Liquidity and bank performance are key factors in determining the survival, growth, sustainability and performance of a banking system. Mistakes in liquidity planning and implementation can affect banking operations and might exhibit long term effect on the economy. The main aim of this study is to find empirical evidence of the impact of liquidity on the financial performance of listed Deposit Money Banks. 5 banks were surveyed which constitute the some of the deposit money banking industry in Nigeria between 2013 and 2018. Secondary data were collected and analysed using SPSS. The study uses descriptive, correlations and inferential statistics. Bank performance in terms of profitability is measured by its return on equity. Three hypotheses are formulated and statistically tested at 5 per cent level of significance using Multiple Linear Regression Analysis. Findings from the empirical analysis show that there is a significant relationship between liquidity management and the performance of Deposit Money Banks in Nigeria. The correlation results reveal positive impacts between return on equity and liquidity management variables: liquidity and cash reserve ratios, whereas loan to deposit ratio shows negative impact. However, the key results indicate that only the banks with optimum liquidity were able to maximize returns. The study concludes that illiquidity and excess liquidity pose problem to bank management operations and recommends that bank should adopt optimum liquidity model for efficiency and effectiveness.
TABLE OF CONTENT
TITLE
PAGE.. 52
CERTIFICATION.. 53
DECLARATION.. 53
DEDICATION.. 55
ACKNOWLEDGEMENT. 56
ABSTRACT. 58
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study. 1
1.2 Statement of the Problem.. 3
1.2 Objectives of the Study. 4
1.4 Research Hypothesis. 4
1.5 Significance of the Study. 5
1.6 Scope of the Study. 5
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction. 8
2.2 The Concept of Liquidity. 8
2.3 Concept of Financial Performance. 10
2.3.1 Bank Performance.
2.3.2 Measurement of Bank Performance.
2.3.3 Profitability. 12
2.3.4 Return on Investment 13
2.3.5 Return on Assets. 13
2.3.6 Net Interest Margin. 14
2.4 Sources of Liquidity.
2.5 Major Risks Faced by the Banks.
2.5.1 Credit Risk.
2.5.2 Market Risks.
2.5.3 Operational Risk.
2.5.4 Interest Rate Risk.
2.5.5 Foreign Exchange Risk.
2.5.6 Strategic Risk.
2.6 Liquidity Measures. 14
2.6.1 Liquidity Asset Measure. 14
2.6.2 Liquidity Ratio. 14
2.6.3 Loan-to-Deposit Ratio. 15
2.6.4 Cash Reserve Ratio (Cash to Total Deposit Ratio) 16
2.6.5 Liability Liquidity (Cash Flow) 16
2.7 Factors Influencing Liquidity. 16
2.7.1 Short Term Interest Rate. 17
2.7.2 Macroeconomic Condition. 18
2.7.3 Liquidity Ratio.
2.7.4 Short Term Debt 19
2.7.5 Poor Asset Quality. 19
2.7.6 Bank Size. 20
2.7.7 Capital 20
2.8 Empirical Review.. 20
2.9 Impact of Liquidity on the Financial Performance of
Deposit Money Banks.
2.10 Theoretical Framework. 22
2.10.1 Asset Theory. 22
2.10.2 Liquid Asset Theory. 24
2.10.3 Shiftability Theory. 24
2.10.4 Anticipated Income Theory. 25
2.10.5 Liability Management Theory. 25
2.10.6 Commercial Loan Theory. 25
CHAPTER THREE
RESEARCH
METHODOLOGY
3.1 Introduction. 27
3.2 Research Design. 27
3.3 Population of
the Study. 27
Table 3.1
Population of the Study. 28
3.4 Sample, Size
and Sampling Techniques. 29
Table 3.2: Sample
Size of the Study. 29
3.5 Source and
Method of Data Collection. 30
3.6 Technique of
Data Analysis. 30
3.7 Variables and
their Measurement 31
3.7 Technique of
Data Analysis. 32
Model Specification. 33
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
4.1 Introduction. 34
4.2: Descriptive
Statistics. 34
Table 4.2: Descriptive Statistics of the Variables. 34
4.3 Correlation Analysis. 35
Table 4.3: Correlation Matrix of Dependent and Independent
Variables. 35
4.4 Multiple Regression Result 36
Table 4.4: OLS Regression Coefficients. 37
Table 4.5: Regression Coefficients. 37
4.5 Hypotheses
Testing. 38
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Introduction. 39
5.2 Summary of Findings. 39
5.3 Conclusion. 40
References. 42
APPENDIX I. 45
TABLE OF VARIABLE.. 45
APPENDIX II. 46
DATA ANALYSIS. 46
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Globally,
the maintenance of adequate liquidity level plays a very crucial role in the
successful functioning of all organizations. The recent turmoil in the global economic
system has revealed some deficiencies in liquidity management of the financial
institutions. Financial institutions are seen to be the backbone for providing
capital for infrastructure, innovation, job creation and overall development.
