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Product Category: Projects

Product Code: 00006037

No of Pages: 80

No of Chapters: 5

File Format: Microsoft Word

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This study examined the effect of liquidity management on the performance of commercial banks in Nigeria for the period 2012 to 2021. The study employed secondary data from five banks listed on the stock exchange in Nigeria namely, Sterling Bank, Zenith Bank, Fidelity Bank, United Bank for Africa, and Access Bank. The data garnered were analyzed and the hypotheses were tested using multiple regression analytical tools. The proxies employ for liquidity management are; loan to assets ratio (LAR), loan to deposit ratio (LDR) and liquidity ratio (LR), while return on assets (ROA) and return on equity (ROE) are proxies for financial performance (Profitability). The study finds that loan to assets ratio (LAR), loan to deposit ratio (LDR) and liquidity ratio (LR) have positive and significant effect on financial performance as measured by return on assets (ROA) and return on equity (ROE) for Sterling Bank, Zenith Bank, Fidelity Bank, United Bank for Africa, but for Access bank a negative and insignificant relationship was observed. It therefore recommends that banks in Nigeria should establish sound governance and risk management systems by developing strategies, policies for liquidity management that is well integrated into its risk management practices as well as establish a contingency funding plan to address any liquidity shortfall during periods of stress or emergency while ensuring that active monitoring liquidity funding needs to avert any liquidity challenge that could trigger crisis in the banks is promptly addressed.


Keywords:     Liquidity Management, Loan to Assets Ratio, Loan to Deposit Ratio, Liquidity Ratio, Profitability, Return on Assets, Return on Equity





Cover Page                                                                                                                              i

Title page                                                                                                                                 ii

Declaration                                                                                                                              iii

Certification                                                                                                                            iv

Dedication                                                                                                                               v

Acknowledgement                                                                                                                  vi

Abstract                                                                                                                                   vii

Table of contents                                                                                                                     viii




1.1           Background to the study                                                                   1

1.2      Statement of the Problem                                                                                             3

1.3      Objectives of the Study                                                                                               3

1.4      Research Questions                                                                                                      4

1.5      Statement of the Hypotheses                                                                    4

1.6      Significance of the Study                                                                                             4

1.7             Scope of the Study                                                                                                     4

1.8      Definition of Terms                                                                                                      5




2.1      Introduction                                                                                                                 7

2.2      Conceptual Framework                                                                                                7

2.2.1   Concept of Liquidity                                                                                                    9

2.2.2  Concept of Financial Performance                                                                               12

2.3      Theoretical Framework                                                                                     15

2.3.1   Shiftability Theory                                                                                                       15

2.3.2   Liquidity Preference Theory                                                                                        16

2.3.3   Trade-off Theory                                                                                                          17

2.4      Empirical Review                                                                                                         17

2.4.1   International Empirical Evidences                                                                               17

2.4.2   Empirical studies in Nigeria                                                                                         21

2.5      Research Gap                                                                                                               25

2.6      Summary of Literature Review                                                                                    26




3.1           Introduction                                                                                                                 27

3.2           Research Philosophy                                                                                                    27

3.3           Research Design                                                                                                           27

3.3      Sources of Data                                                                                                            28

3.5      Population of Study                                                                                                     28

3.6      Sampling Technique and Sample Size                                                                          28

3.7      Data Analysis Methods                                                                                                29

3.7.1   Model Specification                                                                                                     30

3.7.2   Operational Variables                                                                                                   31




4.1      Introduction                                                                                                                 33

4.2      Presentation of Data                                                                                                     33

4.3      Analysis of Data                                                                                                           35

4.3.1   Test of Hypothesis One                                                                                                35

4.3.2   Test of Hypothesis Two                                                                                               44

4.4      Discussion of Results                                                                                                   52

4.4.1   Relationship between liquidity and Return on Asset                                                   52

4.4.2   Relationship between liquidity and Return on Equity                                                 54



5.1      Introduction                                                                                                                 57

5.2      Summary of the Study                                                                                                 57

5.3      Conclusion                                                                                                                    58

