Effect of Monetary Policy on Profitability of Deposit Money Banks in Nigeria
Abstract
This study examines the effect of monetary policy on the profitability of Deposit Money Banks in Nigeria from 1986 to 2025. The study used secondary data sourced from world bank data site. To test for the hypotheses, the study used the Autoregressive Distributed Lag model, the study analyzed the effects of key monetary policy instruments, including the Cash Reserve Ratio , Liquidity Ratio , Monetary Policy Rate , and lending rates on the profitability of deposit money banks in Nigeria. The results revealed that CRR and LIR positively affected bank profitability in both the short and long run, contradicting traditional expectations that higher reserve requirements constrain bank earnings. MPR also significantly affects profitability, as banks in Nigeria successfully transfer higher borrowing costs to customers. Conversely, lending rates exhibited a negative long-run effect on bank profitability, as excessively high rates discouraged borrowing, reduced loan demand, and increased non-performing loans . The findings emphasized the need for a balanced monetary policy approach that ensures financial stability while fostering banking sector growth. The study recommended that, the government should maintain cash reserve ratio to balance financial stability with bank ability to generate revenue, adopt proactive liquidity management strategies to optimize liquidity ratio, adopt a flexible monetary policy approach and lastly encourage banks to set competitive and reasonable lending rates.
References
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