MONETARY POLICY AND FINANCIAL PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA

MONETARY POLICY AND FINANCIAL PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA

ABSTRACT

This study examined the effect of monetary policy on the financial performance of deposit money banks in Nigeria. Using a time series data for 35 years for the period 1981 to 2015, 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 study was based on Sangmi and Nazir (2010) Asset Quality theory. 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. Post estimation test were also conducted.

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. Monetary policies for previous years are particularly highly significant. The lending rate had no significant effect on financial performance of deposit money banks. Increasing liquidity ratio in the current year is necessary towards improving the financial performance of deposit money banks in the future. Efforts toward upward reviews of the loans to deposit ratio and reduction in the cash reserve ratio are important for improvements in the financial performance of deposit money banks both in the current and future years.

Keywords: Monetary Policy, Financial Performance, Deposit Money Banks, Nigeria