1
THE CENTRAL BANK OF NIGERIA (CBN) AS A CATALYST TO
NATIONAL ECONOMIC POLICY AND DEVELOPMENT (1986 - 2011)
CHAPTER ONE
1.0
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
The role of the central bank in promoting national economic policy and
development has in recent years become a topical international economic policy
issue. Although the empirical evidence on the relationship between central bank
operations and macroeconomic stability proxied by price stability is not conclusive
(Folawewo and Osinubi, 2006), the prevailing wisdom supports the need to accord
a central bank a reasonable degree of autonomy that will give it substantial
discretion to conduct its monetary policy in a manner that will help achieve its
assumed central mandate of maintaining domestic price stability, defined as a
regime of relatively low inflation rate and an environment free of inflation
expectations.
While monetary policy’s aim at long-run price stability is critical to fostering
sustainable economic growth, central banks’ role in promoting growth and, more
generally, a healthy economy goes beyond the conduct of monetary policy (Sanusi
2
2002). Through involvement in financial regulation and supervision, as well as in
the oversight of payments system operations, central banks play a key role in
preserving and enhancing the safety and soundness of the banking and financial
system
(Alicia
and
Rio
2003)
The Central Bank of Nigeria (CBN), like most central banks in the developing
economies, undertakes some non-traditional central bank functions such as
promotion of economic development, especially during the formative years in the
1960s and 1970s. The contribution of the CBN in this regard, was focused on the
creation of the financial environment and institutional framework conducive to the
mobilization and channeling of financial resources into productive investment.
Thus, during the first decade of its establishment, the Bank concentrated on the
task of promoting and transformation of the rudimentary financial structure of the
economy. These included the issuance of money and capital market securities such
as the Nigerian Treasury Bills and Federal Government Development Stocks.
Moreover, it provided technical assistance to other relevant institutions, and startup capital for the development of money and capital market institutions. The CBN
initiative to encourage long-term bank lending to the economy included the
establishment of various refinance and guarantee schemes, focused on the priority
sectors of the economy. Two of such schemes are the Agricultural Credit
Guarantee Scheme Fund (ACGSF), and Export Refinance Scheme.
3
1.2
STATEMENT OF THE PROBLEM
Given the number of years since the Central Bank of Nigeria was established and
the substantial financial resources and endowment available in the country,
coupled with the existing institutions one will expect that the monetary sector and
the economy at large would have been well-established. But one can claim that the
entire spectrum of the economy has not been sufficiently active especially when
compared with the economy of other developing countries.
Some of the problems that are identified for this include: Political
problems in the country, poor implementation of past policies, insufficiency of
database, ethical problem.
The main thrust of this study shall be to critically appraisal the performance of the
Central Bank of Nigeria (CBN) with a view to suggesting ways to improve its
effectiveness and adapt to changes in the economic environment.
1.3
OBJECTIVES OF THE STUDY
The main objectives of the study are as follows:
1. To examine the practice of Central banking in Nigeria;
2. To examine the role and function of the Central Bank of Nigeria;
3. To critically evaluate the performance of the Central Bank of Nigeria in terms of
4
macroeconomic developments;
4. To make suggestions as to how the operations of the Central Bank could be
improved.
1.4
Research Questions
1.
Do you think that central bank have a significance role on economy growth?
2.
Do you think that central bank activities within the period of years study
performed very good in the economy.
3.
Do you suggest changes in the central bank future policy.
1.5
STATEMENT OF HYPOTHESES
The hypotheses to be tested in the course of this research work are:
HYPOTHESIS I
H0 - That the Central bank’s operations do not affects economic growth in
Nigeria.
H1 - That the Central bank’s operations affect economic growth in Nigeria.
HYPOTHESIS II
H0 - That the Central bank’s operations do not impact on inflation in
Nigeria.
H1 - That the Central bank’s operations impact on inflation in Nigeria.
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1.6
SIGNIFICANCE OF THE STUDY
This study is significance because it would provide an objective view of the
performance of Central Bank of Nigeria in terms of macroeconomic
developments.
Besides, it would provide policy recommendations to policy-makers on
ways to make the Central Bank more effective.
