Author(s): Gideon Tayo Akinleye, Oladimeji Emmanuel Oluwadare
Cash reserve requirement is an important policy instrument in many developing countries. This study examined the effect of cash reserve requirement on banks’ profitability in Nigeria for a period of 10 years, spanning from 2010-2019. The study covered all the listed Deposit Money Banks (DMBs) in Nigeria among which, 8 listed banks designated as Systematically Important Banks (SIBs) by Central Bank of Nigeria (CBN) were purposively selected. Secondary data obtained from the audited annual financial statement, CBN Annual reports and account of DMBs of the selected listed SIBs were used. Panel regression of fixed and random effect estimation was employed and this was carried out after descriptive statistics and Pearson correlation have been done. It was discovered that cash reserve ratio exerts a negative and significant effect on return on assets of Deposit Money Banks (DMBs) in Nigeria to the tune of -0.0025(p=0.036<0.05) and that cash reserve ratio has a negative and significant effect on return on equity to the tune of -0.0039(p0.026<0.05). The study established that the effect of cash reserve requirement on banks’ profitability is statistically significant. Thus, it was recommended that in setting the minimum cash reserve requirement of banks, the objective of the policy makers should not solely center on how to eradicate the possibility of bank failure, they should also focus on how to improve banks’ profitability.