Draft:Monetary Policy and Market Performance of Nigerian Banks

The importance of the financial sector in promoting economic activity in all nations, including Nigeria, cannot be overstated. Banks are the main repository of the public savings, the core of the payment system, and the entities with the power to create money and distribute financial resources that enable the implementation of credit and monetary policies . Banks facilitate the flow of funds from lenders to borrowers, thereby supporting economic activities and growth. Their intermediary role, which relies on their sound performance within the economy, ensures the efficient mobilization of funds from surplus areas to those with significant deficits. This process helps lenders meet their investment financial requirements, ultimately fostering economic growth Throughout the years, commercial banks have endeavored to maintain their importance in Nigeria’s economy and to achieve this, they have explored various works and services to maximize revenue, increase profit, and strengthen their performance . Nigerian banks have continually evolved by diversifying their revenue streams, embracing technological innovations, expanding their range of products and services, and strengthening risk management practices. This multifaceted approach not only boosts their profitability and operational performance but also cements their role as pivotal contributors to the Nigerian economy. For the country to experience rapid economic growth and development, it is crucial to have a well-performing and efficient banking sector. Ensuring consolidated performance is fundamentally linked to having an efficient deposit money banking sector, especially in a country where rapid economic growth and development is urgently needed.

Due to the unique nature of the banking sector and the critical need to maintain its significance in the economy, the government has significantly involved itself in the activities of banks. It has done so by implementing a range of monetary policies aimed at ensuring stability and growth within the sector (Mokuolu, 2024). The government makes use of monetary policies such as adjusting interest rates or controlling money supply, to influence economic conditions. These monetary policies are designed to regulate the operations of banks, fostering an environment where they can thrive while also safeguarding the broader financial system. This governmental involvement helps to balance the need for economic growth with the importance of maintaining a robust and resilient banking sector, ultimately benefiting the overall economy. Government’s intervention also helps to align the banking sector’s operations with broader economic goals and ensures that banks play a constructive role in the economy.

The banking sector serves as the channel through which the government implements its monetary policy. Since the inception of the Central Bank of Nigeria in 1958, monetary policy has been crucial in regulating the Nigerian economy. The operations of banks are heavily influenced by monetary policy, which is implemented by the Central Bank of Nigeria (CBN) to manage the economy's money supply and interest rates. Monetary policy involves the application of various monetary tools to regulate the quantity, cost, consistent availability, and movement of money and credit. The goal is to achieve key macroeconomic objectives, such as full employment, price stability, an acceptable level of inflation, and overall economic prosperity. It is the tool used to aim at policies of higher economic growth or to control inflation. Monetary policy and deposit money banks are closely intertwined and the evaluation of the banking system, particularly in areas like loans and advances, can be assessed through the effectiveness of monetary policy tools. Monetary policy can either be expansionary or contrationary depending on the objectives of the central bank. Monetary policy is expansionary when the central bank increases the money supply or reduces interest rates to stimulate economic growth. It is typically used during periods of economic slowdown or recession to encourage borrowing, spending, and investment. Contractionary monetary policy is implemented when the central bank decreases the money supply or raises interest rates to curb inflation. The goal is to reduce consumer and business spending, which can help stabilize prices. The tools implemented by the Central Bank of Nigeria to manage the money supply are referred to as monetary policy instruments. The monetary policy instruments are categorized as direct and indirect monetary policy instruments. The direct monetary Policy instruments introduced by the Nigerian Central Bank include credit ceilings, interest rate controls, selective credit control, administered liquidity ratios. The indirect monetary policy instruments include Monetary Policy Rate (MPR), Cash Reserve Ratio (CRR), Open Market Operation (OMO), Liquidity Ratio (LR), and Loan to Deposit Ratio (LDR) among others. The monetary policy committee has made changes in the Monetary Policy Rate (MPR) over the past few years, and as of February 2025, the committee retained the MPR at 27.50%, the asymmetric corridor around the MPR at +500/-100 basis points, the Cash Reserve Ratio (CRR) of Deposit Money Banks at 50.00%, and the Liquidity Ratio (LR) at 30.00% https://www.cbn.gov.ng/Out/2025/CCD/Central_Bank_of_Nigeria_Comminique_No.156_20_February_2025.pdf. These changes reflect the CBN’s efforts to control inflation and stabilize the naira. The inflation rate as of January 2025 is 24.48%. The performance of publicly listed banks in Nigeria on the stock market is crucial because it reflects the value and attractiveness of these banks to investors. This performance is influenced not just by the individual bank's performance (like their earnings or growth) but also by broader economic factors, such as fluctuations in interest rates or inflation. Banks traded on the Nigerian Stock Exchange are impacted by factors like investor sentiment, government monetary policy decisions, and the general economic climate. Therefore, analyzing the performance of the banking industry in the market will provide insights into how financial policies and economic conditions influence the entire financial system. Market performance is mainly evaluated through several crucial indicators, with the Nigerian Exchange (NGX) Banking Index being particularly important.

The NGX Banking Index serves as a benchmark that monitors the performance of the most highly capitalized and liquid banking stocks on the Nigerian Exchange. It captures the overall shifts in the market value of chosen banking equities and offers investors, policymakers, and researchers an up-to-date insight into the market valuation of the banking sector. The Nigerian Exchange Banking Index is very responsive to macroeconomic changes, particularly the monetary policy actions taken by the Central Bank of Nigeria (CBN). It has shown significant sensitivity to changes in the policy landscape, which includes reforms in foreign exchange, adjustments to interest rates, and regulations concerning capital adequacy. This sensitivity highlights the interconnectedness between monetary policy tools and performance metrics in the market, reinforcing the importance of examining how monetary policy influences market performance in the Nigerian setting.

In conclusion, the market performance of publicly listed banks in Nigeria, as indicated by fluctuations in share prices and the behavior of the index, offers critical insights into the viability and stability of the financial sector. Specifically, the NGX Banking Index provides a comprehensive perspective on how decisions related to monetary policy affect investor sentiment, bank valuations, and the overall performance of the sector within the capital market.