Dynamics of Bank Lending in Nigeria

Abstract

This study examines factors influencing Nigeria’s Loan Aggregates (LLOA) using the Loanable Funds Theory. Using the ARDL estimation technique and quarterly data from 2010Q1 to 2024Q4., the study found that deposit (VD), money supply (M2), exchange rate (EXR), and inflation (INF) variables are significant in influencing short-run changes in loan growth. On the other hand, monetary policy variables such as cash reserve ratio (CRR) and minimum lending rate (MLR) are less significant in influencing long-run changes in loan growth. The bounds test confirmed that there is a cointegrating relationship between these variables. The ECM revealed that any disturbances to equilibrium are corrected over time. Diagnostic tests confirmed that this model is robust with no serial correlation, heteroscedasticity, or non-normality in residuals. This study concludes that the Nigerian loanable funds market is functional but vulnerable to various factors, dominated by deposit mobilisation and expansionary monetary policies. However, these markets are vulnerable to inflation and exchange rate risks. Based on these findings, this study recommends that to achieve sustainable growth in Nigeria’s credit markets, there is a need to balance deposit mobilisation through financial inclusion and cooperative integration strategies with macroeconomic stability and effectiveness in monetary policy instruments.