MONETARY POLICY AND DEPOSIT MONEY BANK PERFORMANCE IN NIGERIA: A LONG-RUN QUANTITATIVE ANALYSIS
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Abstract
This study examined the effect of monetary policy on the performance of deposit money banks in Nigeria over the period 1986–2022. The study employed annual time-series data sourced from the Central Bank of Nigeria (CBN), the National Bureau of Statistics (NBS), and the World Development Indicators (WDI). An Autoregressive Distributed Lag (ARDL) model was adopted to investigate both the short-run and long-run effects of selected monetary policy variables on the performance of deposit money banks. The explanatory variables included the Cash Reserve Ratio (CRR), Monetary Policy Rate (MPR), Broad Money Supply (M2), Liquidity Ratio (LR), and Inflation Rate, while bank performance served as the dependent variable. The empirical findings revealed that the performance of deposit money banks in Nigeria is significantly shaped by the dynamics of monetary policy instruments. Specifically, Cash Reserve Ratio (CRR), Monetary Policy Rate (MPR), and Inflation Rate exhibited negative relationships with bank performance in both the current and lagged periods (first and second lags), although these effects were statistically insignificant. Conversely, Broad Money Supply (M2) and Liquidity Ratio (LR) exerted positive effects on bank performance, consistent with theoretical expectations, suggesting that improved liquidity conditions and monetary expansion enhance banking sector performance. Based on these findings, the study recommended that the Central Bank of Nigeria should adopt a balanced monetary policy framework that minimizes the adverse effects of excessive reserve requirements, high policy interest rates, rising funding costs, and liquidity constraints on deposit money banks. Such policy measures should aim to strengthen banks' lending capacity, stimulate investment, improve financial intermediation, and ultimately enhance banking sector performance while supporting sustainable economic growth.
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