CHAPTER ONE

INTRODUCTION

1.0 Background of the Study

Most banking activities are directed towards lending as credit has remained the backbone of banking operations. It is due to the fact that it provides the bulk profits. Today, its vital role in commercial banking activities anchored on the direct effect it has on total economic growth and business development. Every year the (BSL) central bank of Sierra Leone being the monetary authority that is solely responsible for the issuance of guidelines, policies and the interpretation of such, comes up with economic measures, roles and regulation under which the banks and other financial institutions in the country operate. Such policies direct the use of funds from depositors, stockholders, and creditors in order to control the size of loan portfolio thereby determining the general circumstances under which it is appropriate to make an advance. The economic policies (fiscal and monetary) also aim at helping the banks to maintain a sound financial and banking system promote confidence in sustenance of reasonable banking services for the public as well as ensuring a high standard of conduct and professionalism in banking industry. These rules and regulations are contained in monetary and fiscal policy circular being issued by the central bank at the beginning of every year. The techniques of monetary policies could be broadly divided into two namely:
Quantitative and qualitative While the direct approach has been used very extensively in the more developed market economies, the indirect approach predominate in the less developed economies such as Sierra Leone. However, both policies aims at influencing the cost and availability of banking system’s credit. The direct system techniques (qualitative measures) involves fixing of credit ceiling and interest weight rates by the Central Bank (BSL) for compliance by banks, while the indirect approach achieves the same objective through the financial market. The most potent instrument of the indirect monetary policy technique( Quantitative measures) is the open market operation (OMO). It is worthy of note that effort aimed at introducing correct monetary and credit-control lies on the use of OMO these themselves are parts of the given receipts which they would present to the gold smith on withdrawal. According to Paul Sammuelson, (1990-20) money has an anonymous quality making a dollar just as good as another. In relation to the above the goldsmiths recognized that not all depositors of gold will come back at the same time to collect them. These receipts signified time to collect them. These receipts signified debt and were transferable. Out of the gold deposited, the goldsmith started to lend out part of them and charge a fee for these services. Hence the evolution of our bank lending. As development continued to surface in the society it become possible for financial institutions to emerge and act as bank where people go to deposit their money and other precious metals for future withdrawals and most importantly lending money to the users of fund. Bank lending has ever since then been on the increase with different levels of operations.

1.1 Background of the Case Study

Zenith Bank Plc was established in May 1990, and commenced operations in July of the same year as a commercial bank. The Bank became a public limited company on June 17, 2004 and was listed on the Nigerian Stock Exchange (NSE) on October 21, 2004 following a highly successful Initial Public Offering (IPO). Zenith Bank Plc currently has a shareholder base of about one million and is Nigeria’s biggest bank by tier-1 capital. In 2013, the Bank listed $850 million worth of its shares at $6.80 each on the London Stock Exchange (LSE). Headquartered in Lagos, Nigeria, Zenith Bank Plc has over 500 branches and business offices in prime commercial centers in all states of the federation and the Federal Capital Territory (FCT). In March 2007, Zenith Bank was licensed by the Financial Services Authority (FSA) of the United Kingdom to establish Zenith Bank (UK) Limited as the United Kingdom subsidiary of Zenith Bank Plc. Zenith Bank also has subsidiaries in: Ghana, Zenith Bank (Ghana) Limited; Sierra Leone, Zenith Bank (Sierra Leone) Limited; Gambia, Zenith Bank (Gambia) Limited. The bank also has representative office in The People’s Republic of China. The Bank plans to take the Zenith brand to other African countries as well as the European and Asian markets.
Zenith Bank Plc blazed the trail in digital banking in Nigeria; scoring several firsts in the deployment of Information and Communication Technology (ICT) infrastructure to create innovative products that meet the needs of its teeming customers. The bank is verifiably a leader in the deployment of various channels of banking technology, and the Zenith brand has become synonymous with the deployment of state-of-the-art technologies in banking. Driven by a culture of excellence and strict adherence to global best practices, the Bank has combined vision, skillful banking expertise, and cutting-edge technology to create products and services that anticipate and meet customers’ expectations; enable businesses to thrive and grow wealth for customers. Zenith Bank Plc, founded by Jim Ovia in 1990, has since grown astronomically to become one of the leading financial institutions in Africa. Zenith Bank Plc currently ranks as the 6th biggest bank in the continent. The Bank grew its shareholder’s fund of ₦20million in 1990 to ₦704.50billion as at year end 2016. Today, the Bank continues to thrive on the strong values, brand equity, corporate culture of professionalism and service excellence which are the foundations upon which the bank was built. Zenith Bank Sierra Leone Limited is a subsidiary of Zenith Bank Plc., Nigeria. Zenith Bank Sierra Leone commenced banking operation in September 2008. The bank’s exceptional approach to excellent service delivery has endeared Zenith franchise to its teeming customers.
Zenith Bank Sierra Leone Limited has it’s headquarter at 18-20 Rawdon Street, Freetown. The bank also have branches in Kenema (Eastern Region), Lumley (Freetown) and Freetown International Airport, Lungi (Northern Region). The bank also have strategic branch expansion plan in place, this will enable the bank to have presence in every part in Sierra Leone. Zenith Bank has clearly distinguished itself in the banking industry through superior service quality, unique customer experience and sound financial indices. These have become part of the corporate culture to the extent the bank is easily associated with the following attributes; Best-in-class customer experience, creativity, excellent financial performance, good asset quality, stable management, dedicated and highly skilled work-force, cutting-edge Information and Communication Technology, efficient and effective distribution channels.

