Cash Reserve Requirement Research Articles

Performance of Microfinance Institutions: Do Risk Management Regulations really matter?

The study was conducted to assess the impact of risk management regulations on the financial performance of Microfinance Institutions (MFIs) in Tanzania. Specifically, the study was guided by a descriptive research design. The target population of this study included Microfinance Institutions (Tier 1 Microfinance Institutions) in Tanzania where all three (3) MFIs were selected. The study employed secondary data collected from the MFIs yearly annual reports from 2019 to 2022 and Bank of Tanzania (BOT) published statistics on MFIs. The study used a panel data random effect model to establish the relationship between risk management regulations and MFIs financial performance. The study found capital adequacy ratio requirements (CAR) to statistically positively influence the financial performance of the MFIs while the cash reserve requirements (CRR) statistically negatively influence the financial performance of the MFIs and liquidity ratio requirements (LRR) do not significantly influence the financial performance of the MFIs.The study concluded that MFIs should continue adhering to the available policy and regulations so as to evade exposed risks. Moreover, in terms of capital adequacy and cash reserve requirements, the BOT should set minimum capital depending on the risk capabilities of the MFIs. Furthermore, our study recommended that BOT should ensure that all MFIs adhere to the written policy and procedures to mitigate the operational, financial, and strategic risks among the MFIs.

The Impact of Cash Reserve Requirement on Banks Profitability: A Study of Conventional Commercial Bank in Bangladesh.

The Impact of Cash Reserve Requirement on Banks Profitability: A Study of Conventional Commercial Bank in Bangladesh.

Determinants of Commercial Bank Credits in Nigeria

The study examined determinants of commercial bank credits in Nigeria. The specific objectives were to: examine the effect of volume of deposits, interest rate, cash reserve requirement and liquidity ratio on commercial bank credits in Nigeria. Ex-post facto research design was adopted in the study. Secondary sources of data were used as the main methods of data collection. The relevant data for this study were obtained from the Central Bank of Nigeria (CBN) statistical Bulletin. The data were collected on annual basis from 1990 to 2021. Several techniques were employed in this study to test and estimate the relevant equations. These include the unit root test, the cointegration test, granger causality test and the error correction mechanism. Based on the analysis of the study, the following findings were discovered: There was a significant effect of volume of deposits on commercial bank credits in Nigeria, there was a significant effect of interest rate on commercial bank credits in Nigeria, there was a significant effect of cash reserve requirement on commercial bank credits in Nigeria and there was a significant effect of liquidity ratio on commercial bank credits in Nigeria. Based on the findings in this study, the study recommended that commercial banks should focus on how to increase the volume of deposits so as to improve their credit facilities. Finally, Central bank of Nigeria stipulated minimum cash reserve requirement should be considerably low so as to enhance commercial bank credits to private sectors.

Asymmetric Effects of Monetary Policy on Commercial Banks Deposits in Iraq

This study propose and test a new channel for the transmission of monetary policy, when monetary policy changes banks respond to the interest they charge on deposits and affects directly on the size of banks deposits and, thus, affects lending power of commercial banks. Given this issue in mind, this study examines the asymmetric effects of monetary policies on commercial banks deposits in Iraq. The study applied Unit root test, Nonlinear autoregressive distributed lag (NARDL) approach, Error correction model (ECM), Bound test and Wald test using monthly data spanning from Jan 2005 to Dec 2019. Policy Interest Rate (IR), Cash Reserve Requirement (RR), and Broad Money Supply (M2) were used to proxy the monetary policies. Bank Deposit (BD), were used as the proxy of the Iraqi commercial banks deposit. The findings of NARDL show a non-linear relationship between monetary policies and Banks deposit. Furthermore, the results of Bound test and ECM confirmed the existence of the long run and short run relation between monetary policies and commercial banks deposit in Iraq. Finally, the result of Wald test indicates that policy interest rate and reserve requirement has asymmetric effect on banks deposit, while money supply has symmetric effect. Hence, it is suggested that policy makers in Iraq should consider the positive and negative shocks of monetary policy as commercial banks respond asymmetrically to the monetary policy Instruments.

