Monetary Policy and Bank Soundness in Nigeria: A Panel Data Analysis of Capital Adequacy Indicator.
Vol.5 Issue 1
This study examined the effect of monetary policy on Nigeria commercial bank soundness. Cross sectional data were sourced from annual reports of commercial banks and Central Bank of Nigeria Statistical Bulletin. Capital adequacy indicators of commercial banks soundness were used as dependent variables while cash reserve ratios, open market operation rates, monetary policy rate, treasury bills rates and money supply were used as independent variables. Panel data methodology was employed while the fixed effects model was used as estimation technique at 5% level of significance. Fixed effects, random effects and pooled estimates were tested while the Hausman test was used to determine the best fit. Panel unit roots and panel cointegration analysis were conducted on the study. Findings of the study proved that cash reserve ratio have positive but insignificant relationship with capital adequacy indicators of commercial bank soundness. Open market operations had positive and no significant relationship with capital adequacy indicators. Monetary policy rate has positive and no significant relationship with capital adequacy indicator. Treasury bills rates have positive and have no significant relationship with capital adequacy indicators. Monetary policy rates have positive but insignificant relationship with capital adequacy indicators. Money supply has positive and no significant relationship with capital adequacy indicators. The study concluded that cash reserve ratio, open market operations rates, treasury bills rates and monetary policy rates have no significant relationship with capital adequacy. From the findings we recommend that Central Bank of Nigeria should intensify the use money supply as a veritable effective monetary policy tool to achieve bank soundness in Nigeria. Furthermore, Central Bank of Nigeria should redefine these monetary policy instruments such as open market operation to make them more attractive to the banks, moderate cash reserve ratio as a tool for regulating commercial banks operation.
