IMPACT OF DISAGGREGATED INTEREST RATES ON BANKING SECTOR PERFORMANCE IN NIGERIA (1995–2023)

Abstract

This study examines the effect of real interest rate on the real profitability of listed banks in Nigeria using quarterly time-series data from 1995Q3 to 2023Q4. An ex-post facto research design was adopted, while the Autoregressive Distributed Lag (ARDL) framework was employed to capture both short-run dynamics and long-run equilibrium relationships among real lending rate (RLR), real monetary policy rate (RMPR), real interbank rate (RIBR), and real return on assets (RROA). The unit root results confirm that all variables are integrated of order one, thereby justifying the ARDL bounds testing approach, which further establishes the existence of a stable long-run relationship among the variables. The findings reveal that increases in interest rate components exert significant negative effects on bank profitability in the short run, reflecting higher funding costs, tighter liquidity conditions, and constrained credit expansion. However, the lagged coefficients of the interest rate variables are positive and significant in the long run, indicating that banks adjust through asset-liability repricing, portfolio restructuring, and margin recovery over time. The error correction term is negative and statistically significant, confirming a stable equilibrium with a relatively fast speed of adjustment toward long-run balance. The study concludes that while monetary tightening initially suppresses bank performance, adaptive financial intermediation mechanisms enable profitability recovery over time. It recommends a predictable and transparent monetary policy framework alongside strengthened asset-liability management practices to enhance banking sector resilience under fluctuating macroeconomic conditions.