5.4      Recommendations                                                                                                        59

5.5      Suggestions for Further Study                                                                                                 60

References                                                                                                                              62

Appendix A: Secondary Data Collected                                                                                69

Appendix B: Global Banks Liquidity Metrics                                                                        72







LAR:               Loan to Assets Ratio

LDR:               Loan to Deposit Ratio

LR:                  Liquidity Ratio

ROA:               Return on Assets

ROE:               Return on Equity

CBN:               Central Bank of Nigeria

ALCO:                        Asset Liability Management Committees










1.1       Background to the study

The importance of an effective liquidity management in the banking industry and financial markets cannot be overemphasized. The relevance of liquidity management became pronounced during the 2007-2008 global financial crisis when the banking industry came under severe liquidity strain and stress. During the crisis, it was apparent that liquidity can evaporate like a mirage, but illiquidity can last for an unforeseen or longer period than anticipated. 

According to Anyanwu (2003), liquidity management means the ease with which assets can easily be convertible to cash without loss and hence the bank’s ability to pay its depositors on demand. It is judged by the ease with which an asset can be exchanged for money. Liquidity management involves controlling the level of money supply in an economy in order to maintain monetary stability. Liquidity management in banks has posed several challenges during the distress era of 1980s and 1990s in Nigeria and persisted to the recapitalization phase of 2004 when banks were mandated to increase their capital base from N2 billion to N25 billion (Agbada and Osuji, 2013).

The Central Bank of Nigeria (CBN) mandate for recapitalization was considered to be the salvation for the banking and indeed financial system in Nigeria, however, just five years later, precisely in 2009, the Central Bank’s intervention was sought to stabilize and redeem eight banks that were deeply enmeshed in illiquidity. Consequently, N620 billion was injected into the eight affected banks to stimulate stability, and confidence and subsequently heralded the establishment of Asset Management Corporation of Nigeria (AMCON) for the acquisition of the affected banks. For instance, in 2004, there were 89 deposit money banks in Nigeria, 62 were assessed as being sound/satisfactory, 14 as marginal and 11 as unsound while two of the banks did not render any returns during the period (Ajayi 2009). According to Soludo (2004), the problem with the unsound deposit money banks included persistent illiquidity, poor asset quality, weak corporate governance and gross insider abuses. Most of the banks had weak capital base thus constraining them to overdrawn their accounts with the Central Bank of Nigeria and high incidence of non-performing loans. Liquidity is a precondition to ensure that firms are able to meet their short-term obligations. Liquidity refers to an enterprise’s ability to meet its current liabilities and it is closely related to the size and composition of the enterprise’s working capital position (Kontus and Muhanovic 2019). 

Raza, Farhan and Akram (2011) aver that banking performance over the years has been measured in terms of three major indicators or variables namely Profitability, Return on Asset (ROA) and Return on Capital Employed (ROCE). Profitability is the potential of a venture to be financially successful, the ability of an investment to make profit or the state or condition of yielding a financial profit or gain. Brealey, Myers and Marcus (2014) affirmed that manager often measure the performance of a firm by the ratio of net income to total assets, otherwise referred to as Return on Asset (ROA). Return on Capital Employed (ROCE) in Accountancy is a common method of measuring and judging the size of the return which has been made on the funds invested in a business. Omorukpe (2013) posits that ROCE is the ratio of an accounting entity for a period to capital employed in the accounting entity during that period usually expressed as a percentage. Various measures of profit and of capital employed may be used in calculating this ratio. It is in line with the above submissions that this study appraised the effect of liquidity on the financial performance of commercial banks in Nigeria.


1.2       Statement of the Problem

The issue of liquidity for organizations is very vital to the existence of any organization especially the deposit money banks. However, illiquidity of firms especially the banks can lead to loss of businesses thereby reducing the potentials of earnings and profitability.

Commercial banks have experienced huge financial losses due to poor liquidity management (Vintila and Nenu, 2016). Thus poor liquidity management in the banks poses major liquidity management which adversely affects their capital structure and earnings. If not properly managed, liquidity management may lead to severe consequences in the institution (Marozva, 2015).