Shocks to Monetary Policy Instruments: Does Credit to the Private Sector Respond in a Similar Manner to Public Sector Credit in Nigeria? A Vector Autoregressive Approach

This paper aims to investigate the response of private and public sector credit to shocks in monetary policy instruments with a view to ascertaining if the responses differ. The study utilized the vector autoregressive (VAR) model with monthly data covering the period from 2010M1 to 2021M8. Findings show that credit to private sector responds positively to shocks in money supply and monetary policy rate (MPR) in all periods. However, the response to cash reserve requirement (CRR) was negative beginning from period five, and it also responded negatively to foreign interest rate shock. On the other hand, credit to government was found to respond positively to shocks in money supply up to period two and CRR in all the periods, but it responded negatively to MPR starting from period three. The results of the variance decomposition show that other than shocks to itself, which was 100% in the first period, shocks to other variables influence private sector credit. Also, other than shocks to itself, which was 99.89% in the first period, shocks to other variables lead to shocks to credit to government. We therefore recommend that policies used to influence financial intermediation should factor in the sensitivity of both public and private sectors to these policy instruments and the impact of exogenous shocks should be factored into policy formulation.

Financial Sector Liberalisation and Capital Market Growth in Nigeria

The study examined financial sector liberalisation and capital market growth in Nigeria from 1985 to 2021 with secondary data sourced from the Central Bank of Nigeria Statistical Bulletin. The two formulated hypotheses were tested with the Augmented Dickey-Fuller (ADF) and error correction mechanism. Findings from the study revealed that broad money supply and credit to private sector have a positive and significant effect on both market capitalisation and volume of transactions. Also, cash reserve requirements and exchange rate have negative and significant effects on both market capitalisation and volume of transactions. Interest rates have significant and positive effects on market capitalisation and significant negative effects on volume of stock transactions. Foreign direct investment has a positive and insignificant effect on market capitalisation and volume of transactions. The study recommended that the monetary authority in Nigeria must continually improve the monetary policy to control the money supply in the economy and reduce the interest rate to enhance capital market expansion. Also, the Nigerian government should encourage more exports to create a positive relationship between exchange rate and stock prices. This will make local currency depreciate and local firms will become more competitive, leading to an increase in stock prices.

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

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.

The Impact of Monetary Policy on Assets Management of Deposit Money Banks in Nigeria

The study investigated the impact of monetary policy on assets management of banks in Nigeria which has been an issue that has gained momentum among scholars of repute. Different relevant empirical reviews were carried out. The study specifically addressed the effect of monetary policy rate, liquidity rate and cash reserve requirement on banks asset management for the period of 37 years which spanned from 1981 through 2017. While secondary data were sourced from the Central bank of Nigeria Statistical bulletin and National Bureau of Statistics. However, Vector Error correction (VECM) econometric techniques approach was applied on the secondary data. It employed this econometric technique on unit root test to establish the stationarity of the variables and the macroeconomic variables used were not stationary at level hence the study proceded to first difference where the macroeconomic variables used became stationary at the first order. The result from Johansen Co-integration reveals that monetary policy rate and cash reserve requirement have significant and positive effect on bank asset management while liquidity rate had an insignificant negative effect on bank asset management. The study concluded that monetary policy has a significant effect on bank asset management in Nigeria. It was recommended that Central Bank of Nigeria (CBN) should adjust the monetary policy rate by reducing the cash reserve ratio which will increase liquidity to enable the commercial banks to discharge their lending and investment duties effectively to the public.

