IMPACT OF MONETARY POLICY INSTRUMENTS ON THE

PERFORMANCE OF NIGERIAN BANKING INDUSTRY

Abstract
This study examined the impact of monetary policy instruments on the performance of deposit
money banks in Nigeria. In formulating relevant hypotheses, total demand deposit of deposit
money banks in Nigeria was used as proxy for bank performance which was the dependent
variable, while monetary policy instruments such as money supply, monetary policy rate and
cash reserve ratio were the independent variables. The study period covers 30 years from 1988
to 2017 and the data source was CBN statistical bulletin of 2017. Using the OLS regression
technique, E view 9 was used to run the data. The empirical findings of the study revealed that
money supply and cash reserves requirement have positive relationship while monetary policy
rate has negative relationship with total demand deposit. However, money supply and monetary
policy rate were statistically significant but cash reserve requirement was statistically
insignificant on total deposit of banks in Nigeria. Based on the f statistics result, the study
concluded that monetary policy instruments has a significant impact on the performance of
deposit money banks in Nigeria. The study recommended that government through its
appropriate authority must ensure that the policy instrument should be geared towards
promoting and stimulating growth and development in the banking sector of the Nigerian
economy.
Keywords: Cash Reserve Ratio, Deposit Money Banks, Monetary policy, Money supply, Total
demand deposits.

Introduction

The imperative for managing the level of money supply and some other factors is undoubtedly a
major concern for countries of the world. In Nigeria, the government through its monetary
agency charged with managing the level of money in circulation makes use of an important tool
in order to achieve certain objectives. This tool is known as monetary policy. Monetary policy
according to Ndugbu, (2015) involves a deliberate effort by the monetary authority (the Central
Bank of Nigeria) to control the money supply and credit conditions for the purpose of achieving
certain broad economic objectives. Ajayi and Atanda (2012) points out that the Central Bank is
responsible for the conduct of monetary policy in order to pursue macro-economic objectives.

In addressing the issue of monetary policy, Central Banks of the world such as the Central Bank
of Nigeria (CBN), often employ certain monetary policy instruments like bank rate, open market
operation, changing reserve requirements and other selective credit control instruments in order
to implement their economic plans. The instruments of monetary policy are used through their
effects on financial markets. The policy instruments have their initial impact on the demand for
and supply of reserves held by depository institutions and consequently on availability of credit.

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 IMPACT OF MONETARY POLICY INSTRUMENTS ON THE
PERFORMANCE OF NIGERIAN BANKING INDUSTRY

By manipulating these instruments, Central Banks affect the rate of growth of the money supply,
the level of interest rate, security prices, credit availability and liquidity creation through
commercial bank. These factors, in turn can exert monetary imbalances or shocks on the
economy by influencing the level of investment, consumption, imports, exports, government
spending, total output, income and price level in the economy (Mishra & Pradhan, 2008). In this
regard, banks are therefore the linchpin of the economy of any country. They occupy central
position in the country’s financial system and are essential agents in the development process.
By intermediating between the surplus and deficit savings units within an economy, banks
mobilize and facilitate efficient allocation of national savings, thereby increasing the quantum of
investments and hence national output. In a developing economy such as Nigeria, financial
sector development has been accompanied by structural and institutional changes and the sector
generally has long been recognized to play a crucial role in the economic development of the
nation (Ajayi & Atanda, 2012).

The Central Bank of Nigeria (CBN) over the years, have instituted various monetary policies to
regulate and develop the financial system in order to achieve major macroeconomic objectives
which often conflict and result to distortion in the economy. However, some monetary policy
like cash reserve and capital requirements have been used to buffer the liquidity creation process
of commercial banks through deposit base and credit facilities to the public. According to
Akomolafe, Danladi, Babalola and Agbah, (2015) monetary policy remains a critical tool in
stimulating the growth and stability of financial institution in most developing economics. 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 which 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
(Akomolafe, et al, 2015).

