DOES MONETARY POLICY CAUSE LIQUIDITY PROBLEM IN BANKS? EVIDENCE FROM NIGERIA

This study examined the effect of monetary policy on Nigerian banking sector liquidity and if the former causes illiquidity in the latter. The study used descriptive statistics, vector error correction mechanism (VECM) and Granger causality to analyze the relationship between most of the monetary policy variables (exchange rate, maximum lending rate, average savings deposit rate, monetary policy rate, Treasury Bill rate, broad money and financial sector contribution to the gross domestic product) and banking sector liquidity (actual liquidity ratio of commercial banks) for the period 1981 – 2018.Findings show that there exists a positive and significant relationship between monetary policy and banking sector liquidity in Nigeria contrary to the argument of the financial repression hypothesis. The study concluded that monetary policy exerts positive effect on banking sector liquidity rather than impairing it, at least in the short-run and the study thus recommended that in order to contribute more to economic growth, the Central Bank of Nigeria (CBN) should encourage banks to advance more credits to the productive sectors of the economy, which in turn will improve their liquidity position through profits, dividends and other banks’ incomes. Furthermore, savings should be encouraged through increased savings deposit rate as savers will save more as the rate is increased. This will also make the banking system more liquid.