The Economic Implication of Cash Reserve Requirement on the Profitability of Deposit Money Banks in Nigeria

Abstract

This paper investigated the impact of cash reserve requirement on the profitability of deposit money banks in Nigeria over the period of 31years between 1988 and 2018. Quantitative secondary data from the Central Bank of Nigeria (CBN) Statistical Bulletin 2018 edition was considered in the study. The study employed Augmented Dickey-Fuller Unit Root Test, Co integration test, Granger Causality test and multiple regressions methods for the empirical test. It was revealed that there is long-run relationship between cash reserve requirement and the profitability of deposit money banks in Nigeria with the test of Johanson co integration. It was further revealed that there is no unidirectional or bidirectional relationship between cash reserve requirement and profitability of deposit money banks in Nigeria. The study revealed that cash reserve requirement has an inverse relationship with profitability of banks although, f-statistics indicated that cash reserve requirement with other variables included in the model have a significant impact on the profitability of banks in Nigeria for the period under review. Based on these findings, the study concluded that cash reserve requirement has a significant impact on the profitability of deposit money banks in Nigeria. Therefore, the study recommends among others that the monetary authority should ensure that the cost of funds such as interest rate and lending rate should be at a reasonable rate.