1.7
SCOPE OF THE STUDY
The financial system is a large component with lot of diverse and sometimes
complex parts; this research work will only look at a particular part of the
financial sector i.e the Central bank. This work will cover all the facets that
make up the operations of the Central bank, with emphasis on the Bank’s
impact on selected macroeconomic parameter. The empirical investigation
shall be restricted between 1986 to 2011 with special focus on major Central
bank’s monetary instruments i.e cash ratio, liquidity ratio and money supply.
1.8 DEFINITION OF TERMS
In order to make this work a bit clear certain terms will be defined
1)
BANK: Any person who carries on banking business and includes all
the financial institution such as commercial bank mortgage bank on
acceptance house and discount house etc.
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2)
MONETARY POLICY: It is an instrument used by central bank to
control inflow and outflow of money in the Nigeria economy.
3)
MONEY MARKET: This is a market for borrowing and lending short,
medium term loan or funds.
4)
OPEN MARKET OPERATION: This weapon involves the sale and
purchase of securities, bills bonds, and government securities by the
CBN
5)
LEGAL RESERVES RATIO: This is minimum percentage of deposit
that commercial bank is required by law to deposits with the CBN.
6)
CREDIT GUIDELINES: This is a prescribed guidelines both with regard to
the amount of loan and advance on commercial and merchant bank would
REFERENCES
Alicia G. H. and Pedro del Rio (2003), “Financial stability and the design of
Monetary Policy” Being a paper presented at the 24th SUERF Colloquium in
Tallin, June.
Folawewo, A. O. and Osinubi, T. S. (2006). “Monetary Policy and Macroeconomic
Instability in Nigeria: A Rational Expectation Approach”. Journal of Social
Science, vol.12(2): pp.93-100.
7
Sanusi, J. O. (2002). “Central bank and the macroeconomic Environment in
Nigeria”. Being a lecture delivered to participants of the Senior executive course
No. 24 of the National Institute for Policy and Strategic Studies (NIPSS), Kuru on
19th August.
CHAPTER TWO
2.0
LITERATURE REVIEW
TUCKMA N (1978) says that every serious piece of research includes a
review of relevant literature. Emory (1980) also asserts that literature survey in the
obvious first step in an exploration. One gains little from discovering what is
already known. A literature study usually turns up a number of leads for further
investigation that will advance the research especially if we do not confirm the
investigation to obvious a lot of looks have been written researchers conducted and
paper delivered by various scholars and individuals on the role and impact of the
8
central bank of Nigeria economic growth. Some Nigeria scholar have also
provided a sound frame work for descriptive analytical and systematic study of
issues related to strategies of banks and the financial system.
This apex institution in America is called the federal reserve system in
Nigeria, central bank of Nigeria (CBN) and in Britain (from where Nigeria
borrowed and a lot about the art of central banking) the bank of England. One
glaring fact about the art of central banking, be it in a developed or developing
country, capitalist or social list system of economy, is that the traditional duties of
these banks are the same i.e promoting monetary stability and sound financial
system, is a state bank and usually the only legal institution that issues a legal
render (means of exchange) etc other duties like developmental (the secondary
functions) may be fashioned as the dictates of the economy and the policies of the
government in power in that country may wish.
The history of central banking in Nigeria is not as that of commercial
banking. In fact, that has been the trend in the historical development of almost all
central banks in the world, including the bank of England the mother of all modern
central banks. This scenario would make it possible for either some powerful
financial to amalgamate to became acceptable as a “central bank” or the
government may decide to use the facilities of an already existing well established
9
and strong commercial bank by nationalizing and calling it a state bank or a central
bank.
However, in Nigeria case non of these was the case. A totally new institution
was established to be the apex bank and this have had, and is still living a lot of
advisers consequences in our financial system following the analysis further, other
countries like Britain, America and even Ghana had a well established financial
system that was yauning for a leader a co-ordinator to lead the entire financial
system to advices desired goal. In the case of Nigeria it may be likened to a
headless body. The body was not even having the necessary appendages like hands
stomach, legs etc to carry the head forced on it, did not have eyes, ear, month, or
the brain. In fact virtually all the organs that the head as the “head of the unit”
needed to control the entire body system were absent. In the case of other countries
the boy had already developed all the necessary appendages and the head allowed
to develop naturally or gradually to able to control. The entire body system
harmoniously. In Nigeria, it could be said that the forced on neither the body nor
the head had developed enough appendages for the smooth and efficient working
of the entire system. This formed the basis of the thinking of our colonial masters
and especially those that were called to come and study the viability and
desirability of an apex bank for Nigeria in the 1950’s by Nwankwo G. O. (1980)
the Nigeria financial system.
