Monetary Policy and Commercial Bank Lending to the Real Sector in Nigeria: A Time Series Study
Keywords:
Monetary Policy, Commercial Bank Lending, Real Sector, Nigeria Economy, Time Series Study.
Abstract
This study empirically examined the effects of monetary policy on commercial banks lending to the real sector from 1981 – 2014. The objective was to examine the effectiveness of monetary policy in channeling bank credit to the real sector. Annual time series data were sourced from Central Bank of Nigeria statistical bulletin. Two multiple regression models were specifically estimated with the aid of Software Package for Social Sciences. The study modeled commercial banks credit to agricultural and manufacturing sector as the function of interest rate, monetary policy rate, treasury bill rate, exchange rate, broad money supply and liquidity ratio. The result shows collinearity that corresponds with the Eigen value condition index, and variance constant are less than the required value. The Durbin Watson statistics shows the absence of multiple auto correlation and negative autocorrelation, while the variance inflation factors indicate the absence of auto-correlation. The regression results from model one found that interest rate, monetary policy rate have positive relationship with commercial banks lending to the agricultural sector while Treasury bill rate, exchange rate, broad money supply and liquidity ratio have negative effect on the dependent variable. Model two found that interest rate, Treasury bill rate, exchange rate, broad money supply and liquidity ratio have negative effect on commercial banks lending the manufacturing sector while monetary policy rate have positive relationship with the dependent variable. We recommend that monetary policy should be harmonize with bank lending objectives to enhance commercial banks lending to the real sector of the economy and that management of commercial banks should formulate policies of managing the negative effect of monetary policy variables on its lending.
References
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Ashcraft, A., (2006). New Evidence on the Lending Channel. Journal of Money, Credit and Banking 38(3), 751–775.
Berger, A. N., & Udell, G. F., (1994). “Did Risk-Based Capital Allocate Bank Credit and Cause a ‘Credit Crunch’ in the United States?” Journal of Money, Credit and Banking 26(3), part II: 585–628.
Bernanke, B. S., & Blinder, A. S., (1988). Credit, Money, and Aggregate Demand. American Economic Review Papers and Proceedings 78(2), 435–439.
Bernanke, B. S., & Blinder, A. S., (1992). The Federal Funds Rate and the Channels of Monetary Transmission. American Economic Review 82(4), 901–921.
Bernanke, B. S.,& Gertler, M., and Gilchrist. S., (1996). The Financial Accelerator and the Flight to Quality. The Review of Economics and Statistics 78(1), 1–15.
Bernanke, B. S.,& Gertler, M., (1995). Inside the Black Box: The Credit Channel of Monetary Policy Transmission. Journal of Economic Perspectives, 9(4), 27–48.
Borio, C., &Zhu, H., (2012). Capital Regulation, Risk-Taking and Monetary Policy: A Missing Link in the Transmission Mechanism? Journal of Financial Stability 8(4), 236–251.
Brunnermeier, M. K., & Sannikov, Y., (forthcoming). A Macroeconomic Model with a Financial Sector. American Economic Review.
Caballero, R. J., Hoshi, T., & Kashyap, A. K., (2008). Zombie Lending and Depressed Restructuring in Japan. American Economic Review 98(5): 1943–1977.
Campello, M., (2002). Internal Capital Markets in Financial Conglomerates: Evidence from Small Bank Responses to Monetary Policy, Journal of Finance 57(6), 2773–2805.
Cecchetti, S. G., (1995). Distinguishing Theories of the Monetary Transmission Mechanism. Federal Reserve Bank of St. Louis Review May/June, 83–97.
Cetorelli, N., & Goldberg, L. S., (2012). Banking Globalization and Monetary Transmission. Journal of Finance 67(5), 1811-1843.
Diamond, D.W & Philips H.D, (1983). Bank Runs, Deposit Insurance, and Liquidoty. Journal of Political Economy 91, 401-19
Diamond D.W., (1984). Financial Intermediation: Delegated monitoring and long-term relationships. Journal of Banking & Finance 13(1):9-20
Ezirim, B.C., (2005). Finance Dynamics Principles, Techniques & Applications. Markowitz Centre for Research & Development Port Harcourt.
