A Dynamic Analysis of The Relationship Between Monetary Policies and Loan Risk Exposures in Nigerian Deposit Money Banks

Abstract

This work investigated the effects Monetary Policy has on Loan Risk Exposure in Nigeria Commercial Banks. Nigerian banks do not believe much in giving out loans and advances to much of the countries manufacturing and agro based businesses because of the perceived risk associated with lending to these businesses. This has prevented funds from getting to businesses that can help grow the economy. The data analysis of this study was carried out with ordinary least square multivariate regression perspective within the confinement of a vector error correction model (VECM) framework. The result of this study reveals that lending rate does not play significant role in support of loans and advances. However, monetary policy rate reveal the most significant effect on commercial banks loans and advance confirmed by its efficient estimate. This means that monetary policy rate is a competent parameter in measuring the performance of banks in the allocation of their credit facilities. Based on the findings, it is suggested that the monetary authorities give opportunity for the full interplay of the market forces of supply and demand in the allocation of credit .This interplay should be closely monitored to prevent banks from creating artificial scarcity of funds in order to hike their lending rate.

DOI: 10.5901/mjss.2015.v6n6p247