Ekpung, Udude and Uwalaka (2015) explains that the extent to which monetary policy
influences financial and economic activities has been widely argued over the years, it is equally
accepted that monetary policy affects economic and financial performance of any economy.
There are divergence views on the extent of the effects and the channels through which these

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PERFORMANCE OF NIGERIAN BANKING INDUSTRY

effects are achieved. This is particularly relevant in the Nigeria setting where the money and
capital market are under-developed and Nigerian government has over the years adopted various
instruments of monetary policy to regulate and control the cost, volume, availability and
direction of money credit and also the performance of commercial banks.

The rationale for this study stems from the fact that monetary shocks are not in a smooth process.
In this regard, an appropriate analysis of monetary shock transmission mechanisms is of crucial
importance for the Central Bank of Nigeria. This is to determine the process through which
monetary policy influence the entire economy within the financial system framework. In this
view, this study investigates the impact of varying monetary policy instruments on the
performance of Nigeria banking industry from 1988 to 2018. The study made use of money
supply, monetary policy rate and cash reserve requirement as proxies of monetary policy while
total demand deposits of Deposit Money Banks was used to measure the performance of banks in
Nigeria. The paper is structured into five sections. Following this introduction, section two
undertakes a review of conceptual, theoretical and empirical literature. Section three is a
discussion on the methodology and model specification. Empirical results are contained in
section four, while section five provides the findings, conclusion and recommendations.

Literature Review

Concept of Monetary Policy

Monetary policy is the macroeconomic policy laid down by the Central Bank of any nation. It
involves management of money supply and interest rate and is the demand side of economic
policy used by the government of a country to achieve macroeconomic objectives like inflation,
consumption, growth and liquidity (The Economic Times, 2018). Monetary policy being a major
economic stabilization weapon involves measures taken by the Central Bank to regulate and
control the volume, cost, availability and direction of money and credit in an economy to achieve
some specified macroeconomic policy objectives and to counter all undesirable trends in the
economy. The direction of monetary policy is dictated by the prevailing economic situation and
policy objective which have remained broadly the same over a considerable number of years. In

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 IMPACT OF MONETARY POLICY INSTRUMENTS ON THE
PERFORMANCE OF NIGERIAN BANKING INDUSTRY

Nigeria, authorities have enunciated and implemented a myriad of inflationary policies in an

attempt to transcend desired economic growth and development.

According to Akomolafe et al (2015) the stance of monetary policy refers to either expansionary
or contractionary actions of the Central Bank to control money supply. Expansionary monetary
policy is a set of actions by the monetary authority to increase money supply in the economy. It
is conventionally used to stimulate economic activity, usually in a recession. Contractionary
monetary policy on the other hand seeks to reduce the level of money supply in the economy. It
is conventionally used to reduce inflationary pressures in the economy.

Over the years, the CBN has conducted its monetary policy towards achieving these objectives.
More recently, the Bank has refocused on achieving price stability, while at the same time
balancing it with other macroeconomic objectives of the Government. In summary, monetary
policy in the Nigerian context refers to the actions of the Central Bank of Nigeria to regulate the
money supply, so as to achieve the ultimate macroeconomic objectives of government. Several
factors influence the money supply, some of which are within the control of the central bank,
while others are outside its control. The specific objective and the focus of monetary policy may
change from time to time, depending on the level of economic development and economic
fortunes of the country. The choice of instrument to use to achieve what objective would depend
on these and other circumstances. These are the issues confronting monetary policy makers.

Monetary Policy Instruments in Nigeria

Ogunseye and Bada (2012) posits that there are two basic tools of monetary policy: money
supply and interest rate. Money supply is however influenced in a manner using any combination
of the quantitative and qualitative tools. The quantitative tools include: Open Market Operations,
monetary policy rate, reserve requirements, special deposits, and stabilization securities. On the
other hand, the qualitative tools include selective credit control and moral suasion.

Open Market Operations: This involves the buying or selling of government securities from or
by the banks and the non-bank public by CBN. The effect of the purchase of securities is the
increase of banks liquidity or reserves and the reserve is the case when such securities are sold.
Ekezie (2002) insists that a precondition for the successful application of this instrument of
monetary policy is the existence of well developed money and capital markets. The CBN sells

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PERFORMANCE OF NIGERIAN BANKING INDUSTRY

securities when it tends to reduce money supply and purchases when it tends to increase money
supply.