1.2 Statement of the Problem

Monetary and fiscal policies are organized and established system of administration of loan, and its disbursement. They have so many loopholes which undermine its base exercise and guidance. It is a statement that need not be overemphasis. These policies being one out of many measures used by a nation’s ability to mobilize and channel its scare resources to different sectors of the economy. Therefore when these economic policies are seemingly deficient, it poses a big question which needs to be answered. How much authority do such policies allow the banks to use their powers to lend to make remarkable impact on the overall economic positions on themselves (hence profit). A major conclusion has been that effective implementation through the financial intermediation will serve as a machinery for economic progress and profit enhancement. Apart from the explicit policies which are extremely imposed by the BSL, implicit rules and regulations are also developed by the bank to guide their internal operations. But these guidelines are developed from the nature of banking industry. Generally, these policies have three implications. One to the banks, to the borrowers and to the economy. Emphasis is laid here on the implication it has on the banks.
Banks’ lending dates bank to the days when the gold-smiths accepted deposits from the merchants, mostly gold and other valuables for safe keeping. At first, such establishment were simply like warehouse. The central bank of Sierra Leone, work towards the maintenances of prudent banking policies that have fare reading effects on banking and the Zenith bank SL LTD in particular. The BSL’s guidelines, rules and regulation normally contained in the monetary policy circular have always been aimed at achieving targeted goals. The commercial banks which are expected to operate under the guidance of the regulations of the BSL have also their own internal lending policies objectives to achieve. All these pose a lot of problems to the bank’s credit decisions worthy of note is the BSL directives that was given recently by the bank governor that lending for individual should not exceed NLE30, 000 and NLE100, 000 for cooperate bodies Based on the above a performance evaluation of the effect of these policies is inevitable to finding out the resultant effect on banks activities using the scope of our study.

1.3 Objectives of the Study

The purpose of this research work is to undertake an in-depth analysis of the effect of the various guidelines introduced for banking operations by the Central Bank being the sole monitoring authority on the profitability of banks using Zenith bank SL LTD as case study. Other objective include:
• Assessment of the extent to which commercial banks have been able to comply with statutory allocation of credit to the different sectors of the economy through the BSL guidelines.
• Whether the commercial banks have been able to maintain the credit ceiling and how far interest rate deregulation contain in policy has been able to affect the volume of banks’ lending and profitability.
• To test the rigidity of the policies and its effects on the borrowing customers.
• To draw outlines of credit offered by these banks and their appraisal process highlighting the environmental influence that impinge on the monetary policy and fiscal policy practices in Sierra Leone.
• Lending is of paramount importance in the economy hence the research work will investigate lending policies and practical of the banking system in the country funding out how realistic they are in line with the nation’s economic settings. Making recommendations where necessary and suggesting ways to ensure effective implementations of these policies to achieve the desired objectives.

