Monetary Policy, Taxation and Return on Assets of Deposit Money Banks Listed in Nigeria

Abstract

This study examines the effect of monetary policy and taxation on the return on assets (ROA) of deposit money banks listed in Nigeria over the period 2005–2024. The study adopts an ex-post facto research design using panel data sourced from the Nigerian Exchange Group, Central Bank of Nigeria, National Bureau of Statistics, and audited financial statements of selected banks. A purposive sampling technique was used to select ten (10) banks with consistent and complete data. The study employs the Panel Autoregressive Distributed Lag (ARDL) model to analyze both short-run and long-run dynamics, given the mixed order of integration among variables. The findings reveal that monetary policy significantly influences bank performance. Specifically, the Monetary Policy Rate (MPR) exhibits a positive and statistically significant effect on ROA in the long run, indicating that higher policy rates enhance banks’ profitability through increased interest income. In contrast, the Cash Reserve Requirement (CRR) shows a significant negative effect, suggesting that higher reserve requirements constrain banks’ ability to generate earnings. However, Liquidity Ratio (LR), Loan-to-Deposit Ratio (LDR), and government tax revenue (GT) do not significantly affect ROA in the long run. In the short run, MPR and government tax revenue negatively and significantly affect ROA, reflecting immediate adjustment costs and fiscal pressures on banks’ profitability. The error correction term confirms the existence of a stable long-run relationship, with a relatively high speed of adjustment to equilibrium. Overall, the study concludes that monetary policy plays a more critical role than taxation in influencing the profitability of deposit money banks in Nigeria. The study recommends that policymakers ensure consistency in monetary policy implementation to enhance banking sector stability, while banks should improve asset utilization efficiency and risk management practices to sustain profitability.