COVID Crisis: Fiscal, Monetary and Macro-financial Policy Responses

The ongoing COVID-19 pandemic in the world is deepening a profound impact and economic uncertainty. In essence, lockdown and social distancing measures are triggering losses in global production, supply, trades, investments, and employment. This article, to counteract the economic losses and macroeconomic uncertainty, explores the policy evolution of macroeconomic effects during the COVID-19 pandemic. It has communicated different policy responses addressing the potential economic damages in the G-7 countries and 24 emerging market economies (EMEs). The article also illustrates the lockdown and regulatory implications and dynamic economic interventions mandated by the governments, monetary authorities, and central banks. The study demonstrates the potential impact of fiscal, monetary, and macro-financial policy measures on the economic losses caused by regulatory and quarantine measures. Monetary authorities and central banks are lowering the policy rates like repurchase agreement rate (repo), reverse repo, cash reserve requirement (CRR) to ease the liquidity supplies to the economy. Central banks also offered credit facilities to cater to the demand for loans and advances. The study finds that G-7 economies and emerging market economies have implemented a comprehensive fast-track fiscal, monetary, and macro-financial policy to counteract the pandemic’s negative economic consequences. The policy measures include the fiscal stimulus package, direct spending, loans, and credit facilities, refinancing schemes, swap agreement, discount loan window, tax cut on credit, short term loan extension, bridge finance, policy rate cuts, bond purchase, SMEs financing. These policy measures, if implemented successfully, are predicted to minimize the impact of the crisis and to stabilize the economies.

Monetary Policy and the Performance of the Crude Petroleum and Natural Gas Sector in Nigeria (1986-2017)

This study examined the effect of monetary policy on the performance of the Crude Petroleum and Natural Gas sector output in Nigeria. The explanatory variables are monetary policy rate, Treasury bills rate, Cash reserve requirement and money supply; while the dependent variable is the Crude Petroleum and Natural Gas (PEGAS) sector output. The study adopted an ex-post facto research design and used secondary data obtained from the CBN Statistical Bulletin. The study covered a period of 32 years (1986 to 2017). The data were subjected to Augmented Dicker Fuller stationarity test to determine the best suitable econometric tool of analyses. The Autoregressive Distributive Lag (ARDL) was used for data model estimation. The results revealed that: monetary policy tools have no significant effect on the crude petroleum and natural gas output, both in the long and short run; that of all the monetary policy variables in the model, only money supply (M2) has a significant short run effect at the first lag period [M2(-1)]. The study thus concluded that monetary policy has not been an effective long run policy instrument that can largely influence the crude petroleum and Natural Gas sector output in Nigeria. The study recommends that the CBN use expansionary monetary policy that can increase money supply to the PEGAS to boost output indirectly. The study introduced model for the Crude Petroleum and Natural Gas sector output and monetary policy nexus in Nigeria.

Monetary Policy and the Performance of the Manufacturing Sector in Nigeria (1986-2017)

This study examined the effect of monetary policy on the performance of the Manufacturing sector in Nigeria. The explanatory variables are monetary policy rate, Treasury bills rate, Cash reserve requirement and money supply; while the dependent variable is the Manufacturing (MANU) sector output. The study adopted an ex-post facto research design and used secondary data obtained from the CBN Statistical Bulletin. The study covered a period of 32 years (1986 to 2017). The data were subjected to Augmented Dicker Fuller stationarity test to determine the best suitable econometric tool of analyses. The Autoregressive Distributive Lag (ARDL) was used for the model estimation. The results indicate that: monetary policy tools have significant effect on the manufacturing sector output in Nigeria in the short run only. The study thus concludes that monetary policy tools may not be a long run policy instrument for the growth of the manufacturing sector output in Nigeria but rather short run instruments. This study recommended that money supply and treasury bills can be used in the short run as policy instruments to maintain macroeconomic stability in Nigeria with reference to the manufacturing sector.

Cash Reserve Requirement and Credit to SMEs in Nigeria: An ARDL Bounds Test Aproach

This study estimated the impact of Cash Reserve Requirement on Credit to SMEs in both short run and long run in Nigeria. ARDL model was used to capture both objectives. The variables used were annual data from 1981-2017. The study found that Cash Reserve Ratio has an insignificant impact on Credit to SMEs in both short run and long run in Nigeria. Secondly, it was found that Lending Interest Rate has a negative but significant impact on Credit to SMEs. The study therefore suggested that banks and government should not concentrate on the use of Cash Reserve Ratio only in a bid to increase credit to SMEs in Nigeria. However, there is need to regulate the commercial banks? asset base to increase their Liquidity Ratio so as to increase access to credit by the SMEs. Again, government as a matter of necessity should appropriate and monitor the judicious disbursement of interest-free loans/credit to the SMEs in Nigeria as these would boost productivity and the Nigerian economy in the long run.