1.4 Research Questions

The question therefore arises as:
• What are the effects does these policies have on the banking industry and their profitability, customers satisfaction and the economy?
• Are these policies and conditions too strong as to constitute a problem of lending?
• Do commercial banks ensure full compliance to the monetary and fiscal policies circular that is issue by the central bank (BSL)?
• Are there government objective for introducing these rules and regulations being achieved?
• Does the Monetary and Fiscal Policies help to stabilize the Inflation or changes that occur in the economy?

1.5 Scope and Delimitation of the Study

As this research work is aimed at finding out the effect of monetary and fiscal policy on the profitability of banks, our research work will mainly focus on the period of 2012 -2021, looking at the overall policies and effects on profits it cannot be ruled off of limitations, hence during the course of the study, the researchers were constrained by certain tangible and intangible factors which are.
o COST: For any researcher work of this nature to be successful and accurate the cost of affording such is high and not just high but to a student. This made the research work to rely much on the banks Annual report. BSL journals and sites via the internet, Newspapers, magazines, textbooks, and unpublished speeches.
o TIME: The research work has been carried out within the limits imposed by the time constraints, considering the research work such as the academic and non-academic in spite of the some of the banks staff interviewed complained of heavy work load and this made them indisposed to release the necessary data when needed.
o QUESTIONNAIRES: Were not easy to be accepted by some people as they had always complained of one things or the other. These inadequately prolonged the time for the assemblage of data. o PAUCITY OF INTERARTURE: Dearth of current financial statements in the banks also made this research work look impossible. The BSL library is not always opened for everybody and every day and lack of good textbooks in other libraries that treat the current monetary and fiscal policy made the information needed hard.
o FEAR OF CONFIDENTIALITY BY BANKING OFFICIALS: Interviewees were reluctant to respond as their response could be a violation of the banks code of conduct and eventually when they do, they seek anonymity. Despite the limitation above, the generalization made on the effects of fiscal and monetary policy on banks profitability was made relying heavily on the financial reports of banks, then press statements and the proper study of the current monetary policy i.e. 2019 policies and that of the preceding year.

1.6 Significance of the Study

Government over the years have made inspiring calls to all citizens to be self-reliant and in a bid to achieve this loan to agricultural borrowers have been increased and as well sectored allocation to (SMES) small scale and medium enterprises as well as according priorities to key sector of the economy. This research work being an appraisal of the effects of BSL monetary and fiscal policy on the profitability of banks (Zenith) precisely will enable the central bank restructure and relax the assumed stringent measure in order to make it possible for necessary assistance from banks.
However, the primary motive for any corporate business is for profit optimization and the maximization of shareholders wealth and banks are no exception. From this research, they will realize that proper implementation of monetary and fiscal policy can ensure higher profitability of the banking industry. To borrowing customers, they will deduce some acts that are essential in loan defaulting and what are the causes of high interest rates and their remedies. This implies that if they continue borrowing funds without paying back, this banking industry may in future become illiquid which will result in high interest rate and subsequently high cost of borrowing fund. It will also constitute guide towards future design and formulation of lending policies by the monitoring authority through the implementation of recommended measures.
This research work is going to be essential to the government, the bank of Sierra Leone and other regulatory agencies in assessing the best approach in implementing monetary policies and Fiscal policies. Finally, this work will be of immense help to other researchers who will like to write on this topic as well as exposing to monetary and fiscal policies available to the banking industry.