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BRIEF HISTORY OF WEST AFRICAN CURRENCY BOARD (WACB)
Loynes J. B. from the bank of England whom the federal government
commissioned in 1975 to advise her on the establishment of a Nigeria central bank,
the introduction of a Nigeria currency and other associated matters” did not mince
words in condemning the establishment of such an institution in its entirely
because of the non-existence of facilities for a central bank to achieve its goals. By
Loynes J. B. (1975).
Loynes argued that:
“Nigeria does not possess a securities market, and internal
public issue by government are virtually unknown, whatever
the ultimate aim, therefore, the problem and techniques of
central bank must be judged from severely practical banking
angles” it is pointless to discuss “open market operation in
bills and securities unit market exist. The ability and need of
government to the banks and traders to drawn on or employ
resource abound may affect local money conditions more
than central bank action. Moreover other factors, such as
the state of the export trade and the policy of marketing
board evil also continue to make themselves tell me.
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2.1
THE ESTABLISHMENT OF CBN
By Nwankwo (1986) the establishment of central bank of Nigeria, the early
nationalist leader knew for certain will be, but how soon it will was they could not
predict. Be that as it may in 1952 at the floor of federal house of assembly (first
sitting) Lagos Chief Anthony Enactor summoned up courage and moved a
appropriate member motion “calling for establishment of a central bank for the
purpose of rapid economic development in all its phases”. However, as result of
the composition of the house than and lack of awareness of the importance of a
central bank on the part of some Nigeria members the bill failed. Even though the
motion was not successful it strived the hornet-comb. It gingered the colonial
office in London into action within a year. In 1953, the colonial administration
appointed Mr. Fisher, a senior staff of bank of England to inquire into the
desirability and practicability of establishing a central bank in Nigeria as an
instrument for promoting the economic development of the country” fisher in his
report as an agent of colonialism and an orthodox banker standard that a central
bank cannot be established in a financial environment where all factors that make a
central bank perform are non-existent. He noted specifically the absence of well
developed money and capital market on bank credit. Money supply and ultimately
the level of economic activity.
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From the point of view of the bank of Nigeria is highly desirable as it could
be the only means of surviving a crunch. It would prevent liquidity train which
could head to insolvency and possible collapse in outcome which is not unlikely if
banks were compelled by such situation to undertake panic sales of theirs to meet
coins demand.
The second major role the central bank of Nigeria in the operation of the
banking industry arises form the conduct of monetary policy. In this area the
central bank of Nigeria has wide powers and possesses on away of instruments
which may be employed for regulating the volume of bank credit. Or influence the
cost of such credit. The bank could issued directives which are binding on the
banks or engage in moral suasion and it could act directly on bank reserves through
trading in securities in the money market.
Over the years however, the main instrument of control has been credit
landings adjustments to cash liquidity ratios have also been frequently employed.
Since 1990 the bank has found it necessary to supplement the credit ceilings with
issues of stabilization securities.
The rational for the various form of control of the credit lies in the fact that
the banks creates secondary deposits and therefore, money by the extension of
credit in order to regulated the level of money its growth, therefore, the central
13
bank of the Nigeria must be able to influence the level and cost of bank credit in
some ways.
A third important function is prudential reputation and supervision. The
objectives of the banking regulation broadly are to encourage safe and sound
banking practices by individual banks to secure depositor protection and the
stability and efficiency of the banking system. Prudential banking regulation is
accomplished through prescriptions on capital, liquidity provisioning for nonperforming assets / restrictions on banking business and licensing requirements
while prudential supervisors is carried out through off-site surveillance and on site
examination in accordance with control bank guide lines. The scope of motoring
by the bank is very wide, including the external of adequacy of a bank capital, the
standards are well as the level of provision for non performing assets, the quality
and performance of management staff development standards of book-keeping and
the effectiveness of internal control arrangements. Also included is compliance of
banks with policy directives and provision of relevant legislation. In must cases the
bank is empowered to employ. Sanctions to compel compliance.
As parts of the regulating mechanism have been strengthenered or reformed
in recent years.
