CHAPTER ONE: INTRODUCTION

1.1       BACKGROUND OF THE STUDY
A country’s financial sector is the major channel through which funds are mobilized for borrowing and lending transactions. A poorly regulated or managed financial sector or one with insufficient capital for the risks can increase a country’s vulnerability to financial crises.
Improved financial sector regulation and supervision ensures the financial institution take adequate steps to manage risks. Appropriate financial sector policies can stop help to establish deep and liquid domestics capital markets which will reduce the incentive for excessive borrowings. On general, improved financial sector regulation and supervision can help prevent crises by making national economics less vulnerable to adverse developments at home and abroad.
Financial sector crises have occurred in many countries in recent times; both in developed as well emerging market economics.
These crises have resulted in substantial macro-economic and fiscal costs.
Bank failures are widely perceived to have a greater adverse effect on the economy than the failure of the other types of businesses.
They are viewed to be more damaging than other failures because of the fear that they may spread in domino.  Fashion through out the banking system, feeling solvent went as well as insolvent banks. Thus, the failure of an individual bank introduces the possibility of system. Wide failures or systematic risk. Bank failures have been and will continue to be a major public policy concern in all countries in the last two decades reflects primarily regulatory or government failure rather than market failures. One major element of regulation and supervision in the last of decade has been the issuance of a set of prudential measures aimed imparting strength to the banking and system and soundness through greater transparency and accountability.
The prevention of the re-occurrences of banking problems requires a better developed market assisted prudential regulations as well as appropriate incentives. For examples part of the strategy to strengthen the banking system in Nigeria include restructuring the system of inspection particularly the offsite surveillance, enhancing the role of external auditors and strengthening corporate governance, internal controls and audit procedures.
The financial system is described as the gamut of financial instruction, financial instruments and financial markets. The role of the financial system in the economy is appreciated the light of the important functions it performs in financial intermediation, capital formation management of payment systems and facilitating the effectiveness of monetary policy.
The most important functions of the financial intermediation, which facilitates the mobilization of resources from those who have (surplus units) and their transfer to those who do not have (deficit units) this influencing savings and investments and facilitating the achievements of the growth objectives of the economics of policy.
Banks constitute the payment systems, which consist of rules institutions and technical mechanism for the transfer of money for the settlement of personnel and business transactions.
The payment system represents on important nerve centre of the economy, providing the link between the real and financial sector the more efficient the payment system, the greater the confidence of the public and the faster the pace of economic activities.
The financial system also provides the institutional frame work through which monetary policy is conducted. In other words, thus system constitutes the channel through which monetary policy action are transmitted to the real sector to achieve price stability facilitate output growth and enhance employment opportunities. Monetary policy is one of the instruments of economic management employed by the monetary authorities especially the Central Bank, to keep the growth of money supply at a level that consistent with the absorptive capacity of the economy.
Monetary policy can be defined as the management of the expansion and the contraction of the volume of money circulation direction through various techniques/policy instruments.

1.2       STATEMENTS OF PROBLEM
The CBN’s attempt to regulate and implement policies in the banking sector has being faced with some challenges. The present oligopolistic structure of our banking system. The poor management and settlement systems do not foster adequate and timely response to monetary authorities to quake the pulse of the financial system for the purpose.
Another major challenge for the regulations is ensuring transparency in information discloses though timely and accurate reconciliation of financial returns to the CBN by the financial system, transparency reporting of financial data promotes the ethics good corporate governance and enhances the prospects for effective contingency plan for managing system distress.

1.3       OBJECTIVES OF THE STUDY
The impact of monetary policy will be looked at with references to banks profitability. Therefore, the objectives of the study will be to:
-           Examine ways by which government authorities banking operations in Nigeria.
-           To create awareness of the fact that monetary policy helps to stern distress in banks.
To further inform the CBN and government on ways to ensure banks’ compliance with monetary policy.

1.4 SIGNIFICANCE OF THE STUDY
The study will be relevant, as it would seek to:
-           Educate and inform banks on the importance of monetary policy on their profitability, which is their main goal.
-           To create awareness of the fact that monetary policy helps to stern distress in banks.
-           To further inform the CBN and government on ways to ensure banks’ compliance with monetary policy.
           
1.5. SCOPE OF THE STUDY AND LIMITATIONS
This study will investigate how monetary policy affects banks profitability in Nigeria, its challenges and possible solutions the compliance with monetary policy using a case study of guaranty trust bank plc for the period.
In this research, some factors might pose problems for the researcher to carry out very comprehensive research.
-           Financial constraint
-           Time constraint
1.6       RESEARCH HYPOTHESIS
The impact of monetary policy on the profitability of banks in Nigeria is stated in two contrasting hypothesis, which are concretely measured in this study.
The null (HO) or alternative (Hi) hypothesis.
HYPOTHESIS 1
HO:     That monetary policy by the CBN will not lead to increase in profit margin of banks.
HI:       That monetary policy by the CBN will lead to increase in profit margin of banks.
HYPOTHESIS 2
HO:     That there is no significant impact of monetary policy on guaranty trust bank’s profitability.
HI:       That there is a significant impact of monetary policy on guaranty trust bank’s profitability.

1.7       STATEMENT OF RESEARCH QUESTION
 HYPOTHESIS 1
HO:     That monetary policy by CBN will not lead to increase in profit margin of banks.
HO:     That monetary policy by CBN will lead to increase in profit margin of banks.
HYPOTHESIS 2
HO:     That there is no significant impact of monetary policy on guaranty trust bank’s profitability.
HO:     That there is a significant impact policy on guaranty trust bank’s profitability.