The Implication of the New CBN Cashless Economy Policy on Nigerian Banking Stocks: GARCH Models Approach

Abstract

The importance of the banking sector to any nation's economy cannot be overemphasized. An efficient banking system enhances effective resource allocation and therefore promotes economic growth. Since this sector is important to any economy, the central bank in every nation plays a leading role in formulating policies aimed at regulating and stabilizing the banking system with the ultimate aim of achieving macroeconomic stability. The Cashless policy was first introduced in Nigeria in January 2012 to ease the difficulty inherent in cash-related transactions. However, at the time the policy was introduced, deposit banks were not prepared to ensure a smooth working cashless economy system. The policy was thus suspended in August 2015 and consequently re-introduced in January 2023. This study investigated the effect of this cashless policy on Nigerian banking stocks using GARCH and tGARCH models. The study reveals that banks’ stocks return was affected at the time under review by the cashless economy policy. The study further shows that it will take about a month and nine days for the conditional variance in the series to revert halfway. The convergence of the parameters based on Monte Carlo simulations indicates that both the models can capture the volatility in the stock returns, except that tGARCH seems to be skewed to the right as is expected.