Role of Central Bank of Nigeria’s Cash Reserve Ratio on Credit Creation by Commercial Banks

The cash reserve ratio is a key monetary policy instrument through which the Central Bank of Nigeria influences credit creation capacity in the banking system, yet its transmission dynamics require empirical examination. This study examines the role of the cash reserve ratio on credit creation by commercial banks in Nigeria for the period 2008 to 2022. Secondary time-series data were sourced from the Central Bank of Nigeria Statistical Bulletin. Credit creation was proxied by total credit to the private sector and total bank loans and advances. Control variables included the monetary policy rate, bank deposits, and the liquidity ratio. Vector autoregression analysis and impulse response functions were used to assess dynamic interactions between the cash reserve ratio and credit creation. Results showed that a one percentage point increase in the cash reserve ratio led to a reduction in total credit to the private sector of approximately 1.84% after two quarters, with the effect persisting for up to five quarters. Variance decomposition indicated that the cash reserve ratio accounted for 23% of the variation in credit creation over a 12-quarter horizon. The study concludes that the cash reserve ratio is an effective but blunt credit control instrument in Nigeria, with significant lagged effects that should inform the Central Bank of Nigeria's policy sequencing and communication strategies. Complementary credit allocation policies are recommended.

Keywords: cash reserve ratio, credit creation, commercial banks, monetary policy, Central Bank of Nigeria