ABSTRACT
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
TABLE OF CONTENTS
Cover Page i
Title page ii
Declaration iii
Certification iv
Dedication v
Acknowledgement vi
Abstract vii
Table of contents viii
CHAPTER ONE
INTRODUCTION
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
CHAPTER TWO
LITERATURE REVIEW
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
CHAPTER THREE
RESEARCH METHODOLOGY
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
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
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
CHAPTER
FIVE
SUMMARY,
CONCLUSIONS AND RECOMMENDATIONS
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
Abbreviations
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
CHAPTER ONE
INTRODUCTION
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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