Post-consolidation cash reserve volatility, bank credits and economic growth in Nigeria

Abstract

Post-consolidation variations in banks' cash reserves by the Central Bank of Nigeria, are seemingly frequent, aimed at controlling cash availability at banks, cost of credit, and credit advances to facilitate sectoral and overall GDP growth. Research results of analysed data of banks' cash reserves, bank credit, GDP and cash holdings by banks from 2004-2014 using GARCH model show that there exists volatility in the study variables; and a positive and significant relationship exists between volatility in banks' cash reserves and cash held by banks in Nigeria and volatility in bank credit indicating that cash reserve requirement as a liquidity management tool is ineffective in Nigeria in controlling bank lending suggesting that reserve requirements may not effectively constrain bank lending as banks seem to circumvent regulatory controls, creating credit through other means. This necessitates the Central Bank of Nigeria to opt for other liquidity management tools such as introduction of changes in credit window that would enhance cash management. The positive and significant relationship between volatility in bank credit and Nigeria's GDP necessitates the implementation of monetary policies aimed at increasing credit advances to increase production and economic growth.