The Effect of Monetary Policy on the Nigerian Deposit Money Bank System

The Effect of Monetary Policy on the Nigerian Deposit Money Bank System

Alex Ehimare Omankhanlen (Department of Banking and Finance, Covenant University, Ota, Ogun State, Nigeria)
Copyright: © 2014 |Pages: 14
DOI: 10.4018/ijsem.2014010104

Abstract

This study investigates the effect of monetary policy on the Nigerian Deposit Money Bank (DMB) System. The Nigerian banking system is currently under-going a series of reforms in order to enhance its competitiveness and efficiency. The Ordinary Least Square (OLS) method is used to examine the effect of monetary policy on the Nigerian Deposit Money Bank System, using such variables as total loans and advances (TLA) as dependent variable and liquidity ratio (LR),cash reserve ratio (CRR), monetary policy rate (MPR), and average exchange rate (AER) as independent variables. The result of the findings shows that monetary policy rate reveal the most significant effect on commercial banks loans and advances during the period under study. The study thus recommends, among others, that the regulatory authority Central Bank of Nigeria should create credit procedures, policies and analytical capabilities which should be entrenched in the credit management of DMB's operations.
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Statement Of The Research Problem

The Apex bank has gone a long way at ensuring monetary stability by using policies like cash reserve requirements and capital requirements. These are continually used to cushion the effect of liquidity transmission, through deposit base and credit facilities by Deposit money banks; they have been unable to achieve maximum efficiency in this respect.

Indirect instruments of monetary policy are constantly mobilized to control liquidity demand pressures while lending commitments by banks continue to pose a challenge to economic development. The non-cooperation of some banks to adhere to stipulated requirements for issuing of loans and advances has caused the many set-backs in the achievement of macroeconomic objectives. Some have attributed reasons of their non-compliance to the progressive increase of the Monetary Policy Rate (MPR) in recent times. However, others have taken to a contrary stance, laying claim to monetary policy requirements on bank’s Cash Reserve Ratio (CRR) and Liquidity Ratio (LR).

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