Monetary Policy Rate: This is just a fancy word for the interest rate at which banks can borrow
from the central bank. And it is how the CBN influences the rate at which banks can lend to
companies and customers. The higher the rate the less favourable terms you will get for loans
from banks. In May 2016, MPR in Nigeria was 12%. In 2011, it was 8% and has steadily risen
since then to 13% towards the end of last year, then briefly dropped to 11% and for a while now
has been 12%.

Reserve Requirements: The need to control the liquidity of banks arises because of two
reasons; ensuring solvency of the banking system and control of money supply. They are usually
expressed as a percentage of the bank’s assets that have to be liquid. Cash and no interest bearing
assets make up the bank's liquid assets. An increase in the reserve requirements means that the
bank will have to liquidate some of its interest bearing assets such as loans and investments in
order to meet the requirements.

Special Deposits: The CBN monitors regularly the volume of cash in circulation. All banks are
expected to open separate accounts quite distinct from the cash reserve requirement with the
CBN. If the apex bank considers the stock of money in circulation as too large and potentially
capable of causing inflation, the Bank may call upon commercial banks to deposit additional
deposit which may not form part of their (banks) liquid asset with the CBN. This will definitely
reduce the volume of money supply in the vault of the banks for lending to the real and service
sectors of the economy.

Stabilization Securities: This instrument is issued on occasional demands, it principally to mop

up excess liquidity from the financial system.

Selective Credit Control: This is a functional directive or instruction given by the CBN, which
the commercial banks are expected to ensure compliance with. It takes the size and consumption
of their banks loans for the development of preferred sectors of the economy.

Moral Suasion: This is an informal method by which the CBN intimates the banks of the
required money direction of money. An agreement and commitment to comply with the proposed
policy could in the process of such discussion be reached on the part of the banks. Though such

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PERFORMANCE OF NIGERIAN BANKING INDUSTRY

agreements are not binding legally, on the banks, the CBN always has the option of using legal
instruments to exert compliance of the banks will the monetary it adopts.

Objectives of Monetary Policy

Adesoji (2014) articulated that the following are the principal objectives of monetary policy.

Attainment of full level of employment: According to Keynes, full employment means the
absence of involuntary unemployment. In other words, full employment is a situation in which
everybody who wants to work gets work. To achieve full employment, Keynes advocated
increase in effective demand to bring about reduction in real wages. Thus the problem of full
employment is one of maintaining adequate and effective demand.

Price level stability: One of the goals of macroeconomics policy is to stabilize the price level. A
policy of price stability keeps the value of money stable, eliminates cyclical fluctuations, brings
economic stability, helps in reducing inequalities of income and wealth, secure social justice and
promotes economic welfare.

Achieving economic growth and stability: Generally, economists believe in the possibility of
continual growth. This belief is based on the presumption that innovations tend to increase
productive technologies of both capital and labour over time. Rapid growth leads to urbanization
and industrialization with their adverse effects on the pattern of living and environment. The
monetary authority may influence growth by controlling the real interest rate through its effect
on the level of investment. By following an easy credit policy and lowering interest rates, the
level of investment can be raised which promotes economic growth.

Maintenance of favourable balance of payments: Another goal of macroeconomic objectives

has been to maintain equilibrium in the balance of payments. The achievement of this goal has
been necessitated by the phenomenal growth in the world trade as against the growth of
international liquidity.

The supplementary objectives of monetary policy include smoothening of the business cycle,
prevention of financial crisis and stabilization of long term interest rates and real exchange rate
(Mishra and Pradhan, 2008).

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Monetary Policy Framework

The monetary policy framework generally refers to the institutional arrangements under which
monetary policy decisions are made and executed. In view of this, an analysis of any monetary
policy framework extends considerably beyond the confines of the central bank. Indeed, only in
a few countries is much of the monetary policy framework decided by the central bank itself.
Some of the factors that influence the choice of monetary policy framework by a central bank
include:

Structural differences: This includes the structure of the financial sector, types and level of
debt, openness to trade, commodity dependence, fiscal discipline, etc.

Degree of Indexation: This is very common with countries within various levels of economic
integration which requires different types of indexation. In addition, there are other nominal
rigidities that affect the speed of transmission from monetary policy instruments to inflation.

