MACROECONOMIC FUNDAMENTALS AND THE PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA: 1986 TO 2025

Abstract

This study examined the effect of macroeconomic fundamentals on the performance of deposit money banks in Nigeria from 1986 to 2025. Three specific objectives guided the inquiry: to examine the effect of inflation rate on the return on assets of deposit money banks, to assess the effect of exchange rate on return on assets, and to determine the effect of interest rate on return on assets. The study adopted an ex post facto research design and relied on annual time series data obtained from the Central Bank of Nigeria Statistical Bulletin and the World Bank Development Indicators covering the period 1986 to 2025. The Autoregressive Distributed Lag (ARDL) bounds testing approach was applied after confirming the stationarity properties of the series through the Augmented Dickey Fuller test. The results revealed that inflation rate has a significant negative effect on return on assets in both the short run and long run; exchange rate exerts a significant negative effect on return on assets, reflecting the cost pressures of currency depreciation on bank balance sheets; and interest rate has a significant positive effect on return on assets, consistent with the interest margin advantages that rising rates confer on lending institutions. The bounds test confirmed a stable long run relationship among the variables. The study concluded that macroeconomic policy instability remains a material determinant of bank profitability in Nigeria and recommended sustained monetary policy coordination aimed at price stability and exchange rate management to support sound bank performance.