Monetary Policy , the Control of Money Supply and Its Effects on the Profitability of Deposit Money Banks in Nigeria ( 1999 - 2013 )

Abstract

This paper investigated the effects of Monetary Policy and control of money supply on the profitability of Deposit Money Banks (DMBs) in Nigeria from 1999 to 2013. The specific objectives of the study were to: determine the relationship between money supply, the level of credit in the economy, macroeconomic variables (inflationary rate, exchange rate movement, and Real Gross domestic Product and the profitability of DMBs in Nigeria. Three research questions and three hypotheses were raised. Ordinary Least Linear Regression Analysis method was adopted for the study which employed SPSS statistical tool to run the correlation and regression analysis.Data gathered included Quasi Money (QM), Real Gross Domestic Product (RGDP), Exchange Rate (ER), Inflation (INF), Lending Interest Rate (LIR) Real Interest Rate (RIR) Domestic Credit to Private sectors (DCP), Currency in Circulation (CC) and Return on Assets (ROA). The findings revealed among others that; quasi money has insignificant positive relationship with profitability of DMBs, while currency in circulation has insignificant positive relationship with profitability of DMBs in Nigeria. The level of credit in the economy has significant negative relationship with profitability of DMBs. More so, inflation, exchange rate, and real GDP have insignificant relationship with the profitability of the banks. Hence, monetary policy influences the DMBs directly, as well as indirectly through through feed-back effects from the economy It is recommended among others that, monetary policy must work in random to create the right macroeconomic framework, create a favourable investment climate by facilitating the emergence of market based interest rate and exchange rate regimes that would attract both domestic and foreign investments, create jobs, promote non-oil export and revive industries that are currently operating far below installed capacity. The government should also endeavor to make the financial sector less volatile and more viable as it is in developed market economies. Finally, given the limitations of monetary policy in Nigeria, it should be used along with government fiscal policy.