Analysis of Monetary Policy and Bank Lending Nexus in Nigeria

Abstract

In this study, we examined monetary policy nexus with lending behaviour of deposit money banks in Nigeria between 1987 and 2020 using ARDL method. This study empirically established that monetary policy rate has a negative and significant impact on bank lending in Nigeria in both short and long runs in the covered period. Both the liquidity ratio and inflation rate have significant positive impact in the long-run and negative in the short-run in Nigeria. The lending rate exerts a positive and significant impact on bank lending in Nigeria. Monetary policy rate Granger-caused liquidity ratio but not vice versa. Similarly, liquidity ratio Granger-caused loan to deposit ratio but not vice versa. Furthermore, there is a unidirectional causality flow from monetary policy rate to the inflation rate. inflation rate and lending rate Granger-cause each other. This study, therefore, posits that monetary policy is a significant predictor of bank lending in Nigeria such that the tighter the policy, the lower the lending ability of deposit money banks and vice versa, the cheaper the monetary policy, the higher the lending ability of deposit money banks in Nigeria.