Fazzari, S. M., Hubbard, R. G., & Petersen, B. C., (1988). Financing Constraints and Corporate Investment. Brookings Papers on Economic Activity 141–195.
Ferri, G., & Kang, T. S., (1999). The Credit Channel at Work: Lessons from the Republic of Korea's Financial Crisis. World Bank Policy Research Working Paper 2190.
Fields, L. P., Fraser, D. R., Berry, T. L., & Byers, S. S., (2006). Do Bank Loans Relationships Still Matter?” Journal of Money, Credit and Banking 38(5): 1195–1209.
Gambacorta, L., (2005). Inside the Bank Lending Channel. European Economic Review 49(7): 1737–1759.
Gambacorta, L., & Marques-Ibanez D.,. (2011). The Bank Lending Channel: Lessons from the Crisis. BIS Working Paper No. 345, May.
Gertler, M., & Gilchrist, S., (1993). The Role of Credit Market Imperfections in the Monetary Transmission Mechanism: Arguments and Evidence. The Scandinavian Journal of Economics 95(1): 43–64.
Gertler, M., & Gilchrist, S., (1994). Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms. The Quarterly Journal of Economics 109(2), 309–340.
Hall, B. J., (1993). How Has the Basel Accord Affected Bank Portfolios?” Journal of the Japanese and International Economies 7(4), 408–440.
Hancock, D., &Wilcox, J. A., (1994). Bank Capital and the Credit Crunch: The Roles of Risk-Weighted and Unweighted Capital Regulation. Journal of the American Real Estate and Urban Economics Association 22(1), 59–94.
Holod, D., & Peek, J., (2007). Asymmetric Information and Liquidity Constraints: A New Test.” Journal of Banking & Finance 31(8): 2425–2451.
James, C., (1987). Some Evidence on the Uniqueness of Bank Loans. Journal of Financial Economics 19(2): 217–235.
Jimenez, G., Ongena, S., Peydro, J. L., & Saurina, J., (2012). Credit Supply and Monetary Policy: Identifying the Bank Balance-Sheet Channel with Loan Applications. American Economic Review 102(5): 2301–2326.
Kashyap, A. K., & Stein, J. C., (1994). Monetary Policy and Bank Lending. in Mankiw, N. G. (ed.) Monetary Policy Chicago: University of Chicago Press, 221–256.
Kashyap, A. K., & Stein, J. C., (1995). The Impact of Monetary Policy on Bank Balance Sheets. Carnegie-Rochester Conference Series on Public Policy 42(1): 151–195.
Kashyap, A. K., & Stein, J. C., (2000). What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?. American Economic Review 90(3): 407–428.
Kashyap, A. K., & Stein, J. C., (2004).Cyclical Implications of the Basel II Capital Standard. Federal Reserve Bank of Chicago Economic Perspectives First Quarter, 18–31.
Kashyap, A. K., Stein, J. C., & Wilcox D. W., (1996). Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance: Reply. American Economic Review 86(1): 310–314.
Kashyap, A. K., J. C. Stein, & Wilcox. D. W. , (1993). Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance. American Economic Review 83(1): 78–98.
Kashyap, A. K., Lamont, O. A.,& Stein, J. C., (1994). Credit Conditions and the Cyclical Behavior of Inventories, The Quarterly Journal of Economics, 109(3): 565–592.
Kishan, R. P., & Opiela, T. P., (2000). Bank Size, Bank Capital, and the Bank Lending Channel. Journal of Money, Credit and Banking 32(1): 121–141.
Loutskina, E., (2011). The Role of Securitization in Bank Liquidity and Funding Management. Journal of Financial Economics 100(3): 663–684.
Loutskina, E., & Strahan, P., (2009). Securitization and the Declining Impact of Bank Finance on Loan Supply: Evidence from Mortgage Originations. Journal of Finance 64(2): 861–889.
Ludvigson, S., (1998). The Channel of Monetary Transmission to Demand: Evidence from the Market for Automobile Credit. Journal of Money, Credit and Banking 30(3): 365–383.
