Monetary policy remains a critical tool in stimulating the growth and stability of financial institution in most developing economies. In Nigeria, the objectives of monetary policy usually include promoting monetary stability, strengthening the external sector performance and on generating a sound financial system that will support increased output and employment. The central Bank of Nigeria (CBN) over the years has been rolling out pragmatic monetary policies at ensuring policy stability.

Monetary policy is the process by which the monetary authorities of a country control the supply of money. It is referred to as the combination of discretionary measures designed to regulate and control the supply of money in an economy by the monetary authorities with a view to achieving desired macroeconomic goals and generally promoting economic growth, development and stability. Onoh (2004), stated that "Monetary policy is designed to influence the behaviour of the monetary sector." This is because the behaviour of the monetary sector influences various monetary variables or aggregates. In effect, monetary policy affects the level of money supply at any point in time either by expanding it or through its contraction.

In addition to this effect, monetary policy also influences the level of and structure of interest rates and thus, cost of funds in the market depending on the prevailing economic conditions. Monetary policy is used by the monetary authority with the aim of controlling and regulating the activities of banks and other non-bank financial institutions who are active participants in the economy. 

The interest channel of monetary transmission mechanism emphasizes that the change in monetary policy will first affect the banks’ lending rates and its short term interest rates. Next, this changes evolve to long term interest rates that then affects business investment and consumer spending. Commercial banks, on the other hand, play a vital role in the financial system because they are capable of influencing credit creation in the market. 

The effect of monetary policy on the returns of commercial banks are sensitive to banks specific characteristics such as leverage, profitability, size and these vary in different economic conditions. According to Ariyo and Adeleyan (2005), "this is due to monetary policy's effect on banks discount rate and expected cash flows". 

As an important tool of macroeconomic control and regulation, monetary policy entails an extensive, otherwise wide range of activities, stipulation and evaluation of variables, tools and methods and procedures of implementation and would facilitate the achievement of the specific and broad economic objective of the nation. 

As a matter of fact, for any economy to grow develop and be stable there is absolute need for the effective and efficient management or coordination of the monetary resources through the highest monetary authority, the central bank of the nation, in regards establishment of the policy framework, and the need for financial intermediaries like commercial banks. (Osayameh, 1986).

Monetary policy therefore becomes an indispensable means of checking macroeconomic fluctuations to some degree of stability and confidence and attain desired macroeconomic objective.