EFFECTS OF MONETARY POLICY INSTRUMENTS ON LENDING BEHAVIOUR OF QUOTED DEPOSIT MONEY BANKS IN NIGERIA

Monetary policy involves among others the utilization of monetary policy instruments to regulate the value, supply as well as cost of money in nation’s economy. Although there are many monetary policy instruments used by the Central Bank of Nigeria, this study however examines the effects of conventional monetary policy instruments in the form of Cash Reserve Ratio (CRR), Monetary Policy Rate (MPR) and Open Market Operation (OMO) on the lending behaviour of quoted Deposit Money Banks (DMBs) in Nigeria. Ex-post facto and causal research designs are used on data collected from the annual reports of the sampled DMBs for the period spanning through 2007 to 2016. Panel regression was used on the panel data collected and it was found from the random effect model that Cash Reserve Requirements, Open Market Operation and Deposit Ratio were negatively related to lending behaviour of banks with statistical insignificance. However, a significant negative effect of Monetary Policy Rate on Lending Behaviour was found while Exchange Rate was found to have a significant positive effect on lending behaviour of quoted DMBs. The study concludes that quoted DMBs’ ability to grant more credit is not significantly influenced by CRR, OMO and Deposit mobilization. However, lending behaviour of the DMBs significantly reduces as MPR increases, but increases as Exchange Rate increases. The study recommends that, CBN should reassess the use of CRR and OMO as the instruments of monetary policy if the objective of the policy is to influence lending of the quoted DMBs. Monetary policy Rate should also be reviewed to an optimal level that would ensure cost of borrowing supports reasonable access to finance by productive sectors of the economy.

Harmonization of Fiscal and Monetary Policies in Nigeria

To discuss how Nigeria can attain desired macroeconomic outcomes through harmonization of fiscal and monetary policies in Nigeria, we will review the main facts about our attainment of desired economic outcomes over the last decade and assess the deployment of fiscal and monetary policy instruments over the period. The realities of the last decade have been such that all target variables deteriorated, as output growth decelerated steadily until the economy slid into a recession, and liquidity contracted relative to GDP, the Naira lost two-thirds of its value against the US dollar, precipitating a high cost-pushed inflation, which is however well-known to be transitory and self-reversing in nature. We address the grim realities of a decade of growth deceleration and liquidity contraction that culminated in recession, devaluation, and cost-pushed inflation. Issues responsible for the grim realities are teased out and explored, and various options for addressing the issues are identified. Growth decelerations and declining liquidity should have called for looser policies to boost growth and liquidity. Surprisingly, all policy variables were tightened too. By 2016, government spending as a percentage of GDP had contracted very steeply to less than half of its 2008 level, and, since 2010, monetary policy rate has more than doubled, and cash reserve requirements has risen twenty-fold! The decade-long growth deceleration and decline in liquidity were thus precipitated by steep fiscal contractions throughout the decade and a switch to an ultra-tight monetary policy stance since 2010. The recession, devaluation and inflation resulted from negative oil price shocks from mid-2014. In other words, growth deceleration and decline in liquidity were inflicted by decade-long fiscal and monetary policy illusions and myopia, while recession, devaluation and inflation resulted from fiscal and monetary policy inertia in the face of negative external shocks since mid-2014. We make the case for expressing fiscal and monetary quantities as percentages of GDP to overcome illusions, adopting a forward-looking approach to the deployment of fiscal and monetary policy instruments to overcome myopia, and creating institutions to ensure that policy threats are routinely recognized and required actions are routinely taken, to overcome inertia. Since key fiscal and monetary policy instruments have become poorly aligned with key growth and liquidity targets, we suggest ways of realigning the instruments with the targets. We also suggest institutional reforms that will make Nigeria better able to identify and respond proactively to policy threats, and achieve greater harmony in the visions, words, and actions of policy agencies.

