Commercial Banks’ Liquidity and Economic Growth Nexus in Nigeria

Abstract

This study investigated the role of the Central Bank of Nigeria (CBN) liquidity reforms from the perspective of the relationship between commercial banks’ liquidity and economic growth over the study period of 1988-2024 in Nigeria. The estimation methods employed were linear and interactive autoregressive distributed lag (ARDL). Findings from the linear ARDL revealed that loan-to-deposit and liquidity ratio are positive but insignificant while the interaction of loan-to-deposit and liquidity ratio is found to be positive and has significant impact on economic growth in the short run. Additionally, the interactive ARDL results for Models II and III found that both commercial bank recapitalization and lending rate reforms matter, spurring economic growth in the long run through loan-to-deposit (Basel I) and liquidity ratio (Basel II) in Nigeria. More so, commercial bank recapitalization reform matters in Nigeria over the CBN lending rate reform in the short run. Going forward, the study recommends that commercial banks should support the implementation of Basel III while the CBN should enforce the implementation of bank recapitalization and lending rate reforms. The study hence concludes that fiscal policymakers should consciously manage inflation and unemployment rates targeted towards increasing commercial banks liquidity level which will ultimately stimulate economic growth both in the short run and in the long run in Nigeria.