Mohammed, A., & Simon, W., (2008). The Impact of Monetary Policy on Banks’ Credit in Ghana. AERC Paper TI-I, Naairobi Kenya.
Montgomery, H., (2005). The Effect of the Basel Accord on Bank Portfolios in Japan. Journal of the Japanese and International Economies 19(1), 24–36.
Morgan, D. P., (1998). The Credit Effect of Monetary Policy: Evidence Using Loan Commitments. Journal of Money, Credit and Banking 30(1): 102–118.
Nwankwo, G.O., (1991). The Money and Capital Market in Nigeria. Ibadan: Publisher Review of Public Administration and Management Vol. 3, No. 5, July 2014 142.
Oliner, S. D., & Rudebusch, G. D., (1996). Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance: Comment. American Economic Review 86(1): 300–309.
Oliner, S. D., & Rudebusch, G. D., (1996). Is There a Broad Credit Channel for Monetary Policy? Federal Reserve Bank of San Francisco Economic Review 1: 3–13.
Peek, J., & Rosengren, E. S., (1995). Bank Regulation and the Credit Crunch. Journal of Banking & Finance 19(3-4), 679–692.
Peek, J. & E. S. Rosengren (1997). The International Transmission of Financial Shocks: The Case of Japan. American Economic Review 87(4), 495–505.
Peek, J., & Rosengren, E. S., (2000). Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States. American Economic Review 90(1): 30–45.
Peek, J., & Rosengren, E. S., (2005). Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan. American Economic Review 95(4): 1144–1166.
Peek, J., & Rosengren, E. S., (1995). The Capital Crunch: Neither a Borrower nor a Leader Be. Journal of Money, Credit and Banking 27(3): 625–638.
Peek, J., Rosengren, E. S., & Tootell, G. M. B., (2003). Identifying the Macroeconomic Effect of Loan Supply Shocks. Journal of Money, Credit and Banking 35(6, Part I): 931–946.
Petersen, M. A., & Rajan, R. G., (1995). The Effect of Credit Market Competition on Lending Relationships. The Quarterly Journal of Economics 110(2): 407–443.
Slovin, M. B., Sushka, M. E., & Polonchek, J. A., (1993). The Value of Bank Durability: Borrowers as Bank Stakeholders. Journal of Finance 48(1): 247–266.
Somoye, R.O.C.,& Iio, B. M., (2009). The Impact of Macroeconomic Instability on the Banking Sector Lending Behaviour in Nigeria. Journal of Money, Investment and Banking, Issue 7.
Toby, A. J., & Peterside, D., (2014). Monetary Policy, Bank management and Real Sector Finance in Nigeria: Who is to Blame? Proceedings of the First Middle Conference on Global Business, Economics, Finance and Banking (ME 14 Dubai Conference) Dubai.
Ashcraft, A., (2006). New Evidence on the Lending Channel. Journal of Money, Credit and Banking 38(3), 751–775.
Berger, A. N., & Udell, G. F., (1994). “Did Risk-Based Capital Allocate Bank Credit and Cause a ‘Credit Crunch’ in the United States?” Journal of Money, Credit and Banking 26(3), part II: 585–628.
Bernanke, B. S., & Blinder, A. S., (1988). Credit, Money, and Aggregate Demand. American Economic Review Papers and Proceedings 78(2), 435–439.
Bernanke, B. S., & Blinder, A. S., (1992). The Federal Funds Rate and the Channels of Monetary Transmission. American Economic Review 82(4), 901–921.
Bernanke, B. S.,& Gertler, M., and Gilchrist. S., (1996). The Financial Accelerator and the Flight to Quality. The Review of Economics and Statistics 78(1), 1–15.
Bernanke, B. S.,& Gertler, M., (1995). Inside the Black Box: The Credit Channel of Monetary Policy Transmission. Journal of Economic Perspectives, 9(4), 27–48.
Borio, C., &Zhu, H., (2012). Capital Regulation, Risk-Taking and Monetary Policy: A Missing Link in the Transmission Mechanism? Journal of Financial Stability 8(4), 236–251.
Brunnermeier, M. K., & Sannikov, Y., (forthcoming). A Macroeconomic Model with a Financial Sector. American Economic Review.