Endogenous fluctuations in an endogenous growth model: An analysis of inflation targeting as a policy

We implement two different monetary policies – an inflation targeting policy as well as a cash reserve requirement – in a monetary endogenous growth overlapping generations model characterized by production lags and analyse the growth dynamics that emerge from this framework. The growth process is endogenized by allowing productive government expenditure on infrastructure, complementing the lagged private capital input. In the presence of these monetary policies, we show that multiple equilibria emerge along different growth paths, with the low-growth (high-growth) equilibrium being unstable (stable) and locally determinate (locally indeterminate). In addition, we highlight the possibility of convergent or divergent endogenous fluctuations and even topological chaos around the high-growth equilibrium in the growth path where the monetary authority follows a high inflation targeting regime. Conversely, when the monetary authority follows a low inflation targeting regime, oscillations do not occur around either the low-growth or high-growth equilibrium. Moreover, a strictly non-negative cash reserve requirement is a necessary and sufficient condition to initiate the growth process.

Determinants of lending Behavior: Evidence from Nepalese Commercial Banks

This study examined the determinants of lending behavior in Nepalese commercial banks. This study is based on secondary data collected from 17 commercial banks operating in Nepal for the period of 2007/08 to 2015/16. The data were collected from annual reports of commercial banks and banking and financial statistics of NRB published by Nepal Rastra bank. The regression model is used to test the impact of bank specific and macroeconomic determinants of lending of commercial banks in Nepal. The study reveals that bank size, volume of deposit and cash reserve requirement ratio is the major determinant of loan and advances of Nepalese commercial banks. It shows that larger the bank size, higher would be the loan and advances. Similarly, volume of deposit has positive and significant impact on loan and advances. It shows that higher the volume of deposit, higher would be the loan and advances. Likewise, increase in cash reserve requirement ratio leads to decrease in loan and advances. The negative relationship between liquidity ratio and loan and advances shows that when the loan amount provided by banks increase, the amount of illiquid assets in the total assets portfolio of banks increase which leads to the reduction in the level of liquid assets held by the banks. Inflation rate and loan and advances have negative relationship which indicates higher the inflation rate, it leads to decrease in loan and advances. Similarly, GDP has positive relationship with loan and advances. The study suggests that Nepalese commercial banks should make strategy on how to retain more deposit so as to improve on their lending performance.

Social Status, Inflation and Endogenous Growth in A Cash‐in‐Advance Economy: A Reconsideration using the Credit Channel

Conventional models of social status purport a positive inflation‐growth relationship, and attribute this empirical contradiction to the presence of a consumer's desire for social status. These models are dominated by a substitution effect of money holdings for capital holdings, as an increase in the inflation rate due to money growth raises the cost of holding money and depresses the real money holdings. Using a monetary endogenous growth model, the effects of wealth‐induced social status on long‐run growth is reconsidered. The analysis is enhanced through the addition of a competitive banking sector that intermediates the available capital in the economy, subject to a mandatory cash reserve requirement. The cash reserve requirement creates a wedge between the deposit rate and the loan rate. While the real loan rate is tied with the constant marginal product of capital, the real deposit rate is negatively related to the rate of inflation. This leads to another, opposing substitution effect of deposit holdings for real money holdings and hence, increases the cost of holding deposits as inflation increases. The consolidated theoretical model described herein supports a diverse range of theoretical findings, contingent on the presence of wealth effects or the spirit of capitalism, using a simpler and more tractable framework that accounts for the role of the banking system in monetary policy decision outcomes. Significantly, as long as the mandatory reserve requirement imposed on the banking system by the monetary authority exceeds a (small) critical value, an increase in the money growth rate will lead to a decrease in the long‐run growth rate of the economy.

An evaluation of alternative approaches to the application of cash reserve requirements in Nigeria

ABSTRACTThis article evaluated ‘o-size-fits-all’ approach to cash reserve requirement implementation in Nigeria using the Vector Autoregressive methodology and scenario analysis. The central thrust was to ascertain if a one-size-fits-all approach would produce a better outcome or perhaps utilizing a differentiated approach would provide a better outcome. To that effect, our results eloquently provides various scenarios for consideration.

