MONETARY POLICY AND RETURN ON EQUITY OF DEPOSIT MONEY BANKS IN NIGERIA

This study investigated the effects of monetary policy on the return on equity (ROE) of Deposit Money Banks (DMBs) in Nigeria between 1990 and 2023. Monetary policy rate, interest rate, liquidity ratio and cash reserve ratio were monetary policy tools considered. Data on the aforementioned variables were sourced from Central Bank of Nigeria statistical bulletin and the World Bank (World Development Indicators). The data were exposed to Augmented Dickey Fuller (ADF) unit root and descriptive analyses. Following unit root tests, Autoregressive Distributed Lag (ARDL) analytical technique was adopted for further analysis. Results revealed that in the short run, one year lagged return on equity has positive insignificant effect on ROE; monetary policy rate has positive and significant influence on ROE; interest rate and cash reserve ratio have inverse but significant effects on ROE while the effect of liquidity ratio is both negative and insignificant. In the long run, monetary policy rate and cash reserve ratio have direct effects on ROE of banks while interest rate and liquidity ratio have inverse effects on banks’ ROE in Nigeria. However, only the effects of monetary policy rate and interest rate were statistically significant. The study concluded that monetary policy has a significant effect on the ROE of deposit money banks in Nigeria. Thus, there is need for relevant authorities like the Central Bank of Nigeria to optimize monetary policy rate; policy makers should be cautious when adjusting interest rates, as it may negatively impact banks’ profitability; the monetary authority should consider reducing the cash reserve ratio in order to increase DMBs’ lendable funds and improve profitability; and it is important for policymakers to monitor banks’ liquidity levels in order to ensure they maintain a healthy balance between liquidity and profitability.