Credit Guidelines – An Instrument of Monetary Policy in Nigeria

Credit Guidelines – An Instrument of Monetary Policy in Nigeria

Credit Guidelines – This project topic is very sensitive in any economic set – up and as a result much has been said and written on it by eminent scholars and different school of thought in the field of monetary, economics, banking and finance.

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Many writers have tried to give a meaningful definition of credit guidelines.

Eno Ekon in his write – up said that “credit guidelines involves deliberate measure aimed at controlling the quantitative supply of money with a view to attain a specific objectives” He further said that these guidelines may take account of conscious planned manipulation of the volume of money in circulation to achieve the specific objectives of high level of employment, rapid economic growth, balance of payment stability and price stability.

J.A. Anyanwu in his own contribution said that credit policy is a major economic stabilization weapon. It involves measures designed to regulate and control the volume, cost availability and direction of money and credit in any economy to achieve some specific macro-economic policy objectives.

Uzoaga sees credit guideline policy as the management of the expansion and contraction of the volume of money in circulation for specific purpose of achieving certain declared national objectives. He further opined that the guidelines should be amended to enhance rapid change in the economic conditions.

In the same direction with Uzoaga, Olaloku view credit guideline as a deliberate action on the part of the monetary authorities (the CBN and the ministry of Finance) to control the money supply and general credit availability as well as the level of its cost (i.e. the rate of interest) aimed at achieving a certain set of economic objectives.

Ola Vincent, a one time governor of the CBN refers policy guidelines as policy designed to control the quantity of money to support desirable and sustainable economic growth and the supply should not be too much to generate inflationary pressures.

The monetarist school of thought strongly advocate for the use of policy guidelines to keep the economy at the required level. They assumed that the rate of money supply in stable and if it does changes, it does so predictably. Given this assumption, the monetary authority can virtually induce any level of spending it wants simply by adjusting the money to a known and dependable rate. In this sense, monetary authority is both necessary and sufficient to control the Gross national product (GNP). The theme for this school is the demand and supply for money. It is their view that money being a very important factor in business enterprises should be made available to business men at all time. Their thinking influenced the monetary institutions of their era and it is widely believed that policy guidelines provided solutions to all business problems.

In the United State of America where they had their strongest support, monetarist views influence significantly the Federal Reserve Act of 1914. In the original Act, modern economic objectives such as full employment, stable prices and rapid economic growth were ignored because, to achieve them would require the control, regulation, direction and intervention of the authority in the economic process which would go against their believe. The act summarized the objectives of guidelines to be that of effective supervision of banking system in the United States so as to provide elastic economy to business enterprises and facilitate the rediscounting of commercial banks.

In India, the history of aggregate and individual loan ceiling as in Nigeria dated back to May 1956 when the Reserve bank of India asked the scheduled banks to reduce the aggregate advances to a level not exceeding 25% of the prevailing level at the corresponding period in the previous years. The ceiling was one of the measures taken to control what the Reserve Bank of India described as “unhealthy increase in bank advances against these food grains”.

The Central Bank of Canada, though lacks statutory powers over bank advances also uses the ceiling techniques occasionally. In 1955 when there was an unpredictable increase in bank credits, the banks felt that there was need for further actions over and above the tightening of bank cash reserve position. After meeting with representative of chartered banks, the Central Bank of Canada suggested that further expansion in that bank credit was undesirable under the prevailing condition. There was in fact an imposition of aggregate expansion of banks in order to prevent further growth in the advances, and to undertake a more rigorous scrutiny of application for credit with a view to control advances for less essential purposes.

From the different definitions and meanings of credit guidelines given above by various authors and economists, one would be able to find out that all of them point to the same direction that credit guidelines as an instrument of monetary policy is a regulatory control device on money supply based on the objectives of the country. This therefore reveals that in the process of formulating credit policy guidelines, some important objectives must be specified, otherwise, it will be impossible to evaluate performance of effectiveness. However, since credit guidelines is a means to an end not an end itself, it is expected to achieve certain objectives as determined by the monetary authorities.