It Is Time to Resolve Nigeriaas Monetary Policy Conundrums

In the last six years, Monetary Policy Committee (MPC) decisions have included easing the monetary policy rate (MPR) just once, November 2015, and the cash reserve requirement (CRR) has been eased just twice, July and November 2015. In contrast, the MPR has been tightened ten times, including twice during the recession in 2016, and the CRR has also been tightened ten times, including once in 2016. It is very puzzling that MPC finds extraneous reasons, typically about banks or foreign exchange supply, to tighten monetary policy, even when the economy is contracting and can do with some liquidity boost. This paper demonstrates how MPC decisions have become disconnected from economic realities, and suggests the urgent steps that must be taken to ensure a reconnect. We compare the patterns in historical monetary policy decisions across Soludo, Lamido, and Emefiele regimes to trace the emergence of the disconnect and establish the best strategies for reconnecting. We also clarify the numerous misconceptions about the nominal MPR, positive real interest rate, foreign portfolio inflows that are often expressed in the MPC communiques. The economy is bigger and more important than the banks, but MPC statements continue to dwell on banks’ conditions, rather than on economic conditions, indicative of lapses in banking supervision. Failures of micro/macro-prudential policies are spilling over into the monetary policy space, inflicting high growth and employment costs on the economy. What the UK government has done in reforming the Bank of England over the last two decades, especially in functionally separating responsibilities for monetary policy and micro/macro-prudential policies, is an example of the reforms required in Nigeria. Apart from banks’ conditions, MPC statements have also had a lot to say about the need to keep the policy rate high enough to attract foreign portfolio inflows, rather than ease rates to stimulate growth and investment, betraying another spill-over into the monetary policy space from weaknesses in the foreign exchange policies of the Central Bank of Nigeria (CBN). Nigeria’s foreign investment policy must be recalibrated away from preoccupation with volatile and easily reversible portfolio inflows towards greater reliance on harder to reverse diaspora and foreign direct investment inflows. We argue strongly for immediate reforms in Nigeria’s monetary policy processes, Nigeria’s banking supervision arrangements, and Nigeria’s foreign investment policies. Those reforms are needed to ensure an orderly transition to a low MPR/low CRR regime that is urgently needed to boost growth and investment.

Determinants of the spread of bank interests in Bangladesh

The spread between the lending and the deposit rates plays a vital role in accelerating financial sector development of any country. This paper examines the determinants of the interest rate spread in Bangladesh using panel data for the 47scheduledbanks.Annual data for the sample period from 2004 to 2015 have been used to estimate the model.Panel data models are generally estimated using pooled OLS, fixed effects or random effects techniques. The fixed effects model is compared with the pooled OLS estimation. The F-test statistics rejects the null hypothesis of no fixed effect. If the null hypothesis is not rejected this would mean that the least squares dummy variables model are not different from the pooled OLS model. In such a case, bank-specific and period-specific parameters estimate would give us no significant information. In order to distinguish between fixed effects and random effects models the Hausman test was performed. The random-effect model requires the assumptions that individual error components are uncorrelated with each other and with the explanatory variables in the model. The Hausman test fails to reject the null hypothesis of no random effects. Therefore, the model has been estimated using pooled OLS initially and later with Fixed effect method to see the robustness of the results. The empirical results show that the spread is higher if the deposits rates is lower, banks operating cost is higher, market share of deposits is lower, government national savings directorate (NSD) certificate rate and non-performing loans cash reserve requirements (CRR) are higher. However, the results vary among the group of banks. Policy implications of this study would be foreign banks, state owned commercial and specialized banks need to increase deposits rates to lower spread. All banks need to decrease their operating cost. State owned commercial banks and specialized banksneed to lower their classified loans. Finally, Governments NSD certificate rates and the Central Bank's cash reserve requirements are also main drivers of spread. Therefore, government and the central bank need to be careful about these two variables if they want to decrease spread in the banking system in Bangladesh.