Monetary Policy Variables and Commercial Banks’ Loans: A Causality Approach

Abstract

This study examined the cause and effect of monetary policy variables on Commercial Banks Loans and Advances in Nigeria for the period 1980-2013. In the model specified, commercial banks loans and advances (LCBLA) is a function of the explanatory variables; broad money supply (LM2), monetary policy rate (MPR), liquidity ratio (LR), inflation rate (IFR) and exchange rate (EXR). It was found that there is a causal relationship between monetary policy variables and commercial banks loans and advances in Nigeria within the period under study. This implies that there existed cause and effect between commercial bank loans and advances and the monetary policy variables. Specifically, money supply proved to be a significant parameter which causes commercial bank loans and advances. Also, causality runs from monetary policy rate to commercial bank loans and advances. On the other hand, commercial bank loans and advanced was found to significantly influence exchange rate. In ECM, disequilibrium of the system was found to be corrected at a speedy rate by 89.2% yearly. It is estimated from the result, 1% increase in money supply will bring about 0.3% increase in commercial bank loans and advances. However, any increase in liquidity ratio, inflation rate and exchange rate, will bring about decrease in the commercial bank loans and advances. In view of the findings, the relevant monetary authorities should apply with caution monetary policy variables to significantly influence the commercial banks loans and advances. Expansionary monetary policy should be adopted by the CBN force down interest rate and increase money supply because a fall in the bank rate will reduce interest on loans made by commercial banks. This will encourage more customers to secure loans from their banks thereby, increasing investment opportunities in the country ceteris paribus.

Keywords: Monetary policy variables, commercial banks loans and advances, granger causality, expansionary monetary policy, ECM