Institutional arrangements: This refers to the number of institutions making up the monetary
authorities, the enabling laws, data availability and in formulating monetary policy, the monetary
authorities usually set targets whose values the policy maker wants to change.

Monetary Policy and Nigerian Banking Industry

Monetary policy and Banks (commercial banks) are inextricately linked together. In fact, the
assessment of the Banking System (particularly in the area of loans and advances) can be
through the performance of monetary policy tools, which can be broadly classified into two
categories- the portfolio control approach and market intervention. Olokoyo (2011) expressed
that commercial banks decisions to lend out loans are influenced by a lot of factors such as the
prevailing interest rate, the volume of deposits, the level of their domestic and foreign
investment, banks liquidity ratio, prestige and public recognition to mention a few. Many
developing countries, including Nigeria have adopted various policy measures to achieve
targeted objectives. Ajie and Nenbee (2010) contended that reserves of the banks are influenced
by the Central Bank through its various instruments of monetary policy. These instruments
include the cash reserve requirement, liquidity ratio, open market operations and primary
operations to influence the movement of reserves. All these activities affect the banks in their
operations and thus influence the cost and availability of loanable funds. Thus, monetary policy

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instruments are critical in the demand for and supply of reserves held by depository institutions
and consequently on availability of credit.
In Nigeria, the banking industry is dominated by the commercial banks. The Central Bank is
responsible for the conduct of monetary policy to pursue the macroeconomic objectives of the
government. Items in commercial banks balance sheet are influenced by the Central Bank of
Nigeria (CBN) through the use of direct monetary policies. The CBN sets the interest and
allocates credits in the economy according to the economic objectives and plans of the
Government. The policies involves targeting monetary aggregates to monitoring and
manipulating policy rates to direct the interbank rate in the desired direction which in turn
determines the direction of other market rates. Today, the targeting of inflation and control of
interest rate among other policies are the core policies needing the attention of the CBN. Various
monetary policies have been instituted by the Central Bank of Nigeria to control, regulate and
develop the financial system. These have sometimes resulted in distortions in the economy. Over
the years, the effects of monetary policies on the performance on banks have been a subject of
concerns. The removal of the maximum lending rate ceiling in 1993 saw interest rates rising to
unprecedented levels in sympathy with rising inflation rate which rendered banks’ high lending
rates negative in real terms. In 1994, direct interest rate controls were restored. As these and
other controls introduced in 1994 and 1995 had negative economic effects, total deregulation of
interest rates was again adopted in October, 1996. In 2004, the CBN directed that commercial
banks in the country must have a minimum capital base of N25billion. In 2006, Monetary Policy
Rate (MPR) was adopted by the Monetary Policy Committee as a replacement for the Minimum
Rediscount Rate (MRR) (Ajayi &Atanda, 2012). This reason for this was to influence direction
of interest rate in line with the monetary policy condition. The MPR has remained the operating
instrument for the direction of interest rate since then. The volatility in the monetary policy
formulation has no doubt affected the performance of the banking sector in Nigeria. Okoye, and
Eze (2013) studied the impact of monetary policy on the performance of commercial banks in
Nigeria and found out that monetary policy rate has positively affected the performance of
commercial banks. However, Enyioko (2012) showed that monetary policy has not improved the
overall performances of Nigerian banks significantly.

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Theories Applicable to the Study

Bank Lending Channel of Monetary Policy Transmission

The monetary policy transmission mechanism refers to the routes through which monetary
impulses are communicated to the real sector of the economy. Mishkin, (1995), argued that to be
successful in conducting monetary policy, the monetary authorities must have an accurate
assessment of the timing and effect of their policies on the economy, thus requiring an
understanding of the mechanism through which monetary policy affects the economy. The bank
lending channel represents the credit view of this mechanism. According to this view, monetary
policy works by affecting bank assets (loans) as well as banks’ liabilities (deposits). The key
point is that monetary policy besides shifting the supply of deposits also shifts the supply of bank
loans. For instance, an expansionary monetary policy that increases bank reserves and bank
deposits increase the quantity of bank loans available. Where many borrowers are dependent on
bank loans to finance their activities, this increase in bank loans will cause a rise in investment
(and also consumer) spending, leading ultimately to an increase in aggregate output, (Y). The
schematic presentation of the resulting monetary policy effects is given by the following: M ↑ →
Bank deposits ↑ → Bank loans ↑ →I ↑ → Y ↑

