Monetary Policy Effect on Banks Liquidity in Nigeria : Current School News

Monetary Policy Effect on Banks Liquidity in Nigeria

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Monetary Policy Effect on Banks Liquidity in Nigeria.

ABSTRACT

This study investigated the effect of monetary policy on bank liquidity in Nigeria. Specifically, the study investigated firstly the effect of open market operation on bank liquidity in Nigeria.

Secondly, the effect of monetary policy rate on bank liquidity in Nigeria. Thirdly, the influence of cash reserve ratio on bank liquidity in Nigeria. Lastly, the influence of loan to deposit ratio on bank liquidity in Nigeria.

The study was based on theories such as shiftability theory, anticipated income theory, and commercial loan theory.

Time series data of 30 years (1986-2015) was used. The ordinary least square (OLS) method was used to statistically investigate the effect of monetary policy on bank liquidity.

In employing the ordinary least square method, four functional models, that is, linear, semi-log, double log and Exponential models were used. The result of the best regression estimate (linear model) indicated that monetary policy has a significant effect on bank liquidity in Nigeria.

On the specific, the estimate indicated that open market operation has a negative and significant effect on bank liquidity in Nigeria. In addition, the result shows that monetary policy has a negative but insignificant effect on bank liquidity in Nigeria.

Moreover, there was evidence that the cash reserve ratio has a positive and significant influence on bank liquidity in Nigeria. Lastly, the loan to deposit ratio has a negative and significant influence on bank liquidity in Nigeria.

The study recommended that the monetary authority design a workable plan for effective and efficient utilization of open market operations. This will improve the level of saving and investment in the economy, thereby enhancing the level of bank liquidity.

It equally recommended that a strategic long-term plan, implementation process, and constant evaluation mechanism be designed to monitor the effect of monetary policy rate on principle economic variables such as bank liquidity.

This will help to reduce the negative effect of monetary policy on bank liquidity and help the monetary authority to avoid a quick response approach mostly used to maintain bank liquidity in the country.

INTRODUCTION

1.1  Background of the Study

A solid and stable financial sector is essential to make a well-functioning national economy and ensure balanced liquidity within the economy. Appropriate liquidity management is essential to foster economic growth.

Though, to achieve economic stability proper uses of fiscal and monetary policies are required. Despite establishing regulatory agencies and monetary policy committees, Nigerian banks have actually been deterred in creating adequate liquidity and additional credit for the sustenance of the entire economy.

The Central Bank of Nigeria (CBN) over the years, has instituted various monetary policies to regulate and develop the financial system in order to achieve major macroeconomic objectives which often conflict and result in distortion in the economy.

Although, some monetary policy tools like cash reserve and capital requirements have been used to buffer the liquidity creation process of deposit money banks through deposit base and credit facilities to the public.

Monetary policy remains a critical tool in stimulating the growth and stability of the economy through financial institutions in most developing economies.

In Nigeria, the objectives usually include promoting monetary stability, strengthening the external sector performance, and generating a sound financial system that will support increased output and employment.

Monetary policy is a major economic stabilization weapon that involves measures designed to regulate and control the volume, cost, availability, and direction of money and credit in an economy to achieve some specific macro-economic policy objectives.

REFERENCES

Ajayi, F.O., &Atanda, A.A. (2012). Monetary Policy and Bank Performance in Nigeria: Two-step Cointegration Approach. African Journal of Scientific Research, Vol. 9, No. 1, Pp 462-472.

Ayodele, J.C. (2014). Effects of Monetary Policy on the Commercial BanksLending in Nigeria. Review of Public Administration and Management, Vol. 3, No. 5.

Carroll, S. (2014). Types of research designs you can use for your dissertation.http://www.dissertation-statistics.com/research-designs.html.

Ekpung, G.E., Udude, C.C., &Uwalaka, H.I. (2015). The Impact of Monetary Policy on the Banking Sector in Nigeria. International Journal of Economics, Commerce and Management, Vol. 3, Issue 5, PP 1015-1031.

Ibeabuchi, S.N. (2007). Overview of Monetary Policy in Nigeria. Central Bank of Nigeria Economic and Financial Review, 45 (44), pp.15-37.

Jegede, C.A. (2014). Effect of Monetary Policy on Commercial bank lending in Nigeria. Review of Public Administration and Management, Vol. 3, No. 5, Pp 135-146.

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