Bank Interest Rate Policy, Liquidity Management and Private Sector Credit: Multi-Dimension Study from Nigeria

Abstract

This study investigated the effects of bank interest rate policy and bank liquidity management on private sector credit in Nigeria using annual time series data obtained from the Central Bank of Nigeria (CBN) Statistical Bulletin covering the period 1990–2023. Credit to the private sector as a ratio of gross domestic product was used as dependent variable. Interest rate policy variables included the prime lending rate, maximum lending rate, domestic savings as a percentage of GDP, while bank liquidity management variables comprised cash reserve ratio, liquidity ratio, and deposits with the Central Bank of Nigeria. The study employed the Autoregressive Distributed Lag (ARDL) technique to estimate the relationships among the variables through ten different models. The findings reveal that interest rate policy and bank management significantly influence private sector credit, although the magnitude and direction of their effects vary across models and indicators. Specifically, the results indicate that prime lending rate and maximum lending rate generally exert negative effects on private sector credit, while savings-related variables tend to exhibit positive effects. Liquidity management indicators including liquidity reserves, cash reserve ratio, and deposits with the Central Bank of Nigeria were found to exert negative effects on private sector credit. Overall, the results demonstrate that interest rate policy and bank liquidity management practices play critical but diverse roles in shaping financial sector development in Nigeria. The study therefore recommends that monetary authorities encourage banks to maintain interest rate structures that support borrowing while simultaneously promoting savings. In addition, banks should diversify their asset portfolios and adopt more flexible liquidity management frameworks that prioritize lending to the private sector in order to strengthen financial sector development and stimulate broader economic growth.