(Note: M= indicates an expansionary monetary policy leading to an increase in bank deposits and
bank loans, thereby raising the level of aggregate investment spending, I, and aggregate demand
and output, Y,). In this context, the crucial response of banks to monetary policy is their lending
response and not their role as deposit creators. The two key conditions necessary for a lending
channel to operate are: (a) banks cannot shield their loan portfolios from changes in monetary
policy; and (b) borrowers cannot fully insulate their real spending from changes in the
availability of bank credit. The importance of the credit channel depends on the extent to which
banks rely on deposit financing and adjust their loan supply schedules following changes in bank
reserves; and also the relative importance of bank loans to borrowers. Consequently, monetary
policy will have a greater effect on expenditure by smaller firms that are more dependent on

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PERFORMANCE OF NIGERIAN BANKING INDUSTRY

bank loans, than on large firms that can access the credit market directly through stock and bond
markets (and not necessarily through the banks).

The Keynesian Theory

The Keynesian Economists think of monetary policy as working primarily through interest rate.
In Keynesian transmission mechanism, an increase in the money supply leads to a fall in interest
rate to include the public to hold additional money balances. Consequently, a fall in interest rate
may stimulate investment. The increased investments also increase the level of income or output
through the multiplier, which may stimulate economic activities. Thus, monetary policy affects
economic activity indirectly through their impact on interest rates and investment. Therefore, the
Keynesian transmission mechanism is characterized by a highly detailed sector building up of
aggregate demand and a detailed specification of portfolio adjustment process that attaches
central role to interest as an indirect link between monetary policy and fiscal demand. In simple
terms, the monetary mechanism of Keynesians emphasizes the role of money, but involves an
indirect linkage of money with aggregate demand via the interest rate. Where, OMO = Open
Market Operation. R = Commercial Bank Reserve. MS = Stock of Money. r = Interest Rate. I =
Investment. GNP = Gross National Product. On a more analytical note, if the economy is initially
at equilibrium and there is open market purchase of government securities by the Central Bank
of Nigeria (CBN), this open Market Operation (OMO) will increase the commercial banks
reserve (R) and raise the bank reserves. The bank then operates to restore their desired ratio by
extending new loans or by expanding bank credit in other ways. Such new loans create new
demand deposits, thus increasing the money supply (MS). A rising money supply causes the
general level of interest rate (r) to fall. The falling interest rates affects commercial bank
performance and in turn stimulate investment given businessmen expected profit. The induced
investment expenditure causes successive rounds of final demand spending by GNP to rise by a
multiple of the initial change in investment. On the other hand, a fall in money supply causes the
general level of interest rate (R) to rise or increase thereby increasing the commercial banks
profitability (Jhingan, 2005).

