Effects of Central Bank Regulations on Performance of Selected Deposit Money Banks in Nigeria: Panel Data Evidence

Abstract

The objective of the paper is to investigate the effect of regulation by the central bank on the performance of five selected deposit money banks (DMBs) in Nigeria. Return on assets (used as proxy for bank performance) is the dependent variable while the explanatory variables are bank rate (or monetary policy rate (MPR)), cash reserve ratio, treasury bills rate and exchange rate. To achieve the objective of the study, the panel FMOLS estimator is employed to analyse a balanced panel dataset (covering the period from 2003 to 2013) on five major commercial banks in the country. The empirical evidence indicates that monetary policy rate was positively and significantly related to bank performance. This was attributed to the rising demand for bank loans by the deficit unit (or the ultimate borrowers) of the economy in spite of the rising DMBs’ lending interest rate engendered by the rise in the benchmark interest rate (MPR). It was also found that cash reserve ratio was negatively and significantly related to the return on assets of the banks. Furthermore, the study finds that exchange rate depreciation and high treasury bills rate are favourable to the performance of DMBs. To enhance the performance of DMBs in terms of improvement in their returns on assets, the paper recommends inter alia, lowering the cash reserve ratio, increasing the treasury bills rate, and avoiding excessive appreciation of the domestic currency.