Sources and impact of excess liquidity on monetary policy in Nigeria

Authors

S. A. Ukeje, Central Bank of Nigeria
D. Amanze, Central Bank of Nigeria
L. Akinboyo, Central Bank of Nigeria
K. Ajayi, Central Bank of Nigeria

Publisher

Central Bank of Nigeria

Keywords

Banks, Excess reserves, Monetary policy effectiveness

Abstract

This paper examined the sources and effects of excess liquidity in the Nigerian banking system. The Deposit Money Banks (DMBs) in Nigeria do not hold voluntary reserve over and above the required reserve for precautionary reasons depending on their risk appetite. The practice over the years has been that DMBs constrained themselves by holding involuntary reserve which is a major concerns to the monetary authorities. The ideal situation is that banks should deploy excess reserves as loans to the public and invest in government securities, but on the contrary this is not done based on the profit maximisation tendencies of the DMBs. The Ordinary Least Squares (OLS) estimation result using monthly data from 2002 – 2012 showed that banks foreign assets and government deposits were important contributors to observed excess liquidity in the system. Government deposit featured as a key determinant of the demand for excess reserves. The paper also found a positive relationship between excess reserves and inflation.

Author Bio

The authors are staff of the Monetary Policy Department, Central Bank of Nigeria.

Publication Title

CBN Economic and Financial Review

Issue

2

Volume

53

Recommended Citation

Ukeje, S. A., Amanze, D., Akinboyo, L., and Ajayi, K. (2015). Sources and impact of excess liquidity on monetary policy in Nigeria. CBN Economic and Financial Review, 53(2), 79-97.