Brief Empirical Review

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PERFORMANCE OF NIGERIAN BANKING INDUSTRY

Okere (2017) investigated the impact of monetary policy on the performance of deposit money
banks, the Nigerian Experience (1993-2016). Data for this study were collected from the Central
Bank of Nigeria (CBN) statistical bulletin, annual reports and statement of accounts. Ordinary
Least Square and co integration was used to evaluate the impact of monetary policy on the
performance of deposit money banks. The Augmented Dicker Fuller (ADF) unit root test and co
integration proved that the variables are stationary and a long-run relationship exist among the
variables The OLS revealed that amongst all the monetary policy variables (bank deposit rate,
bank lending rate, cash reserve ratio and liquidity ratio) considered in the model, only bank
deposit rate has significant relationship though inverse relationship. On this premise, the study
recommends among others, that the Central Bank of Nigeria (CBN) should moderate the deposit
rate as a tool for regulating deposit money banks operation. Again there is need to modify the
monetary policy instruments to reflect and respond more rapidly and easily to local economic
conditions. Anowor and Okorie (2016) empirically reassessed the impact of monetary policy on
economic growth of Nigeria adopting the Error Correction Model approach. It utilized time
series secondary data spanning between 1982 and 2013. The result showed that a unit increase in
Cash Reserve Ratio (CRR) led to approximately seven units increase in economic growth in
Nigeria. The result was in consonance with economic literature as monetary policy among other
objectives is geared towards achieving the macroeconomic objectives of sustained economic
growth and price stability. Therefore, the study recommends that monetary authorities should
give priority attention to CRR monetary policy tool as it will produce a more desired result in
terms of economic stabilization. And also some combination of fiscal policy measures are
needed to attain the complementary balance required driving an economy towards to desired
goals. Ujuju and Etale, (2016) also examined the role of monetary policy instruments in controlling
inflation in Nigeria. The study adopted interest rate, minimum rediscount rate, liquidity ratio, and cash
reserve ratio as proxy for monetary policy instruments and the independent variables. These were
regressed against inflation rate, the dependent variable. Secondary time series panel data for the period
covering 1982 to 2011, were collected from the Central Bank of Nigeria (CBN) Statistical Bulletin in
2011. The study employed multiple regression technique based on E-views 7 computer software to
analyze data obtained on the study variables. Four hypotheses were tested and the null hypotheses were
accepted based on the regression results. The study found that interest rate, minimum rediscount rate,
liquidity ratio and cash reserve ratio had no significant influence on inflation. The study recommended

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PERFORMANCE OF NIGERIAN BANKING INDUSTRY

that Nigeria shift from being a consumption driven (import) economy to production based (export)
economy for the impacts of these policies to achieve desired result.

Ekpung, Udude and Uwalaka (2015) investigated the effect of monetary policy on Banking
sector performance in Nigeria. The study period covers 36 years from 1970 to 2006, using
selected indicator and employing the OLS regression technique. We tested the null hypothesis of
no significant relationship between bank deposit liabilities and chosen indices of banking
performance, namely Exchange Rate (EXR), Deposit Rate (DR) and Minimum Discount Rate
(MDR). Results showed that overall; monetary policy has a significant effect on the banks
deposit liabilities. Main while, on individual basis, we discovered that Deposit Rate (DR) and
Minimum Discount Rate (MDR) had a negative influence on the banks deposit liabilities in
Nigeria, whereas Exchange Rate (EXR) had a positive and significant influence on the banks
deposit liabilities in Nigeria. We conclude therefore that monetary policy plays a vital role in
determining the volume of bank’s deposit liabilities in Nigeria. The study recommended that
government and its monetary authorities should strive to create a conducive environment for
banking sectors to grow in the country by packaging appropriate monetary policies that would
guarantee and enhance growth and development of the banking sectors in Nigeria. Gbadebo and
Mohammed (2015) also examined the effectiveness monetary policy as an anti-inflationary
measure in Nigeria. In order to explore the relationship between inflation and monetary
impulses, the cointegration and error correction methods approach were employed on quarterly
time series data spanning from 1980Q1 to 2012Q4. The unit roots test shows that all the
variables are differenced stationary. The cointegration test indicates a long-run relationship
between inflation and the vector of regressors employed. The estimated result reveals that for the
period covered, interest rate, exchange rate, money supply and oil-price are the major causes of
inflation in Nigeria. It was also observed that although in the short-run increased in income
encourages inflation; proper utilization of the growth would reduce inflation. The Money supply
variable shows a significant positive impact on inflation both in short and long runs. This means
that Nigerian inflationary situation is driven by monetary impulses. As such, antiinflationary
monetary policy measures, backed-up by some necessary fiscal policies are incumbent for
structural and economic stabilization.

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Research Methods

The study employed secondary data and a time series analysis for the period of 1988 to 201. Data
on money supply, monetary policy rate, cash reserve requirement and total demand deposit
mobilized by commercial banks were obtained from Central Bank of Nigeria (CBN) Statistical
Bulletin of 2017. An expost facto research design was employed for the study because it does not
give room for data manipulation on the part of the researcher. The method of data analysis
employed in this research work is Ordinary Least Square (OLS) with Multiple Regression
Analytical Technique to evaluate the relationship between the dependent and the independent
variables. The analysis was facilitated through the use of Econometric view (E-view 9).

