INVESTIGATING THE IMPACT OF MONETARY POLICY ON NON-PERFORMING IN NIGERIAN BANKS

This study examines the impact of monetary policy on banking sector stability in Nigeria from 2010 to 2024, using Return on Equity (ROE) as a proxy for stability and analyzing the effects of Monetary Policy Rate (MPR), Inflation Rate (INF), Exchange Rate (EXR), and Broad Money Supply (MS). The Autoregressive Distributed Lag (ARDL) bounds testing approach is employed. The short-run results indicate significant negative effects of money supply (coefficient -0.131599, p=0.0117) and inflation (coefficient -0.223254, p=0.0142) on ROE, with MPR showing a mixed impact (positive initially, coefficient 0.222074, p=0.0856; negative lagged, coefficient -0.216642, p=0.0897), and exchange rate being insignificant. Long-run results show no significant effects (p-values 0.61880.9607), supported by the ARDL bounds test (F-statistic 2.23869), though the Johansen test suggests two cointegrating relationships (p=0.0203, 0.027). The Error Correction Model indicates a weak adjustment process (coefficient 0.113123, p=0.5859), reflecting structural inefficiencies. Diagnostic tests confirm model robustness with normal residuals (Jarque-Bera p=0.451992), homoskedasticity (Breusch-Pagan Godfrey p=0.1132), and no significant serial correlation (Breusch-Godfrey p=0.1101). The findings highlight that monetary policy significantly influences banking stability in the short run Through liquidity and inflation but has limited long-run impact due to weak policy transmission. The recommendations by the study include cautious monetary expansion, robust inflation targeting, exchange rate stabilization, and enhanced banking resilience through stricter regulations. Addressing structural rigidities is also crucial for improving monetary policy effectiveness and ensuring sustainable banking sector stability in Nigeria which will ultimately contribute to broader economic growth.