2.2
HISTORY OF THE BANKING INDUSTRY IN NIGERIA
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Prior to the establishment of the central bank of Nigeria in 1959, the main
banks in Nigeria were have branches of banks of the metropolitan countries whose
lending and related activities ever largely continued to the financing of exrebiate
business which consisted largely of the export of primary commodities and import
of manufactories. The banks as such were mere enclave institutions that had litter
to do with economic development efforts of the country. By 1960, the twelve (12)
commercial banks operating in the country had the total asset of N235.8 million
and about 190 branches throughout the country. The only merchant bank Philip till
(Nigerians) limited which later merged with Nigerian Acceptance limited did very
little business. There were no specialized development banks. Soon after the
establishment of the central bank it assumed responsibility for the Nigerian isotion
of the credit base through the creation of local money and capital market
instruments in which financial institutions could invest their surplus funds instead
of the money and capital market abroad.
Development in the economy and the changing views of the monetary
authorizes had great imput on the perceived sales of he financial system. The
banking system in Nigeria today, is made up the central banks of the Nigeria, the
commercial and merchant banks federal saving banks and special banks.
The central banks, the development banks the saving banks and the people
bank of Nigeria are owned and control by the federal government although same
15
non-government equity is involved in the case of the development banks. The
commercial and merchants banks are orgaracterizitised by private initiative and
participation while community banks are sponsored by communities.
2.3
THE CENTRAL BANKS OF NIGERIA AND THE BANKING
INDUSTRY
The role of central bank of Nigeria (CBN) in the banking industry is largely
anchored on two important legislations. The central bank of Nigeria Act 1958 (as
amends and the banking decree 1969 (as amended) under the act the central bank
of Nigeria is empowered to act as banker to the banks to perform the role of lender
of least resort to them.
This function of central bank of Nigeria is of crucial importance in situation
of crises arising from shape contractions in liquidity.
In such situation, the bank could in exercise its powers, prevent a run on a
few banks from regenerating into a run on the industry as whole. In the face of
such threat, the central bank is empowered to supply liquidity to the banks and
thereby arrest the descriptive effects of the run to cope with the development of in
the industry. Such development include the rapid expansion in the number of
16
institutions and increased risks of bank failure and the growing level of problem
loans and also oiling institution.
2.4
THE CENTRAL BANK AND THE FINANCIAL SYSTEM The
financial system may be said to perform two key functions which are vital to the
process of economic growth and development. First, the system provide a
convenient and efficient payments system without which specialization in product
so vital to productivity improvements and trade could be greatly impends. The
payments system has continues to advance in sophistication and conveniently
change from instrument such as notes and coin bank deposit credit. Cards etc, to
avoid automatic fund transfer system as in the advanced countries. Second, the
financial system pools savings form net surplus and channels them to productive
investment, a function often referred as financial intermediation. In the
intervention process, financial companies engage principally in matching lenders
and borrowers. They bring savers and borrowers together by selling debt
instrument or securities to savers to money and lending such money to borrowers.
As a result, the lender or investor receives claims on the investments which
generally have stable market value and high liquidity. However, financial
intermediation does not ensure from the lending borrowing process which involves
the generation and exchange of debt instruments or securities. The securities are
then held by the intermediates in exchange for their lending or parking with
17
liquidity. The point of emphasis there fore is that financial intermediaries use their
own liabilities to create additional assets help mobilize funds gather small sums
together to reap economics of scale and minimize the risk of investors.
The financial system features a wide away of banking and non-bank
financial intermediaries. The banking sub-sector of the system companies of
commercial and merchant banks development bank and the central banks the open
institution sub-sector includes a wide range of organization. The non-bank
financial institution sub-sector includes a wide range of organization operating as
regulators facilitates and investors. The list includes insurance companies the
securities and exchange commission the stock exchange, stock brokers, pension
and provident funds investment and financial companies. In terms of market share,
insurance companies and the Nigerian provident fund predominates this list of
institution in the capital market.
The functions of the central bank in the financial system include the issue of
currency, the value of the currency (the naira) and the promotion of monetary
stability and a sound financial system. in addition, the central bank is a banker, to
the bank and government and has over the years the years assumed the important
non-traditional functions of supporting, the country economic development efforts.
The central bank therefore, has a vital role to pay in every face of the financial
system and indeed. The national economy.
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The institutions and markets in the financial systems constitute channels or
conducer for the transmission of monetary policy measures to the real sector of the
economy. The activities of the various intermediaries are, therefore important
influence the outcome of actions taken by the monetary authorities. The
monitoring of institutions in the financial systems by the central bank is therefore,
necessary for the effective conduct on monetary policy.