The following model is specified in an attempt to determine impact of monetary policy

instruments on the performance of Nigeria banking industry.
TDD = f (MSP, MPR, CRR) ……………………………………...…. (1)

The econometric model is given as:

TDD = β0+ β1 MSP1 + β2 MPR2 + β3 CRR3 + µ ………………. (2)
Where,
TDD = Total Demand Deposit (mobilized by deposit money banks)
MSP = Money Supply
MPR = Monetary Policy Rate
CRR = Cash Reserve Requirements
β1 – β3 = Coefficient of independent variables
µ = Error term

Data Analysis and Interpretation of Results

Table 1: Group Unit Root Test

Group unit root test: Summary

Series: TDD, MSP, MPR, CRR
Date: 02/21/19 Time: 15:09
Sample: 1988 2017
Exogenous variables: Individual effects
Automatic selection of maximum lags
Automatic lag length selection based on SIC: 0 to 1
Newey-West automatic bandwidth selection and Bartlett kernel

Cross-
Method Statistic Prob.** sections Obs

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Null: Unit root (assumes common unit root process)

Levin, Lin & Chu t* -4.92930 0.0000 4 111

Null: Unit root (assumes individual unit root process)

Im, Pesaran and Shin W-stat -6.12488 0.0000 4 111
ADF - Fisher Chi-square 57.5792 0.0000 4 111
PP - Fisher Chi-square 58.1826 0.0000 4 112

Source: Econometric View Version 9

** Probabilities for Fisher tests are computed using an asymptotic Chi
-square distribution. All other tests assume asymptotic normality.
The unit root test in table 1 above shows that at various levels of significance (1%, 5% and 10%),
the time series were stationary. The researcher opted for group unit root test for better output.
From the result, total demand deposits, money supply, monetary policy rate and cash reserve
ratio was integrated at the same order which is I (1), therefore all the time series data in this
study are stationary at first difference.
Table II: Model Results

Dependent Variable: TDD

Method: Least Squares
Date: 02/21/19 Time: 15:10
Sample: 1988 2017
Included observations: 30

Variable Coefficient Std. Error t-Statistic Prob.

C 1660.218 477.1630 3.479352 0.0018

MSP 0.280113 0.014266 19.63504 0.0000
MPR -106.9995 26.50182 -4.037440 0.0004
CRR 8.113591 5.259514 1.542650 0.1350

R-squared 0.956508 Mean dependent var 2112.287

Adjusted R-squared 0.951489 S.D. dependent var 2370.416
S.E. of regression 522.0868 Akaike info criterion 15.47711
Sum squared resid 7086940. Schwarz criterion 15.66394
Log likelihood -228.1567 Hannan-Quinn criter. 15.53688
F-statistic 190.6028 Durbin-Watson stat 1.134433
Prob(F-statistic) 0.000000

Source: Econometric View Version 9

From the table above, the result of the econometric model shows that the fitted OLS model is
given and rewritten as follows:

TDD = β0+ β1 MSP1 + β2 MPR2 + β3 CRR3 + µ

TDD = 1660.218 + 0.280113 MSP1 -106.9995 MPR2 + 8.113591 CRR3 + µ

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The implication of the rewritten econometric model is that holding all the independent variables
constant, TDD will be at a positive value of 1660.218. However, any unit increase in MSP and
CRR will cause 0.280113 and 8.113591 increase in TDD. As it pertains to MPR, a unit increase
in this variable will trigger -106.9995 units decrease in TDD for the period under review while
keeping other variables constant.

Table 2 also shows the validity statistics for the fitted model. The results revealed that the
multiple correlation coefficient between TDD which is the dependent variable and the
independent variables (MSP, MPR and BRT) exhibit a strong positive correlation at R = 0.956
with a coefficient of multiple determination (R 2) of 0.952 which indicates that exactly 95.2
percent of the variations in the growth of TDD in Nigeria is influenced by the joint effect of
independent variables while the remaining 4.8 percent is due to other factors equally responsible
for determining the growth of TDD, but captured by error term.

