Monetary Policy and Financial Performance of Deposit Money Banks in Nigeria

Yimka S A Alalade,Ezekiel Oseni,Olusegun A Adekunle

doi:10.5539/ass.v16n11p123

Yimka S A Alalade, Ezekiel Oseni + Show 1 more

Open Access

https://doi.org/10.5539/ass.v16n11p123

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Abstract

This study considered the influence of monetary policy on the financial performance of deposit money banks in Nigeria. The study engaged the use of a time series data for 35 years, from the period 1984 to 2018; all deposit money banks as captured by the Central Bank of Nigeria Statistical Bulletin (2015) were considered. The effect of liquidity ratio, lending rate, loan to deposit ratio and cash reserve ratio were examined on the financial performance of deposit money banks measured by their net worth and total credits. The data was analyzed using descriptive and inferential statistics. Based on the result of stationarity test, the ordinary least square method and the Autoregressive Distributed Lag method were employed. A short run model of net worth and long run model for both the log of net worth and the log of total credits were estimated. The results revealed that the mean of net worth and total credits are 5455.27 and 79608.63 respectively. In the long run, monetary policy variables including liquidity ratio, lending rate, loans to deposit ratio and cash reserve ratio had no significant effect on the log of net worth. However in the short run, variations in the liquidity ratio, loans to deposit ratio and the cash reserve ratio for previous years had significant effect on the log of net worth in the current year. When financial performance is measured as total credits, the liquidity ratio and loans to deposit ratio had positive significant effect in the long run. The cash reserve ratio had a negative significant effect in the long run. The log of lending rate was insignificant in both the long and short run. The study concluded that monetary policy significantly explains the financial performance of deposit money banks both in the short and long run.

Highlights

Financial sector of any economy plays a very important role in the economic growth and development of a nation and this cannot be overemphasized
This study considered the influence of monetary policy on the financial performance of deposit money banks in Nigeria
The effect of liquidity ratio, lending rate, loan to deposit ratio and cash reserve ratio were examined on the financial performance of deposit money banks measured by their net worth and total credits

Summary

Introduction

Financial sector of any economy plays a very important role in the economic growth and development of a nation and this cannot be overemphasized. A strong financial sector helps to sustain an economy against external shock that may arise from fall in external capital flow. The banking industry is one of the sectors that play an imperative duty in the allocation of capital resources and risk sharing of future flows in any given economy or country. An efficient and effective banking industry in any economy is likely to facilitate increased growth and welfare, and it will smooth business cycles. These functions give banks a central position within the process of saving and investment allocation. Because of the type of functions banks perform, there is need to have in place proper monetary policy involving issues such as barriers to entry, market concentration, the borrower-lender relationship, deposit insurance, and the taxation of financial intermediation in order to improve the performance of the financial sector (Ibrahim & Muritala, 2015)

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