Caballero, R. J., Hoshi, T., & Kashyap, A. K., (2008). Zombie Lending and Depressed Restructuring in Japan. American Economic Review 98(5): 1943–1977.
Campello, M., (2002). Internal Capital Markets in Financial Conglomerates: Evidence from Small Bank Responses to Monetary Policy, Journal of Finance 57(6), 2773–2805.
Cecchetti, S. G., (1995). Distinguishing Theories of the Monetary Transmission Mechanism. Federal Reserve Bank of St. Louis Review May/June, 83–97.
Cetorelli, N., & Goldberg, L. S., (2012). Banking Globalization and Monetary Transmission. Journal of Finance 67(5), 1811-1843.
Diamond, D.W & Philips H.D, (1983). Bank Runs, Deposit Insurance, and Liquidoty. Journal of Political Economy 91, 401-19
Diamond D.W., (1984). Financial Intermediation: Delegated monitoring and long-term relationships. Journal of Banking & Finance 13(1):9-20
Ezirim, B.C., (2005). Finance Dynamics Principles, Techniques & Applications. Markowitz Centre for Research & Development Port Harcourt.
Fazzari, S. M., Hubbard, R. G., & Petersen, B. C., (1988). Financing Constraints and Corporate Investment. Brookings Papers on Economic Activity 141–195.
Ferri, G., & Kang, T. S., (1999). The Credit Channel at Work: Lessons from the Republic of Korea's Financial Crisis. World Bank Policy Research Working Paper 2190.
Fields, L. P., Fraser, D. R., Berry, T. L., & Byers, S. S., (2006). Do Bank Loans Relationships Still Matter?” Journal of Money, Credit and Banking 38(5): 1195–1209.
Gambacorta, L., (2005). Inside the Bank Lending Channel. European Economic Review 49(7): 1737–1759.
Gambacorta, L., & Marques-Ibanez D.,. (2011). The Bank Lending Channel: Lessons from the Crisis. BIS Working Paper No. 345, May.
Gertler, M., & Gilchrist, S., (1993). The Role of Credit Market Imperfections in the Monetary Transmission Mechanism: Arguments and Evidence. The Scandinavian Journal of Economics 95(1): 43–64.
Gertler, M., & Gilchrist, S., (1994). Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms. The Quarterly Journal of Economics 109(2), 309–340.
Hall, B. J., (1993). How Has the Basel Accord Affected Bank Portfolios?” Journal of the Japanese and International Economies 7(4), 408–440.
Hancock, D., &Wilcox, J. A., (1994). Bank Capital and the Credit Crunch: The Roles of Risk-Weighted and Unweighted Capital Regulation. Journal of the American Real Estate and Urban Economics Association 22(1), 59–94.
Holod, D., & Peek, J., (2007). Asymmetric Information and Liquidity Constraints: A New Test.” Journal of Banking & Finance 31(8): 2425–2451.
James, C., (1987). Some Evidence on the Uniqueness of Bank Loans. Journal of Financial Economics 19(2): 217–235.
Jimenez, G., Ongena, S., Peydro, J. L., & Saurina, J., (2012). Credit Supply and Monetary Policy: Identifying the Bank Balance-Sheet Channel with Loan Applications. American Economic Review 102(5): 2301–2326.
Kashyap, A. K., & Stein, J. C., (1994). Monetary Policy and Bank Lending. in Mankiw, N. G. (ed.) Monetary Policy Chicago: University of Chicago Press, 221–256.
Kashyap, A. K., & Stein, J. C., (1995). The Impact of Monetary Policy on Bank Balance Sheets. Carnegie-Rochester Conference Series on Public Policy 42(1): 151–195.
Kashyap, A. K., & Stein, J. C., (2000). What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?. American Economic Review 90(3): 407–428.
Kashyap, A. K., & Stein, J. C., (2004).Cyclical Implications of the Basel II Capital Standard. Federal Reserve Bank of Chicago Economic Perspectives First Quarter, 18–31.
Kashyap, A. K., Stein, J. C., & Wilcox D. W., (1996). Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance: Reply. American Economic Review 86(1): 310–314.
