The Effect of Monetary Policy on the Nigerian Banking Sector (1981–2023)

Abstract

This study examined the effect of monetary policy on the Nigeria banking sector over a period of 43 years between 1981 and 2023. Specifically, the study established the effect of inflation rate, money supply (M2), monetary policy rate (MPR) and exchange rate on the financial performance of the Nigeria banking sector. Secondary data were sourced from CBN statistical Bulletin for the period, 1981-2023. Being a time series data, multiple regression technique was employed. The findings of the study indicated that inflation rate, monetary policy rate and exchange were found to be statistically not significant. The study conclude that overall, the results underscore the importance of monetary policy instruments, particularly the MPR and money supply, in shaping banking sector dynamics in Nigeria. The study therefore recommends among others, that the Central Bank of Nigeria (CBN) should apply caution in raising policy rates. This is so because a relatively low or stable MPR can stimulate lending, encourage investment, and support overall banking profitability. More so, that government should maintain inflation rate at moderate levels, as excessive inflation could erode banks’ asset values and customer deposits. The CBN should actively utilize open market operations and reserve requirements to promote optimal money supply levels that support bank lending and investment.