EVALUATING THE RELATIONSHIP BETWEEN MONETARY POLICY AND BANK ASSET QUALITY IN NIGERIA

This study investigates the role of monetary policy on the asset quality performance of Nigerian banks. Using secondary data, the research examines the impact of monetary policy instruments—including money supply, liquidity ratio, monetary policy rate, and cash reserve ratio—on bank performance indicators such as loans and advances, total assets, and turnover ratio. The methodology employs multiple regression analysis using Ordinary Least Squares (OLS) alongside unit root tests (Augmented Dickey-Fuller) to ensure stationarity of the variables. Empirical results indicate that monetary policy significantly affects bank performance, but the impact is instrument-specific; certain tools influence specific performance indicators more effectively than others. The combined use of multiple instruments was found to have the strongest effect, supporting the monetarist view that monetary policy, when properly implemented, can influence banking activities and portfolio performance. Findings also reveal that monetary and fiscal policies in Nigeria are inadequately harmonized, with co-integration tests indicating a 41% disequilibrium. The study recommends that banks maintain net loan losses within anticipated provisions, while the Central Bank of Nigeria (CBN) should enhance supervision of loan loss provisions and adjust monetary policy rates, including reducing the cash reserve ratio, to increase liquidity and enable banks to meet lending and investment obligations effectively.