Kashyap, A. K., J. C. Stein, & Wilcox. D. W. , (1993). Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance. American Economic Review 83(1): 78–98.
Kashyap, A. K., Lamont, O. A.,& Stein, J. C., (1994). Credit Conditions and the Cyclical Behavior of Inventories, The Quarterly Journal of Economics, 109(3): 565–592.
Kishan, R. P., & Opiela, T. P., (2000). Bank Size, Bank Capital, and the Bank Lending Channel. Journal of Money, Credit and Banking 32(1): 121–141.
Loutskina, E., (2011). The Role of Securitization in Bank Liquidity and Funding Management. Journal of Financial Economics 100(3): 663–684.
Loutskina, E., & Strahan, P., (2009). Securitization and the Declining Impact of Bank Finance on Loan Supply: Evidence from Mortgage Originations. Journal of Finance 64(2): 861–889.
Ludvigson, S., (1998). The Channel of Monetary Transmission to Demand: Evidence from the Market for Automobile Credit. Journal of Money, Credit and Banking 30(3): 365–383.
Mohammed, A., & Simon, W., (2008). The Impact of Monetary Policy on Banks’ Credit in Ghana. AERC Paper TI-I, Naairobi Kenya.
Montgomery, H., (2005). The Effect of the Basel Accord on Bank Portfolios in Japan. Journal of the Japanese and International Economies 19(1), 24–36.
Morgan, D. P., (1998). The Credit Effect of Monetary Policy: Evidence Using Loan Commitments. Journal of Money, Credit and Banking 30(1): 102–118.
Nwankwo, G.O., (1991). The Money and Capital Market in Nigeria. Ibadan: Publisher Review of Public Administration and Management Vol. 3, No. 5, July 2014 142.
Oliner, S. D., & Rudebusch, G. D., (1996). Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance: Comment. American Economic Review 86(1): 300–309.
Oliner, S. D., & Rudebusch, G. D., (1996). Is There a Broad Credit Channel for Monetary Policy? Federal Reserve Bank of San Francisco Economic Review 1: 3–13.
Peek, J., & Rosengren, E. S., (1995). Bank Regulation and the Credit Crunch. Journal of Banking & Finance 19(3-4), 679–692.
Peek, J. & E. S. Rosengren (1997). The International Transmission of Financial Shocks: The Case of Japan. American Economic Review 87(4), 495–505.
Peek, J., & Rosengren, E. S., (2000). Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States. American Economic Review 90(1): 30–45.
Peek, J., & Rosengren, E. S., (2005). Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan. American Economic Review 95(4): 1144–1166.
Peek, J., & Rosengren, E. S., (1995). The Capital Crunch: Neither a Borrower nor a Leader Be. Journal of Money, Credit and Banking 27(3): 625–638.
Peek, J., Rosengren, E. S., & Tootell, G. M. B., (2003). Identifying the Macroeconomic Effect of Loan Supply Shocks. Journal of Money, Credit and Banking 35(6, Part I): 931–946.
Petersen, M. A., & Rajan, R. G., (1995). The Effect of Credit Market Competition on Lending Relationships. The Quarterly Journal of Economics 110(2): 407–443.
Slovin, M. B., Sushka, M. E., & Polonchek, J. A., (1993). The Value of Bank Durability: Borrowers as Bank Stakeholders. Journal of Finance 48(1): 247–266.
Somoye, R.O.C.,& Iio, B. M., (2009). The Impact of Macroeconomic Instability on the Banking Sector Lending Behaviour in Nigeria. Journal of Money, Investment and Banking, Issue 7.
Toby, A. J., & Peterside, D., (2014). Monetary Policy, Bank management and Real Sector Finance in Nigeria: Who is to Blame? Proceedings of the First Middle Conference on Global Business, Economics, Finance and Banking (ME 14 Dubai Conference) Dubai.
Published
2018-01-16
How to Cite
., O., & Magnus, T. (2018). Monetary Policy and Commercial Bank Lending to the Real Sector in Nigeria: A Time Series Study. American Finance & Banking Review, 2(1), 12-43. https://doi.org/10.46281/amfbr.v2i1.127
Section
Research Paper/Theoretical Paper/Review Paper/Short Communication Paper
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