Bank Lending Channel of Monetary policy Transmission Mechanism in Nigeria

Abstract

This paper investigated the existence of a bank lending channel in monetary policy transmission in Nigeria using quarterly data spanning the period 2002:1 through 2017:1. The analysis was conducted using Vector Error Correction Mechanism (VECM). Findings revealed the presence of three cointegrating relationship among the variables, identified as loan demand and supply by testing for exclusion and exogeneity restrictions on the cointegrating relationships. The study also found that loan supply was significant and positively associated with borrowing rate but negatively significant with lending rate equation which supports the existence of a lending channel for monetary transmission process. The policy implication of this is that, if the CBN raises the policy rate, bank supply of loan will respond negatively. This will restrict the total amount of loan that banks can offer to the private sector. Based on this finding we therefore recommend that the apex bank should give more credence to credit rates when instituting its monetary policies transmission.