Idle Balances and Foreign Portfolio Investments in Nigeria

Purpose: The study analysed the effect of investing inactive bank deposits on the net inflows of foreign portfolio investments in Nigeria. Methodology: The study utilized secondary data obtained from the Central Bank of Nigeria (CBN) spanning 1981 to 2022. Based on the theory of bank-based financial system, the study modelled net inflows of foreign portfolio investment (PI) as a function of credit supply to private sector (CS), money supply (MS), lending rate (LR), deposit rate (DR), and idle balances (IB). The study employed descriptive statistics, correlation analyses, augmented dickey fuller test, and the Auto-regressive Distributive Lag (ARDL) regression technique to analyse 42 observations. Results and Conclusions: The results showed that idle balances have negative and significant effect on foreign portfolio investment both in the long and short runs. The study concludes that idle balances, when reduced by way of actively invested in returns generating assets in the stock market of foreign countries will promote portfolio investment net inflows into Nigeria. Implications: The findings imply that deposit money banks should on behalf of depositors, invest inactive bank deposits (idle balances) in foreign portfolio investment having thoroughly analysed associated risks and returns.