nigerian Economy and Central Bank of Nigerian Bulletin Introduction Over the years nationally and globally the financial sector and indeed the banking industry in particular to a large extent has always been regarded by scholars, and Financial analysis as pivotal and special (Toby 2008). This is because of strategic systemic role in the transformation of a developing economy like Nigeria into a modern industrial society. This sector contributes immensely to economic growth and development of every nation by channeling financial surplus resource into productive investment (Okafor, 1983). Online Journal of Arts, Management and Social Sciences (OJAMSS); Vol.1 No.2, December 2016, pg.124 147 (ISSN: 2276 – 9013) 125 Hence, it is obvious that without these sectors, a country domestic economy would have been characterized and limited to a barter economy, which is dearly an ineffective and inefficient system because markets cannot develop nor can specialization take place Onoh (2002). This is also informed by the fact that the main aim of banks is to seek profit like any other institution. Its capacity to earn profit depends upon its investment policy, in turn, depends on the nature and manner in which it manages its investment portfolio. Thus commercial bank investment policy emerges from a straight forward application of the theory of portfolio management which is refers to the prudent management of a bank's asset and liabilities in order to seek some optimum combination of income or profit, liquidity and safety. Of-ail assets of cornmerc4al banks, the loan portfolio appears to be the most important to the public, the government and the bank itself. When a bank operates, it acquires and disposes of income-earning assets. These assets plus the bank's cash make up is know as its portfolio, Jhingan (2004), hence these manipulations can have important effects on the monetary policy, on the borrowing and spending practices of household, businesses and on the economy as a whole. However, through the monetary policies guideline of the Central Bank of Nigeria (CBN) which is made public or available to banks annually or periodic gives a clear-cut directives on the extent to which commercial banks can create credit, Central Bank of Nigeria (CBN) by law controls and supervises the activities of other banks (Deposit Money Bank) through its monetary instruments such as Open Market Operation (OMO),discount rate (MRR), Minimum Liquidity Ratio (MLR), and even Loan to Deposit Ratio (LDR). Monetary policy according to Ohale and Onyema (2002) can be defined as the measures taken by the government to influence money supply, interest rates (credit) in the economy with a view of influencing the overall macroeconomic aggregates (that is output, employment, economic growth, balance of payment disequilibrium and prices). Monetary policy may be expansionary or restrictive (concretionary). An expansionary monetary policy is designed to regulate the growth of aggregate demand through increase in the rate of growth of money supply, thus making credit more available and interest rate lower. An expansionary monetary policy is most appropriate when aggregate demand is low in relation to capacity of the economy to produce. That is when unemployment of resources especially labour is high. A restrictive or concretionary monetary policy is designed to control the growth of aggregate making credit less available and interest rates high. A restrictive monetary policy would be most appropriate in terms of excess money supply caused by inflation. According to Onoh (2007), monetary policy is a major of economic management, bank asset portfolio behaviour and overall economic performance. However, for monetary policy to achieve its necessary desired objectives, it has to be well co-ordinated, managed, harmonized and well complemented with fiscal policy. Also, there is the active use of stabilization securities as an instrument of monetary control from time to time. There is a requirement that the components of government (gilt-edge) securities held in each banks liquid asset portfolio be of a certain minimum percentage. According to Moses and Mbufor (2007), as cited in Gbosi 2005, the conduct of monetary policy relates to the deliberate strategies which are adopted by authorities to influence the level of credit in an economy Online Journal of Arts, Management and Social Sciences (OJAMSS); Vol.1 No.2, December 2016, pg.124 147 (ISSN: 2276 – 9013) 126 with 1 he view of achieving desired objective of price stability which is usually set as the prime objective of monetary policy. According to Central Bank of Nigeria (2002), in order to encourage healthy competition for non-government sector deposits and to facilitate financial deepening, all insured bank in the system were directed to transfer all government deposits to the Central Bank of Nigeria (CBN). This directive drastically worsened the liquidity position of many banks resulting in some of the banks borrowing in the inter bank market at a very high rates. The failure of direct approach to monetary controls over the years prompted the adoption of open market operations (OMO), an indirect system. Thus, with the adoption of indirect approach to monetary and credit control, credit ceilings had to be imposed on banks whose financial conditions are unsatisfactory while banks with satisfactory financial conditions have the liberty to expand their credit portfolio to any level that can be prudently sustained. Therefore, our focus in this work is to examine, assess the effects to changes on the various monetary instruments ordinary held in the portfolio of insured deposit money banks and to also ascertain whether or not there has been a significant change in insured bank asset portfolio behaviour in recent times. Statement of Problem The Central Bank of Nigeria (CBN) which is the Apex Bank occupied an important role ensuring and promotion of monetary stability and soundness of financial system. This cannot be reemphasized because it also helps to carryout an efficient and effective monetary policy. It has to act as penalties to erring/defaults banks. These policies more often than not conflict with the banks objectives which include profit maximization and shareholders wealth maximization with the aim of maintaining optimum liquidity, safety and cost minimization strategies. The techniques by which the CBN put together to achieve its monetary objective can be classified broadly into two, namely: the portfolio control and market intervention approach. The former places restriction on deposit money banks by limiting their ability to acquire assets and liabilities. The later relies on the power of the monetary authorities to influence the availability and rate of returns on financial assets thus affecting both the supply and demand of money. Apart from monetary policy, other factors that also affect bank asset portfolio behaviour are the general economic condition, the existing policies of the banks and change in government policies and progammes, bank past experience, externalities and profit level may also be a determine factor. Channel of monetary policy transmission, changes in the money (consumption, investment) through the effects of the changes in interest rate on cost of capital. The credit channel works mainly by portfolio adjustment in banks, household and firm balance sheets in favour of asset that have higher returns during periods of monetary fluctuations. Under normal situation, other asset commanding higher demand would produce more and thus stimulate the economy. A special case of the credit channel is the bank to ratio credit. In such a situation, customers who depend on bank loans would be crowded out of the loan market. However, with these noble objectives of monetary policy in relation to the effects on bank asset portfolio behaviour in Nigeria economy, monetary policy instruments are yet to yield the much desired results, these justify the need to undertake a research to analyze the effects of monetary policy on bank asset portfolio behaviour as it affect the stock of money Online Journal of Arts, Management and Social Sciences (OJAMSS); Vol.1 No.2, December 2016, pg.124 147 (ISSN: 2276 – 9013) 127 supplies and the credit base of banks thereby having positive outcome on the economy. It would also examine if a change in bank asset portfolio behaviour vis-a-vis in Nigeria economic growth within the period understudy. Objective of the Study The main purpose of this study is to determine whether there is any significant effect of monetary policy on bank asset portfolio behaviour using evidence from Nige