Monetary Policy on Credit Growth of Deposit Money Banks in Nigeria (2010 – 2025)

Abstract

This study examines the influence of monetary policy instruments on the growth of deposit money banks’ credit to the private sector in Nigeria over the period 2010–2025. Employing annual time-series data sourced from the Central Bank of Nigeria and applying the Autoregressive Distributed Lag (ARDL) bounds testing approach, the study investigates both short-run and long-run dynamics of monetary transmission. The results confirm the existence of a stable long-run relationship between credit growth and selected monetary policy variables. Long-run estimates reveal that liquidity-based instruments, particularly the Cash Reserve Ratio (CRR) and systemic liquidity conditions proxied by the ratio of broad money supply to private sector credit, exert significant influence on credit growth. In contrast, the Monetary Policy Rate (MPR) demonstrates a negative but statistically insignificant effect, suggesting weak interest rate pass-through in Nigeria’s bank-dominated financial system. The error correction mechanism confirms gradual adjustment toward long-run equilibrium following short-run shocks. The findings indicate that monetary transmission operates predominantly through the liquidity channel rather than the price channel. The study recommends strengthening liquidity management coordination and improving interest rate transmission mechanisms to enhance sustainable private sector financing and monetary policy effectiveness.