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a) Explain the following monetary policy instrument, that BNM use in order to achieve its monetary stability objectives

i. Moral suasion

ii. Liquidity requirement

iii. Selective credit control

(12 marks)


i. Moral suasion

Moral suasion has on occasions been relied upon to influence the direction of activities of the banking. It is a technique used by BNM to induce voluntary response from the financial system to its policy initiatives. It can be made more effective if financial institutions own their own accord take the necessary action to fulfill the role required of them. The effectiveness depends on factors such as prestige, standing of the monetary authority and the degree the financial institutions are convinced the actions to be taken.

ii. Liquidity requirement

Liquidity requirement are required by banking institutions to observe a minimum liquidity ratio in order to ensure there are liquid asset at all times to meet customer’s withdrawals. It also immobilized in the banking institutions and therefore earns a return. The uses of liquidity requirement is to ensure banks always maintain liquid assets to safeguard the interest of depositors, to be used for credits policy purposes, and to be used as a means to ensure continuous and ready financing of the government development project. Liquid assets include cash, clearing balances with BNM, treasury bills, government securities and others.

iii. Selective credit control

Selective credit control is a imposition of lending guidelines to the priority sector and selective administrative measures are meant to target only specific sectors of the economy it is necessary to ensure that the economic and social objectives are met, consistent with the objectives. In the case of selective measure, such credit controls are imposed to influence the direction...