Monetary Policy and Bank Performance in Nigeria

This study investigates the impact of monetary policy and banking intermediation variables on the performance of deposit money banks in Nigeria over the period 1960 to 2024. Bank performance is measured using return on assets (ROA), while the independent variables include monetary policy rate (MPR), money supply rate (MSR), real interest rate (RIR), credit ratio (RER), loan-to-deposit ratio (LTDR), and cash reserve ratio (CRR). The study employs an ex-post facto research design using secondary data sourced from the Central Bank of Nigeria Statistical Bulletin and the Nigerian Bureau of Statistics. The autoregressive distributed lag (ARDL) approach is utilized to examine both short-run and long-run dynamics, following stationarity, lag length selection, and bounds cointegration tests to ensure robust estimation. The results indicate that the monetary policy rate (MPR) and cash reserve ratio (CRR) exert significant negative effects on bank profitability, reflecting the restrictive impact of higher interest rates and regulatory liquidity requirements on banks’ earning assets. In contrast, the money supply rate (MSR), credit ratio (RER), and loan-to-deposit ratio (LTDR) have positive and statistically significant effects on ROA, demonstrating that greater liquidity and efficient intermediation enhance bank performance. The real interest rate (RIR) exhibits a negative but marginally significant impact, suggesting a limited short- and long-run influence on profitability. The ARDL error correction results reveal a stable long-run equilibrium, with the error correction term indicating that deviations from equilibrium adjust rapidly over time. The findings are consistent with Keynesian liquidity preference theory, the monetary transmission mechanism, and credit channel theory, highlighting the interplay between macroeconomic policy and bank operational efficiency. Based on these results, the study recommends that policymakers adopt a balanced monetary policy to avoid undue constraints on bank profitability, while banks should optimize credit deployment, manage deposits effectively, and strategically respond to policy changes.