Reserve Requirement and Loan to Deposit Ratio of Commercial Banks in Nigeria
Abstract
This study examined the relationship between reserve requirement and the loan to deposit ratio of commercial banks in Nigeria. Time series data were sourced from Central Bank of Nigeria Statistical Bulletin from 1990-2023. The study tested for the time series property of the variables used and adopted Ordinary Least Squares (OLS), Co-integration and Granger causality techniques to estimate the models. Loan to deposit ratio was modeled as the function of Cash Reserve Ratio, Stabilization Securities Reserve, Statutory Requirements, Fractional-Reserve and Liquidity Reserve. The study found that reserve requirements explained 62.9 percent changes on the dependent variables. The models are statistically significant from the value of f-statistics and probability. However, the ECM coefficient indicates that the models can adjust at the speed of 53.3 percent annually. The coefficient of the variables found that cash reserve ratio, liquidity ratio and statutory reserve have negative effect on loan to deposit ratio while stabilization reserve and fractional reserve have positive effect on loan to deposit ratio. The study conclude that reserve requirement moderately determines the changes in loans to deposit ratio of commercial banks in Nigeria. the study recommend that Policies should be advanced to deepen the operation of the money markets such that the market will accommodate all the liquidity needs for commercial banks to enhance liquidity management of commercial banks and Bank management should device strategic and tactical measures of managing the negative effect of liquidity reserve in order not to adversely affect the lending capacity of banks.
Keywords
Reserve RequirementLoan to Deposit RatioCommercial BanksNigeria
References
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