Aside from issues of monetary management, the safety soundness stability
of the financial systems as well as the responsiveness of the financial system to the
need of the economy are also of primary interest to the center bank.
Within the banking system, the central bank of Nigeria (CNB) plays a lead
role in the management of the economy through its additional and development
functions, thereby, influencing the face and director of economic growth.
CENTRAL BANK OF NIGERIA’S TRADITIONAL FUNCTIONS
CURRENCY ISSUE AND DISTRIBUTION: Economic transaction in the
Nigerian economy is still Longley cash oriented. The banks currency issue
function which involves distribution, safe custody of stock and management of
orders constitutes a vital of the day management of the economy gives the
enormous reliance by Nigerians on cash transaction. Without the regular supply of
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currency economic activities would at best, grind to a habit. The valve of currency
in circulation as at end – December 1990 was N16.3 billion which was on crease of
twenty-nine (29) percent over its level in December 1989.
i)
BANKERS BANKS TO ALTER BANKS: The CBN promotes confidence
in the system through its activities as banker to other banks. In its
supervisory activities. They monitors mentality and quarterly performance of
the tile commercial and merchant bank and undertakes adhence and on the
sport examination of the statement of account to the banks. This facilitate
effective monitoring to assess quality of loans, loans adequacy ratios, the
existence or extent of fraud in the banks compliance with monetary policy
guidelines and the pursuits of prudent banking practice the CBN monitors
the cheques clearing system to ensure operational efficiency within the
banking system.
The bank accommodates commercial and merchant bank in temporary need
of liquidity for example during September 1989. The CBN through the NDK
extended facilities total N2.3 billion to ten banks. Four commercial bank and six
merchant banks the availability of the bank as a lender of the last resort in stills
confidence in the banking system ability to withstand economic stain and stresses.
The CBN also consolidates public sector account particularly since the
directive in money 1989 that all government account by maintain with CBN.
20
ii)
PROMOTION OF MONETARY STABILITY: The effectives of any central
bank in managing on economy changes crucially on it ability to promote
monetary stability. The CBN perform supply and the control of other
monetary aggregates when inflation rate in 1988, reached 38.3 percent the
central bank employed monetary policy reserve to moderate the rate of
inflation. A slower growth in the stock of narrow money M, was induced of
1989, increase by 3.08 percent over the level of the end of 1988. This
represented a substantial declaration from the growth rate of 43.6 percent
recovered 1988. As a result of the monatisation of government foreign
exchange earning and rise. In aggregate banking system credit through
slightly modifies by lower income relocity of money stock (M1 and M2)
substantially toward the end of 1990.
SECTORIAL ALLOCATION OF CREDIT (%)
Sector
Commercial
Merchant bank
bank
A. High productivity
Sectors
i.
50.0
50.0
15.0
10.0
Agricultural
Production
ii. Manufacturing
21
Enterprises
B. Others
Total A and B
35.0
40.0
50.0
50.0
100.00
100.00
As at end December d 1990, M1 and M2 rose by 340.7 and 38.8 percent to the
level of 30.6 billion and 27.7 including the introduction of stabilization securities
in August
1990 to MOP up excess liquidity in the system.
iv.
Direct control of credit: Direct control of credit ensures that the growth in
money supply is restricted to eh amount perceived to be need to support a
reasonable growth rate without over extending the economy.
v.
Interest fate policy: Interest rate have continued to be the subject of much
controversy. They were controlled and regulated up till 1980 when the structural
adjustment program was introduced.
The rate were gradually deregulated from 1986 and later decontrolled from august
1989. Since the rates lefts almost entirely to market forces. The passive on saving
promote industrial expansion and encourage health competition among the banks.
NIGERIAN ECONOMY IN PERSPECTIVE
The Nigerian economy has undergone series of changes over time with
different policy regimes. Prior to 1986, a medium-term “development plan” was
22
adopted as a major framework for developing and restructuring the economy. The
First National Development Plan, 1962-1968, was developed to put the economy
on a fast growth path. The plan gave adequate priority to agriculture and industrial
development as well as training of high-level and intermediate manpower.
However, the disruptions to economic activities during the period later
paved
way for broader economic policies for reconciliation and reconstruction. Thus,
the Second National Development Plan, 1970-1974, was launched primarily to
reconstruct and rehabilitate infrastructure that had been damaged during the
civil war. Thus, the government invested a lot of resources into the construction
and rehabilitation of infrastructure as well as improving the incomes of the
people.
