Monetary Policy Instruments and the Performance of Deposit Money Banks in Nigeria (2010–2023)

Abstract

This study examined the effect of monetary policy instruments on the performance of deposit money banks in Nigeria over the period 2010–2023. Specifically, the study investigated the impact of the Cash Reserve Ratio (CRR), Liquidity Ratio (LQ), and Monetary Policy Rate (MPR) on bank profitability, measured by Return on Assets (ROA). Secondary time series data were sourced from the Central Bank of Nigeria and other relevant publications, and the Ordinary Least Squares (OLS) regression technique was employed for analysis. The findings reveal that CRR exhibited a positive but insignificant relationship with ROA, while both LQ and MPR showed negative but statistically insignificant effects. The low explanatory power of the models, with R-squared values ranging from 1% to 13%, indicates that monetary policy instruments explain only a minimal proportion of variations in bank profitability during the study period. This outcome suggests that external and structural factors such as inflationary pressures, exchange rate volatility, and regulatory burdens play a more dominant role in shaping the performance of Nigerian banks. The study concludes that monetary policy instruments exert limited direct influence on bank profitability in Nigeria. It therefore recommends that the Central Bank of Nigeria strengthen monetary policy transmission mechanisms, enhance coordination with fiscal authorities, and pursue long-term structural reforms to improve policy effectiveness. Additionally, banks are encouraged to diversify income sources and adopt stronger risk management frameworks to enhance resilience in the face of policy and macroeconomic uncertainties.