Malete Journal of Management and Social Sciences

MAJOMSS

IMPACT OF EXCHANGE RATE ON DOMESTIC CREDIT: EVIDENCE FROM NIGERIA

Yusuf Toyin Yusuf, Sodiq Olaiwola Jmoh, Gbenga Felix Olafa, Fatai Akosile

ABSTRACT

This study investigates the relationship between exchange rate fluctuations and domestic credit dynamics
in Nigeria. Employing non-linear autoregressive distributed lag (NARDL) and linear autoregressive
distributed lag (ARDL) models, this research explores the effects of Real Effective Exchange Rate (RER)
on Domestic Credit (DOD) over a significant period. The findings of the non-linear ARDL analysis reveal
a notable positive short-run effect of RER on DOD. Specifically, the depreciation of the naira appears to
discourage market participants from assuming higher risks, resulting in a decrease in credit volumes.
Conversely, an appreciation of the naira encourages market participants to take greater risks, leading to
an improvement in credit volumes. However, the linear ARDL analysis demonstrates a contrasting negative
effect of RER on DOD. In the context of the linear ARDL results, the appreciation of the naira seemingly
discourages market participants from taking increased risks, consequently causing a deterioration in
credit volumes. Based on the findings, a key policy recommendation emerges. Policymakers are advised
to consider devaluing the naira to dissuade market participants from assuming higher risks, thereby
potentially reducing credit volumes in the short run. This recommendation aims to address the observed
dynamics between exchange rate movements and credit volumes, offering a strategic approach to
influence market behaviors and credit outcomes in Nigeria’s economic landscape.