Monetary Policy and the Profitability of Deposit Money Banks in Nigeria: An Autoregressive Distributed Lag Analysis, 1990–2025

Abstract

This study examined how monetary policy instruments shape bank profitability in Nigeria, spanning 1990 to 2025. Using annual time-series data obtained from the Central Bank of Nigeria Statistical Bulletin, the Nigeria Deposit Insurance Corporation annual reports, and the audited financial statements of deposit money banks, the study modeled Return on Assets (ROA) as a function of the Cash Reserve Ratio (CRR), the Liquidity Ratio (LR), the Monetary Policy Rate (MPR), and the Treasury Bill Rate (TBR), controlling for the Inflation Rate (INF) and the Exchange Rate (EXR). The Autoregressive Distributed Lag (ARDL) estimation procedure was adopted. The long-run estimates showed that the Cash Reserve Ratio and the Inflation Rate exerted statistically significant negative effects on profitability, while the Liquidity Ratio, the Monetary Policy Rate, the Treasury Bill Rate, and the Exchange Rate do not attain conventional significance. The paper concluded that reserve-requirement policy and macroeconomic price stability, rather than the benchmark policy rate or open-market instruments, are the dominant channels through which monetary policy affects the profitability of Nigerian deposit money banks, and it proposes a more differentiated and gradual approach to the use of the Cash Reserve Ratio.