The Indigenization Decrees of 1972 and 1974 put the commanding heights
of the Nigerian economy in the hands of Nigerians within the context of
nationalism. The Third National Development Plan, 1975-1980, was designed
under a more favorable financial condition of huge oil revenues that accrued to the
nation from the mid-1970s. However, the execution/Implementation of the Fourth
National Development Plan, 1981-1985, was affected by the collapse of the
international oil prices. In 1982 the government introduced the Economic
Stabilization Act as an immediate reaction to dwindling oil earnings and major
23
external sector imbalances. This was aimed at reducing government expenditure
and conserving foreign reserves in order to improve the country’s balance sheet.
It was however found that there was need for a more fundamental reform to
compliment the austerity measures. In 1986, the government accepted the
International Monetary Fund-sponsored Structural Adjustment Programme (SAP).
The SAP aimed at removing cumbersome administrative controls and creating a
more market-friendly environment underpinned by measures and incentives that
would encourage private enterprise and more efficient allocation of resources.
One might argue the SAP recorded some measure of success. However,
some of the gains of the SAP were eroded following the increased spate of policy
reversals between 1988 and 1989. Up to 1990, the economy witnessed some gains
which were associated with increased deregulation and liberalization in economic
management. However, owing to policy slippages, there was a reversal of trends in
major macroeconomic aggregates thereafter, resulting from policy reversals and
inconsistencies. Generally, frequent policy inconsistencies and reversals that
characterized the period under review created distortions in the economy and were
further compounded by external shocks, including the external debt overhang.
Overall, SAP failed to realize the goals of creating wealth and promoting sound
economic development as most of the policies were terminated prematurely or
reversed out rightly.
24
The experimentation with deregulation and liberalization was truncated in
1994 with the advent of a military government. Thus, the Federal Government
reregulated the economy, by capping exchange and interest rates due to high
nominal interest rates that reached an all-time high of 48.0 per cent in commercial
banks and 60.0 per cent in non-bank financial institutions. These rates were in turn
driven by the high rates of inflation at 48.8 per cent in 1992 and 61.3 per cent in
1993. As there was no clear economic strategy for the rest of the decade, the
monetary policy implementation became ineffective to check expansionary fiscal
operations. In addition, weak institutions and an unfriendly legal environment
reduced the benefits that would have accrued to the economy. However, the
scenario changed in 1999, with the return of democratic governance in the country.
Democratic governments have introduced series of reforms that were aimed at
redressing the distortions in the economy and to restore economic growth
following the period of economic decline. In 2004 the government’s economic
agenda was formally launched and tagged the National Economic Empowerment
and Development Strategy (NEEDS).
Within the context of the Central Bank of Nigeria (CBN), a medium-term
policy framework adopted since 2002 was to free monetary policy implementation
from the problem of time inconsistency and minimize over-reaction to temporary
25
shocks. However, periodic amendments are constantly made to the policy
guidelines in the light of developments in the financial markets and performance of
the economy. Thus, in 2005, some new reforms were introduced as “amendments
and addendum” to the 2004/2005 monetary policy circular. Even though, emphasis
on techniques and instruments to achieve these objectives continually changed
over the years, the authority has continued to sanitize and restructure the financial
sector. Thus, in 2004 the banking sector consolidation was initiated aimed at
recapitalizing the banks and ensuring a sustainable and stable financial system that
would support the real sector of the economy.
SOME DEVELOPMENT FUNCTION OF THE CBN
Apart form its traditional functions the central bank of Nigeria (CBN) has been
very influential in other area of agricultural activities through agricultural finance
industrial development promotion at the development of financial market pural
banking export finance, management of external reserve, external debts
consolidation of public sector accounts involvement in banking licensing as well as
other development function.
