Monetary Policy and Deposit Money Banks’ Lending Rates in Nigeria

International Journal of Research and Innovation in Social Science (IJRISS) | Volume V, Issue VI, June 2021 | ISSN 2454–6186

Monetary Policy and Deposit Money Banks’ Lending Rates in Nigeria

Demehin, James Adeniyi
Department of Banking and Finance,
Adekunle Ajasin University Akungba-Akoko, Ondo State, Nigeria

Abstract: Lending rates are vital prices that influence consumption and investment spending decisions of economic units, and thus, the central banks of nations are saddled with the responsibility of ensuring that the rates charged by deposit money banks are providing enabling financial environment, and this responsibility is being discharged by adopting appropriate monetary policy stances taking cognizance of the prevailing macroeconomic conditions. On this premise, this study examined the effect of monetary policy on deposit money banks’ lending rates in Nigeria. Secondary data was obtained from central bank of Nigeria statistical bulletin from 1987 to 2018. Augmented Dickey Fuller, Bound test, and Autoregressive Distributed Lag were used to determine the effect of money supply, monetary policy rates, and cash reserve ratios on lending rates. The stationary results indicated that lending rates and monetary policy rates were stationary at level, and money supply and cash reserve ratios stationary at first difference. Bound test results showed that there were long run relationships between the dependent and the independent variables. From the Autoregressive Distributed Lag results, money supply had positive and insignificant effect on lending rates in the short- run but negative and significant effect in the long-run. Cash reserve ratios exerted positive and significant effect in the short run, and negative and insignificant in the long run. Monetary policy rates influence was positive and significant both in the short run and long run. It was concluded that, with monetary policy rates showing the potency to influence the direction of lending rates, monetary policies would go a long way in producing monetary management capable of generating increased growth with stability in Nigeria. It was equally recommended that the central bank of Nigeria should identify banks funds sources that were outside its control and institute control mechanism in order to improve cash reserve ratios potency both in the short run and long run, and strengthen monetary policies effectiveness.

Key Words: Deposit money banks, central bank, lending rates, monetary policy, macroeconomic conditions

I.INTRODUCTION

Deposit money banks’ roles in the saving and investment process of any nation remain pertinent, hence, their activities are of great concerns to monetary authorities. As financial intermediaries, they mobilize funds, channel same for productive activities and charge interest for the services rendered. In other to evolve efficient monetary management that is growth-inducing, central banks all over the world focused on the activities of deposit money banks considering the central roles played

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