ABSTRACT

This thesis investigated the impact of liquidity on bank performance in Nigeria. To achieve the objective of the study, secondary data from the Central Bank of Nigeria statistical bulletin and the National Bureau of Statistics for the period of 1999-2017 was collected. The analysis of data was conducted using econometric analysis by employing tool of Ordinary Least-Square (OLS). The result of the study has the following key findings: Liquidity Ratio (LR) show that there is a positive and significant relationship with Returns on Asset. On Cash Reserve Ratio (CRR), the result shows that there is a positive and significant relationship between CRR and Returns on Asset. On Loan to Deposit Ratio (LDR), the result shows that there is a positive and significant relationship between LDR and Returns on Asset. This implies that the estimated model can be used for policy analysis as well as for economic inference. It is interesting to note that the regression equation is significant at 5 percent level of significant and show a high degree of influence on the independent variable as shown by the co-efficient of determination R². This study recommended that bank managers should identify and monitor key business drivers (e.g. loan and deposit margins) within the framework of financial analysis.

1.1       Background to the Study

Liquidity management and bank performance are key factors in determining the development, survival, sustainability, growth and performance of a banking system and the ability to handle the trade-off between the two is has become a source of concern for bank managers. For instance, banks make loans that cannot be sold quickly at a high price and also issue demand deposits that allow depositors to withdraw at any time. Such a mismatch of liquidity, in which a bank’s liabilities are more liquid than its assets, causes problems for banks when too many depositors attempt to withdraw at once as it affects bank liquidity position. Many banks have investment in safe and high yielding illiquid assets but are tied up in loans.

Moreover, some banks despite having a lot of assets, the sudden withdrawals and the lack of liquid funds lead to a huge loss as a result of taking out emergency loans. This was identified as the major cause of bank failures and nationalisation in 2008, alongside with inability to make adequate profit (Barrell and Davis, 2008). As the basic ingredient of measuring the “going concern” banks for these reasons are developing various policies to stop runs and strategies to improve the liquidity position which are usually neglected in times of favourable business conditions, yet the problem is unsolved. The attempts by bank managers to increase return tend to have negative impact on liquidity which might be dangerous to the banks as this can lead to loss of bank’s patronage, goodwill, deterioration of bank’s credit standings and might lead to forced liquidation of bank’s assets on one hand, and maintaining excess liquidity to satisfy customers’ demands might affect the returns on the other hand. Mistakes in liquidity planning and implementation can affect bank operations and might exhibit long term effect on the economy. Profitability does not translate to liquidity in all cases. A bank may be profitable without necessarily being liquid. So liquidity should be managed in order to obtain an optimal level, that is, a level that avoids excess liquidity which may mean lack of business idea by management (Owolabi and Obida, 2012). At the same time liquidity level should not fall below minimum requirement as it will lead to the inability of the organization to meet short term obligation that are due.

In Nigeria, most of the few studies on liquidity and corporate performance, such as by Agbeja, Adelakun and Olufemi (2015), Edem (2017), Akinwumi, Micheal and Raymond (2017) were theoretical studies in nature whose findings were subjectively based on leading argument or logic. It is noted that the past studies did not give adequate attention to the link between liquidity and bank performance in Nigeria, as well as highlighting effective strategies for enhancing for liquidity management in the banking sector in Nigeria. Hence, the undertaking of this research work will fill in the gap by critically exploring the interface between liquidity and bank performance in Nigeria.

1.3       Research Questions

This study will be guided be the following research questions:

        i.            What is the impact of liquidity management on the performance of deposit money banks in Nigeria?

     ii.            What is the effect of cash reserve ratio on the profitability of deposit money banks in Nigeria?

   iii.            What is the effect of loan to deposit ratio on the performance of deposit money banks in Nigeria?

1.4       Objectives of the Study

The study will be conducted with the following objectives:

        i.            To examine the impact of liquidity management on the performance of deposit money banks in Nigeria.

     ii.            To investigate the effect of cash reserve ratio on the profitability of deposit money banks in Nigeria.

   iii.            To examine the effect of loan to deposit ratio on the performance of deposit money banks in Nigeria.

1.5       Research Hypotheses

The researcher intends to test the following hypotheses:

H_o:      Cash reserve ratio has no effect on the profitability of deposit money banks in      Nigeria.

H_o:      There is no significant relationship between loan to deposit ratio and the    performance of deposit money banks in Nigeria.

1.6       Significance of the Study