In any economy, there are certain objectives which credit guidelines seek to attain. These objectives differ from one country to another depending on the state of the economy at any given point in time. Generally, in Nigeria the predominant identified ones are:

i)                   Price stability

ii)                 Promotion of Economic growth

iii)               Maintenance of balance of payment equilibrium

iv)               Full employment

Prices Stability

The monetary authorities pursue internal price level stability to protect the country from the hardship of inflation such as fall in the value of money, redistribution of income in favour of the entrepreneur and protecting the economy against the balance of payment problem.

Promotion of Economic Growth

This implies an increase in the Gross National Product (GNP) of an economy or increases in production capacity within an economy. The pursuit of economic growth in any economy is an important goal as it is a measure of economic welfare or the standard of living of the entire population of the economy.

Maintenance of Balance of Payment

The monetary authorities pursue a policy that is aimed at eliminating a balance of payment dis-equilibrium. A country having a balance of payment deficit implies that such country is living beyond her resources or means. A simple measure of it is that payment exceeds receipt of such a country. To curb dis-equilibrium, some measures have to be considered and these includes balance of goods, services remittance on current account and long term capital.

Full Employment

By full employment, we do not mean that every person in the economy must be employed but rather a situation whereby the greatest number of people in the labour market are employed in order to maximize the total output of the economy.

In any economy, however, there is bound to be some level of unemployment caused by varied fractures such as seasonal variations, geographical location and discriminations. It is usual for government to introduce a monetary management policy which is aimed at giving equal opportunity to all citizens within her area of authority.

As stated earlier, credit guidelines vary from time to time and economy to economy. Prior to the introduction of the Structural Adjustment Programme (SAP), the objectives pursued among the general objectives include the encouragement and mobilization of domestic savings and attraction of foreign capital for investment into more productive sectors of the economy.

With the introduction of SAP, monetary authorities directed the objectives for achievement of the stated objectives of the programme. For instance, in the 1988 credit guideline, the objectives stated to be achieved included.

i)                   The stimulation of growth in National Output

ii)                 Raising the level of employment in the economy

iii)               The promotion of increased financial savings and efficient resources allocation.

iv)               Moderation of inflation rate and

v)                 The improvement in the balance of payment position.


A free market if left on its own may not be able to allocate resources efficiently or distribute national income equitably or both to lead to a fast equitable growth and development. These inadequacies of the free market system therefore make government intervention inevitable. Below are the various prominent instruments as stipulated in the credit guidelines in Nigeria.

Aggregate Credit Ceiling

Aggregate credit ceiling as the name implies is an instrument of monetary policy by the Central bank of Nigeria in which the banks are restricted to a certain level of growth per annum in loan and advances.

Sectoral Allocation of Loans and Advances

This is the classification of the economy into categories of sectors and sub-sectors for bank lending. For example in Nigeria,  the economy is classified into two major sectors: the high priority sector and others. The high priority sectors include agriculture and manufacturing industries, while the other include the rest of the sectors of the economy.

Interest Rate Policy

The interest rate policy is the rate at which banks are allowed to lend to their customers or borrowers. It also includes the rate at which bills and other money instruments are repaid.

Reserve Requirement

This is a deposit expressed as a percentage of each bank’s total demand deposit liabilities as stipulated. The major reserve requirements include the cash reserve requirement and the liquidity ratio.

Bank Equity Participation

This is policy regulating banks from participating in equity holding of companies in Nigeria. Presently, commercial and Merchant banks are free to take up equity ownership in companies. Each bank should not invest more than ten (10) percent of its paid up capital plus reserves in a company’s equity and a bank overall ownership participation in various enterprises shall not exceed 33⅓ percent of its paid-up capital plus reserves.

Capital Fund Adequacy

This is a ratio of capital a bank is required to maintain before it could be able to apply its fund for payment of dividends to its shareholders. As at 1988 unless a bank maintains a ratio of not less than one is to twelve (1:12) between its adjusted capital funds and its total loans and advances, it shall not apply for the payment of dividend to its shareholders.

Penalties for Default

These are penalties imposed on commercial and merchant banks for non-compliance of the provisions of credit guidelines by the monetary authorities in Nigeria.


The credit guidelines were first introduced in Nigeria in 1964. The National Development Plan was launched in Nigeria in 1962. The projected funds thought to accrue to government from both external and internal source could not be realized. Foreign aid decreased after independence while the domestic sources of fund were overestimated………………………………..

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