Monetary Policy and Performance of Deposit Money Banks in Nigeria

Abstract

This study empirically examined the effect of monetary policy on the performance of deposit money banks in Nigeria from 1990 to 2024. The study proxied monetary policy by broad money supply, monetary policy rate, liquidity ratio and cash reserve ratio while return on asset was used as the indicator of the performance of deposit money banks. Ex-post facto research design was adopted and the study made use of annual time series data sourced from the Central Bank of Nigeria (CBN) Statistical Bulletin and the Nigerian Exchange Group (NGX). Augmented Dickey-Fuller (ADF) statistic and Autoregressive Distributed Lag (ARDL) techniques were the major data analysis techniques adopted. The findings of the study revealed that broad money supply and liquidity ratio have positive and significant effects on return on asset of deposit money banks in Nigeria in both the short run and long run, while monetary policy rate has a negative and significant effect on return on asset in both periods. Cash reserve ratio, on the other hand, was found to have a negative and statistically non-significant effect on return on asset in both the short run and long run. Based on these findings, the study concluded that appropriate and balanced monetary policy measures, particularly those relating to money supply, policy rate, and liquidity management, are essential for improving the profitability and sustainability of deposit money banks in Nigeria. It was recommended, among others, that the Central Bank of Nigeria should adopt and sustain an expansionary but controlled broad money supply policy. Increasing money supply within a manageable inflationary threshold will improve liquidity availability in the banking system, enhance credit creation, and stimulate banking operations and profitability.