1.7 Definition of Terms

MONETARY POLICY: Monetary policy is a set of tools used by a nation's Central Bank to control the overall money supply and promote economic growth and employ strategies such as revising interest rates and changing bank reserve requirements. In other words, monetary policy refers to the combination of measures designed to regulate the value, supply and cost of money in an economy in consonance with the level of economic activities. It can be described as the art of controlling the direction and movement of monetary and credit facilities in pursuance of stable price and economic growth in the economy FISCAL POLICY: In economics and political science, fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variables developed in reaction to the Great Depression of the 1930s, when the previous laissez-faire approach to economic management became unworkable. Fiscal policy is based on the theories of the British economist John Maynard Keynes, whose Keynesian economics theorized that government changes in the levels of taxation and government spending influence aggregate demand and the level of economic activity. Fiscal and monetary policy are the key strategies used by a country's government and central bank to advance its economic objectives.
PROFITABILITY: Profitability is closely related to profit – but with one key difference. While profit is an absolute amount, profitability is a relative one. It is the metric used to determine the scope of a company's profit in relation to the size of the business. Profitability is a measurement of efficiency – and ultimately its success or failure. A further definition of profitability is a business's ability to produce a return on an investment based on its resources in comparison with an alternative investment.
LENDING POLICY: The establishment of directives and other use of the funds from stockholders, depositors and other to control the composition and size of the loan portfolio and the circumstances under which it is appropriate to make a loan. Specifically, it is designed and is contained in the current monetary policy.
CENTRAL BANK: A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a state or formal monetary union,[1] and oversees their commercial banking system. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base. Most central banks also have supervisory and regulatory powers to ensure the stability of member institutions, to prevent bank runs, and to discourage reckless or fraudulent behavior by member banks. In other words, The Apex bank in Sierra Leone to which has been entrusted the supervision of issuing guidelines and monitoring of banking operations.
FINANCIAL SYSTEM: A financial system is a system that allows the exchange of funds between financial market participants such as lenders, investors, and borrowers. Financial systems operate at national and global levels. Financial institutions consist of complex, closely related services, markets, and institutions intended to provide an efficient and regular linkage between investors and depositors.
In other words, financial systems can be known wherever there exists the exchange of a financial medium (money) while there is a reallocation of funds into needy areas (financial markets, business firms, banks) to utilize the potential of ideal money and place it in use to get benefits out of it. This whole mechanism is known as a financial system. The Sierra Leone financial system is made up of the supervisory and regulatory bodies.
o The banking system
o Non-bank financial institution.
o The financial markets.
BANK: A bank is a financial institution that is licensed to accept checking and savings deposits and make loans. Banks also provide related services such as individual retirement accounts (IRAs), certificates of deposit (CDs), currency exchange, and safe deposit boxes.
There are several types of banks including retail banks, commercial or corporate banks, and investment banks. A bank means a corporate body licensed by the central bank to carry on the banking business in accordance with the banking Act of 2019.
LENDING: A facility offered by a bank to its customers or non-customers on the ground that such a facility will be returned with the principal and interest when due.
FINANCIAL INTERMEDIATION: Intermediation involves the "matching" of lenders with savings to borrowers who need money by an agent or third party, such as a bank.
If this matching is successful, the lender obtains a positive rate of return, the borrower receives a return for risk taking and entrepreneurship and the banker receives a return for making the successful match. If the borrower's speculative play with the funds provided by the bank does not pay off, the bank can face significant losses on its loan portfolio, and if the bank fails its depositors can lose some of their money if the deposits are not insured by a third party. The skill of identifying potential successful new entrepreneurs who can take market share off competitors or develop whole new markets is one of the most vital (and intangible) skills any banking system can possess.

1.8 Organization of the Study

The structure of the study comprises of five chapters.
Chapter one (1) gives the introductory aspect of the research and includes the background of the study, statement of the problem, research objectives, research questions, significance of the study, etc.
Chapter two (2) gives a review of related review and the theoretical framework of the study;
Chapter three (3) gives the research methodology used in the study to collect information and data on the research questions;
Chapter four (4) gives data presentation, analysis of the data, and discussion of the findings; lastly,
Chapter five (5) gives the summary, conclusion, and recommendations.

1.9 Summary

This chapter gives a brief description about the background of the impact of Monetary and Fiscal policies of the Bank of Sierra Leone (BSL) on the profitability of Commercial banks in Sierra Leone. and as well as the background of the case study which serve as the subject matter to be investigated, it also involves the problem statement that the researchers want to solved, the objectives of the study, the various research questions, the significance of the study, the scope and delimitation of the study, organization of the study and as well as the definition of terms.