THE EXAMINATION OF THE ROLE OF FINANCIAL BANK IN CONSOLIDATING STABILITY IN FOREIGN EXCHANGE

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THE EXAMINATION OF THE ROLE OF FINANCIAL BANK IN CONSOLIDATING STABILITY IN FOREIGN EXCHANGE

CHAPTER ONE

INTRODUCTION

1.0 BACKGROUND TO THE STUDY

The goal of every government of nay economy is to archive equilibrium in the economic system. It is therefore important that the authorities concerned must regulate the system indirectly with policies. This necessitates that government of any country adopting certain economic policies in order to consolidate specific macro-economic goal or objective. Some of such major economic policies include the monetary policies, fiscal policies, exchange rate policies, most of this policies can only be administered thorough the agent of commercial bank which is the pivot of this research work. In Nigeria for instance. Monetary policies have been conducted under wiled ranging economic environment since the establishment central bank of Nigeria (CBN) over many years ago. Basically, monetary and finical polices serve as one of the vital and strategic economic policy adopted by the government of the country in posturing the economic development with a view of consolidating certain economic goals such as acceleration of the economic growth, sustainable balance of payment, maintaining a stable exchange rate of international competitive level, combating inflation, price stability and full employment.

Monetary policy is defined according to the CBN briefs 1994 as the combination of measures design to regulate the values supplied and cost of money in an economy. In consonance with the level of economic activity. Anyanwu (1993, VS 140) refer monetary policies as major stabilization weapon involves measure designed to regulate and control the volume, cost, and availability and direction of money and credit in an economy to archive some specified macro-economic policy objectives. Fiscal policy on the other hand is an attempt by the government using expenditure and tax policy to shift the aggregate demand and aggregate expenditure functions towards desired position. According to Anyanwu (1997, VS 241) fiscal policy is taking to refer to that part of government policy is concerning the raising of revenue and deciding on the level and pattern of expenditure fore the purchase of influencing economic activities or attaining some desirable macro-economic goods. The intricacy in handling the monetary and fiscal policy to consolidating the desired macro-economic objective necessitate that needs for an independent authority so in Nigeria today.

The federal government is the sole monetary authority, but it has delegated some aspect of implementation to both the ministry of finance and the central bank of Nigeria is to formulate and execute monetary policy, to promote financial system. To archive a desired policy objective, the CBN is empowered to use monetary policy techniques or instrument and the CBN dose most of its function through he commercial banks. This techniques can be classified into group, the direct portfolio control and the indirect portfolio approaches. Indirect portfolio includes the open market operation (OMO), reserve requirements, discount rate mechanism. While direct instrument includes; selective credit control, credit selling and moral suasion. Furthermore monetary policy presupposed that there is some relationship between the supply and the demand for money on the one hand economic aggregate such as output, income, savings, general price level and investment. The mix of monetary policy instrument to be used and its effectiveness depends on this relationship. Monetary policy involves monetary management.

Monetary management according Ojo (1992, VS 3) is defined as the act of controlling the movement of monetary and credit aggregate in the issuancxce of stable price and sustainable economic growth. Therefore the Central bank or the central monetary authorities must attempt to keep the money supply growing at an appropriate rate o insure sustainable economic growth, domestic and external stability. Howe ever, in Nigeria the role of monetary and fiscal policy has increased tremendously since after independence. Both civilians and minitry government has adopted this policies consolidate macro objectives. But despite this measure to suit the constant changes in the economic situation of Nigeria, still a lot of problem be deviled the economy ranging from high unemployment, inflation and balance of payment. This prompted me to research on examination of the roles of commercial banks in consolidating stability in foreign exchanges.

1.1 STATEMENT OF PROBLEMS

The application on the monetary and fiscal policies by the monetary authorities using the monetary instrument such as open market operation (OMO), bank reserves etc. in consonance with the prevailing economic situation is aimed at consolidating the macro-economic good of the country such as full employment, low level of inflation, favorable balance of payment. But in Nigeria, inspite of this numerous monetary policy measures adopted, the economy still suffers the problem of high rate of unemployment, inflationary pressure, balance of payment deficit and unstable foreign exchange.

The question that follows the effective are monetary and fiscal policies are in controlling some of this variables, inflation in particular. Why have monetary policies and fiscal policies late in ore economy inspite that they have work in other country. What may be the reason militating against the effectiveness of the monetary policies? As the commercial are the enzymes used by the CBN in administering economic measures, what can they do to aid in consolidating foreign exchange stability. In view of the above outlined question, this research work will try as much as possible to proffer some answers.

1.2 OBJECTIVE OF THE STUDY

The study aims on finding the following;

1. To reexamine the instrument of monetary and fiscal policy and there performance

2. To examine the major policy objective and their achievement in the country

3. To appraise some monetary and fiscal policy measures in Nigeria and see how commercial bank respond to there instruction

4. To make recommendation to policy members

1.3 SIGNIFICANCE OF THE STUDY

This research work is significance because it tries to establish the relationship of monetary and fiscal policy and the role commercial bank plays in the economic stabilization. It is hoped that this work will enhance and improve the use of monetary and fiscal policy in the realization of macro-economic goals associated with economic growth and development

1.4 LIMITATION OF THE STUDY

i. Time frame: due to lack of time, it was very difficult to carry out extensive study on the above topic

ii. Lack of material: it has been wildly observed that in carrying out a study, material that are related to such study tends to be difficult to lay hands on. Apparently, this made it difficult to carry out a thorough research in the above topic. Further more, most of our libraries do not have adequate material needed and this leads to the limitation of the study that is been carried out.

iii. Non-charlante attitude of some organization: Some organization finds it difficult to release some document or information that will help in carrying out a study. This further helps in limiting the extent in which the study would have gone.

1.5 DEFINITION OF TERMS

Commercial bank: the first set of banks to appear in the Nigeria banking area is the commercial bank. The African banking cooperation with head office in Liver Pool opens a branch in Lagos in 1892. It has some problems and later metamorphosize into what is currently known as first bank of Nigeria. The first sets of bank to operate in Nigeria were expert rate banks. They dominated the scheme until 1933 when the first sovereign indigenous bank joined them. The bank and other financial institution decree No.25 of 1991 define a commercial bank as any bank in Nigeria whose business include acceptance of deposit withdrawal by cheque.

1.6 REFERENCE

Rita M. (1984): Internal Financial Management Chicago Production

(Prentice/ hall Books)

Davis E.W (1974) and K.A Yeomaros: Companies Finance And Capital Market Syndics- Cambridge University press (2000)

Alistair Alcock (2000): The Financial Service And Market Act

Iloh J. (2004): Fundamentals of Financial Management. Enugu/hill Books.

Jochen Krsake (1946): Bankers With a Mission – Oxford University press

Clasan E.M (1994): International and Europeans Monetary System.

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