Although, studies have it that lack of adequate liquidity in a bank is often characterized by the inability to meet daily financial obligations. At time it may have the risk of losing deposits which erodes its supply of cash and thus forces the institution into disposal of its more liquid assets. As opined by Pandy (2015), managing monies of a firm in order to maximized cash availability and interest income on any idle cash is a function of liquidity management. However, the problems of weak corporate governance, poor capital base, illiquidity and insolvency, poor asset quality and low earnings are some of the constraints faced by the banking sector in Nigeria.

It is the light of the above, this study tends to evaluated the effect of liquidity management on the financial performance of commercial banks in Nigeria.


1.3       Objectives of the Study

This study tends to evaluate the effect of liquidity management on the financial performance of commercial banks in Nigeria. The specific objectives include:

1.      To ascertain the effect of liquidity on commercial banks’ Return on Asset.

2.      To appraise the effect of liquidity on commercial banks’ Return on Equity.

1.4       Research Questions

In order to achieve the purpose of this research study, the study will attempt to provide answers to the following research questions.

1.      What is the relationship between liquidity and Return on Asset of commercial banks in Nigeria?

2.      To what extent does liquidity impact Return on Equity of commercial banks in Nigeria?

1.5       Statement of the Hypotheses

To provide answer to the research questions arising from this study, this hypothesis is postulated.

HO1:     There is no significant relationship between liquidity and Return on Asset of commercial banks in Nigeria

HO2:     Liquidity has no significant impact Return on Equity of commercial banks in Nigeria


1.6       Significance of the Study

This study will be helpful to academia the findings will be of great beneficial to future
students of finance in the field of impact of liquidity management practices on profitability by
providing relevant literature in order to build the better insight of that area. The findings of the study will provide assistance in order to make decisions, formulating strategies chiefly about liquidity.

1.8        Scope of the Study

This study tends to examine the effect of liquidity management on the financial performance of commercial banks in Nigeria. The scope of the study will be limited to five out of the 24 commercial banks operating in Nigeria. The research will cover the bank operations for a period spanning 10 years (2012-2021).


1.8       Definition of Terms

The following definition terms are given to facilitate better understanding.

Liquidity Management: This is the act of storing enough funds and razing funds quickly from the market to satisfy depositors, Loan customers and other parties with a view to maintain public confidence.

Loan to Assets Ratio:  also known as the debt ratio, is a leverage ratio that indicates the percentage of assets that are being financed with debt. The higher the ratio, the greater the degree of leverage and financial risk

Loan to Deposit Ratio: Is the Bank’s loans held for investment, before reserves, as a percent of the Bank’s total deposits.

Liquidity Ratio: This is a class of financial metrics that is used to determined a bank’s ability to pay off its short-term debts obligation. Generally the higher the value of the ratio, the larger the margin of safety that the company posses to over short-term debts.

Profitability Ratio: This a class of financial metrics that are used to asses a business ability to generate earning and compared to it expenses and other referent costs incurred during a specific period of time, for most of these ratios, having a higher value relative to a competitors ratio or the same ratio from a previous period is indicative that company is doing well.

Profitability:  is an important indicator of bank performance, it represents the rate of return a bank has been able to generate from using the resources at its command in order to produce and sell services.

Return on Assets (ROA): It is a ratio that indicates bankk’s success to create profits. It states the return on the number of assets utilized in the company. It is used to know the level of efficiency of the overall operations of a bank. Measures bank’s ability to generate profits in the past to then be projected in the future. The larger the ratio, the better because the company can use its assets effectively in bringing profit. ROA is calculated by dividing net income of the bank by the value of its assets. That is, profit before tax / total assets.

Return on Equity (ROE): It is the ratio measuring net profit after tax with its capital. ROE growth states that the company's prospects are getting better because it can increase its profit. ROE demonstrates the efficiency of own capital use. Return on equity (ROE) is often translated as Rentability of Own Share (Rentability of Own Capital). Shareholders can determine how much investment returns on each amount they invest using the Return on Equity ratio. 

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