Effect of Monetary Policy on Bank Profitability in Nigeria
No Thumbnail Available
Date
2024-12
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Lead City University, Ibadan
Abstract
This study investigates the impact of monetary policy on the profitability of seven prominent Nigerian Deposit Money Banks (DMBs) with global authorization over the period 2010 to 2022. Utilizing panel data analysis, specifically panel fixed and random effects estimators, the study examines the relationship between key monetary policy instruments and various measures of bank profitability, including net interest margin (NIM), net profit margin (NPM), return on assets (ROA), and return on equity (ROE). The study employs a comprehensive dataset to explore how changes in monetary policy rates (MPR), interest rate spread (IRS), cash reserve ratios (CRR), and loan-to-deposit ratios (LDR) influence bank profitability in the Nigerian banking sector. The findings reveal mixed relationships between monetary policy variables and bank profitability
indicators. Notably, the study identifies that CRR and LDR have significant negative effects on NIM, NPM, and ROE, highlighting the importance of liquidity management and prudent lending practices in enhancing bank profitability. Moreover, IRS emerges as a significant determinant of NPM, indicating the impact of interest rate risk on banks’ earnings. However, the direct influence of MPR on profitability measures is found to be statistically insignificant, suggesting the need for further examination of monetary policy transmission mechanisms in the Nigerian banking context. The findings underscore the importance of sound liquidity management, effective interest rate risk management, and prudent lending practices in enhancing bank profitability amidst evolving macroeconomic conditions and regulatory frameworks. The study’s
insights have implications for policymakers, regulators, and banking practitioners seeking to foster a stable and profitable banking sector in Nigeria.
Keywords: Monetary policy rate, internet rate spread, cash reserve ratio, loan-deposit ratio, net
interest margin, net profit margin, return on assets, return on equity.
Word Count: 253.
v
Description
Keywords
: Monetary policy rate, internet rate spread, cash reserve ratio, loan-deposit ratio, net interest margin, net profit margin, return on assets, return on equity.
Citation
Kate Turabia