Monetary policy and bank behaviour in Nigeria

Abstract

This paper analyses monetary policy and bank behaviour in Nigeria. Existing evidence shows that banks alter their lending behaviour in a specific way following a change in monetary policy. This study investigates the dynamic relationship between the actions of the monetary authorities through changes in the monetary policy rate (MPR), and the behaviour of deposit money banks in Nigeria through their allocation and pricing of credit. We employed aggregates time-series data as in several studies on bank lending. Two variables, credit to the core private sector and lending rate, which measure whether banks change their behavior when CBN changes the direction of monetary policy were employed. Impulse response analysis was also employed to study the dynamic interaction of the variables. The findings of the study revealed that while other factors are considered by the banks before they change their lending behavior, variation in maximum lending rate is also associated with changes in MPR, suggesting the fact that banks in Nigeria watch closely the movement in MPR for their credit pricing.