REFERENCES
Andrew K. Mullei, , January, 2005, The Role of Central Banks in Macroeconomic
Stability, Growth and
26
Poverty: Have We Won the Battle But Not the War
Central Bank of Nigeria, 2007, Annual Report, 2007
Central Bank of Nigeria, 2006, Statistical Bulletin, 2006
Chukwuma C. Soludu, April 10, 2007, Financial System Strategy, 2020,
Institute of Development Studies, Sussex, January, 2005, The Future of
Development Financing: Challenges, Scenarios and Strategic Choices
United Nations Commission for Europe, January, 2001, Financing for
Development- A Regional
Approach,
CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
3.1 Research Methodology
The methodology adopted in this research study was multiple Linear
Regressions, applying Ordinary Least Squares (OLS) Techniques. The
choice of (OLS) Techniques was not made randomly. The choice of
27
(OLS) was because of the following reasons:
1. Its technique is simple to understand.
2. It posses some interesting properties such as
a. Linearity
b. Unbiased estimation
c. Minimum variance
d. Efficient estimation
e. Minimum mean square error estimation
3. OLS has been used in many empirical works and its results
have always been satisfactory.
3.2 Mode Specification
Theoretical, it is believed that Food import in Nigeria will have a
negative impact on their performance of Nigeria economy. Based
on this, the functional relationship is stated thus:
GDP = f(BR, EXCHR, ITR)………………………………..(3.2.1)
Where:
GDP = Gross Domestic Product (GDP)- Dependent Variable
F = Functional Notation
BR = Bank Rate
28
EXCHR = Exchange Rate
ITR = Interest Rate
The OLS regression equation based on this functional relationship
is GDP= βo + β1BR +β2 EXCHR+ β3 ITR + μ ………….(3.2.2)
Where GDP, BR, EXCHR and ITR are as defined before
βo = constant term
β1 = Parameter of Bank Rate
β2 = Parameter of Bank Rate
β3 = Parameter of Interest Rate
μ = Error Term Based on a prior economic theory, β 1 < 0, β2, >, 0
and β3 < 0
3.3 Method of Evaluation
In this section, the necessary statistical and econometric criteria
that were employed in the evaluation of the model were stated and
defined. The researcher applied the following statistical and
econometric technique to evaluate the working hypothesis.
1.
Coefficient of multiple determinations (r 2)
2.
Student t - statistic
29
3.
f – ratio jf - statistic
4.
Tests for Auto Correlation
First Order Test
1. Coefficient of Determination r2.
Coefficient of Multiple Determinations (r 2) is used to measure the
percentage of changes in the dependent variable that is attributed to the
changes independent variable. This is also called the measure of
goodness of fit. The value or the coefficient ranges from 0 to 1. It is
non negative quantity. The closer it is to 1, the better the fit, otherwise,
the worse the fit.
2.
Student t – statistic
The Student t - statistic is used to test the statistical significant of
individual regression coefficient estimated in the model. The t
statistic is employed because the population variance is unknown.
3. f – ratio/f - statistic
This is used to test the joint influence of the explanatory variables on
the dependent variable. It tests for the statistical significance of the
entire regression plane.
Second Order Test
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1.
Tests for Auto Correlation
Durbin -Watson statistic is used to test for the presence of first order auto correlation.
3.4 Decision Rule
In this section, the researcher set out the rules for accepting or
rejecting the hypothesis
t - Statistic.
The decision rule for t - statistic requires that the null hypothesis
be accepted if the observed value of t (t*) statistic is less than the
tabulated value of t (t 0.025) at the chosen significant level and degrees
of freedom i.e. n-k.
Where; n = number of observations
K = number of variables in the model.
f - Statistic
The decision rule for f - statistic required that the null hypothesis be
accepted if the observed value of f (f*) statistic is less than the
tabulated value of f (f0.05) at the chosen significant level and degrees
of freedom i.e. vl/v2.
Where; v l = k-l
v2 = n-k,
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n and k are as defined above
Durbin- Watson.
The decision rule for Durbin - Watson states that there is no autocorrelation if:
du < d* < (4-du)
du = tabulated value of Durbin - Watson statistic
d* = computed value of Durbin - Watson statistic
3.5 Data Required and Sources
For the benefit of the research work, the researcher collected annual
time series data on Gross Domestic Product (GDP), Investment on
Education, Investment on Health, and Labour Force from the year
1980 to 2011. The data utilized in the study were sourced through the
library research, from publications of the Central Bank of Nigeria
(CBN), Federal Office of Statistics (FOS), National Bureau of
Statistics (NBS), and .Journals.
3.6 Econometrics Software
The software that was used to analyze the data is economist’s views
popularly called E- Views.
REFERENCES
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Isiwu, G. D. (2004), Fundamental of thesis writing in Economics
(Enugu, Afri-Link Books)
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