The Impact Of Monetary Policy Measures On Bank Credit From 1980 – 2003

ABSTRACT  

The study is an investigation into the impact of monetary policy measures on bank credit, covering the period, 1980 – 2003. Specifically, we examined the influence of each of the following instruments namely, liquidity ratio, interest rate, cash reserve requirement, minimum rediscount rate and treasury bill on bank credit.  

Two major statistical tools were adopted, while a time-series analysis was conducted to observe the movement of these named variables as against the movement in bank loans and advances, a multiple regression test was however conducted to determine their effects on total loans and advances of banks. Some of the major findings of these tests confirm the existence of a high correlation between all the explanatory variables taken together and total bank loans and advances. This was further corroborated by the existence of a significant relationship between the monetary policy instruments and total bank loans and advances. However, in terms of the contribution of each of the explanatory variables to bank credit, only treasury bills rate and the liquidity ratio proved to be significant contributors to bank credit at 2% and 5% respectively.  However, beside these two explanatory variables that bear an inverse relationship (negative), also the sign of the cash reserve ratio equally meets the a priori expectation while both the minimum rediscount rate and interest rate failed to meet the a priori test in this regard. Based on these results, some of the major recommendations are that monetary authorities should rely more on the use of treasury bills, liquidity ratio and cash reserve ratio as measures to influence the level and direction of bank credits, having all passed the a priori test. Moreso, both the minimum rediscount rate and interest rate need further re-examination with the aim of making them more responsive to the needs of the economy.