T statistics

The OLS result indicates that money supply has a positive relationship with total demand deposit
of deposit money banks in Nigeria and that the p-value of 0.0000 shows that the coefficient is
statistical significant. Also, monetary policy rate has a negative relationship with total demand
deposit of deposit money banks in Nigeria. However, the probability value of 0.0004 is less than
0.05 level of significance which means that MPR is statistically significant. Lastly, the results of
cash reserve ratio indicate a positive relationship with total demand deposit of deposit money
banks in Nigeria. However, p value of 0.1350 shows that cash reserve ratio has no significant
impact on total demand deposit of deposit money banks in Nigeria under the period of review.

F statistics

Independent variables should be jointly significance to explain dependent variable. If the p-value
of F statistic is less than 5 percent (0.05) we can reject the null and accept alternative hypothesis.
From the result, the f-statistics is 190.6028 with a probability value of 0.000000. Since the p
value is lesser than 0.05 level of significance, this indicates that monetary policy instruments has
a significant impact on the performance of Nigerian banking industry during the period under
review.

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 IMPACT OF MONETARY POLICY INSTRUMENTS ON THE
PERFORMANCE OF NIGERIAN BANKING INDUSTRY

Findings and Conclusion

The findings of the empirical analysis revealed that money supply and cash reserve ratio has a
positice relation with total demand deposit while monetary policy rate had a negative
relationship with total demand deposit. The probability values of the independent variables
acting on the dependent also showed that money supply and monetary policy rate is statistically
significant while cash reserve ration is statistically insignificant. The study also report an f-
statistic of 190.6028 with a probability value of 0.00000. Based on this findings, it is concluded
that monetary policy instruments has a significant impact on the performance of Nigerian
banking industry.

Policy Recommendations

After concluding the study based on the empirical findings of the researcher, the following
recommendations are proposed:

The monetary policy rate given by the CBN should be minimal in order that the lending rate that
will be later given by the deposit money banks to their various customers would not be too high.

The CBN should review the Prudential Guidelines for banks to encourage them to offer more
credits to the real sectors. On the other hand, banks should create more credits by formulating
strategies that could reduce lending rates.

Government through its appropriate authority must ensure that the policy instrument should be
geared towards promoting and stimulating growth and development in the banking sector of the
Nigerian economy.

It is also advised that another instrument be introduced to complement monetary policy rate in
order to generate and simulate the level of economic activity desired in the banking industry.

Finally, money supply should be effectively used in a way so as to has achieved desired price
levels that will propel investors into committing more investment resources for expansion of
output.

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PERFORMANCE OF NIGERIAN BANKING INDUSTRY

Appendix I

Data on Total Demand Deposit of DMBs, Monetary Policy Rate,

Money Supply and Cash Reserve Ratio (1988-2017).
YEAR TDD MSP MPR CRR
(N’Billion) (N’Billion) (%) (%)
1988 10.7 38.36 12.75 0
1989 10.2 45.9 18.5 0
1990 15.6 52.86 18.5 0
1991 22 75.4 15.5 0
1992 49.9 111.11 17.5 29.1
1993 65.3 165.34 26 42.2
1994 79.5 230.29 13.5 48.5
1995 95.9 289.09 13.5 33.1
1996 128.2 345.85 13.5 43.1
1997 142.3 413.28 13.5 40.2
1998 202.2 488.15 13.5 46.8
1999 345 628.95 18 61
2000 448 878.46 14 64.1
2001 503.9 1,269.32 20.5 52.9
2002 577.7 1,505.96 16.5 52.5
2003 728.6 1,952.92 15 50.9
2004 946.6 2,131.82 15 50.5
2005 1497.9 2,637.91 13 50.2
2006 2307.9 3,797.91 10 55.7
2007 3650.6 5,127.40 9.5 48.8
2008 3386.5 8,008.20 9.75 44.3
2009 3830.3 9,411.11 6 30.7
2010 4920.9 11,034.94 6.25 30.4
2011 5070 12,172.49 12 42
2012 5160.8 13,895.39 12 49.7
2013 5421.5 15,160.29 12 63.2
2014 5436 17,679.29 13 38.3
2015 6180 18,901.30 11 30
2016 5980.9 21,607.68 14 46
2017 6153.7 24,140.63 14 22.5
Source: Central Bank of Nigeria Statistical Bulletin, 2017.

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