Liquidity management is a concept that is receiving serious attention all over
the world especially with the current financial situations and the state of the
world economy (Ibe 2003).
Some
of the striking corporate goals include the need to maximize profit maintain
high level of liquidity in order to guarantee safety, attain the highest level
of owner's net worth coupled with the attainment of other corporate objectives.
The impact of liquidity management as it affects corporate profitability in
today's biz cannot be over emphasized. Liquidity plays a significant role in
the successful functioning of a biz firm. Therefore, a firm should ensure that
it doesn't suffer from lack of or excess liquidity to meet its short-term
compulsions. A study of liquidity is of major importance to both the internal
and external analysts because of its close relationship with day-day operations
of a business (Bhunia, 2012)
According
to Begg, Fisher and Rudiger (1991), liquidity refers to the speed and certainty
with which an asset can be converted back into money (cash, income) whenever
the asset holder desires, money itself is the most liquid asset of liquidities
which management seek to ensure for the attainment of its short-term
objectives.
A
liquid bank is one that stores enough liquid assets and cash together with the
ability to raise funds quickly from other sources to enable it meet its payment
obligations and financial commitment in a timely manner. Therefore, liquidity
management according to Ngwu (2006) is the act of storing enough funds and
raising funds quickly from the market to satisfy depositor loan customer and
other parties with a view to maintain public confidence.
Deposit
money banks in Nigeria have been playing their intermediation roles by
absorbing surplus funds (savings surplus units) and making them available for
investment (saving deficit unit that need for investment) within and outside
the economy. The ability of banks to maintain an appropriate liquidity
stimulates the performance and efficiency of Deposit Money Banks (DMB's) in any
economy; however their banking activities. According to Alshatti (2015),
Deposit Money Banks are largely exposed to various types of risk attributable
to liquidity management, which affects the performance and activity of these
banks.
Bassey,
Toby, Bassey and Ekwere (2016) states that liquidity is the lifeblood of banks
performance and inability to meet its liquidity obligations without a
reasonable loss will affect their performance.
The
purpose of business organizations, like bank is to maximize profit. Striking a
balance between liquidity and bank return is of utmost importance. Many
approaches have evolved over the years to measure to measure bank performance
such as the use of accounting ratio and economic approaches. Most commonly
approach is accounting ratio like return on investment (ROI), return on asset
(ROA), and net interest margin among others. The aim of this study is to
analyze the impact of liquidity on financial performance of Deposit Money Banks in Nigeria.
With
this in mind such essential empirical information is crucial for
standardization in the perspective of domestic and international liquidity
regulations.
1.2 Statement of the Problem
The
success of every bank according to Ngwu (2006) is highly dependent on its level
of liquidity; therefore a problem in the survival of management of liquidity
posed a serious problem to the survival of any bank. Liquidity management and
bank performance are key factors in determining the development, survival,
sustainability, growth and management of a banking system and the ability to
handle the tradeoff between the two is 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 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 liquid assets but are tied up
in loans. Some banks despite having a lot of assets, the sudden withdrawals and
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 failure and
nationalization in 2008 doing side with inability to make adequate profit.
Through
the financial intermediation role, the commercial banks reactivate the idle
funds borrowed from the lenders by investing such funds in different portfolios.
Considering the public loss of confidence as a result of bank distress which
has bedeviled the financial sector in the last decade; and the intensity of the
competition in the banking sector due to the emergence of large number of new
banks, every commercial bank should ensure that it operates on profit and at
the same time meets the financial demands of its depositors by maintaining
adequate liquidity.
The
problem on how to select or identify the optimum point or the level at which a
DMB can maintain its assets in order to optimize its objectives since each of
the liquidity has a different effect on the level of profitability. This
problem becomes more pronounced as good numbers of commercial banks are
engrossed with profit maximization and as such they tend to neglect the
importance of liquidity management.
However,
the profit maximization becomes a myth as the resulted liquidity can lead to
both technical and legal insolvency with the consequence of low patronage,
Deposit flight and erosion of asset base. Thus, this study is set to add value
to the growing body of knowledge by examine the impact of liquidity on
financial performance of listed Deposit Money Banks in Nigeria.
1.2 Objectives of the Study
The
main objective of the study is to investigate the impacts of liquidity on the
financial performance of Deposit Money Banks in Nigeria between 2014 and 2022.The
specific objectives are to:-
I. Examine the impact of current ratio on the
financial performance of listed Deposit Money Banks in Nigeria.
II.
Access the impact of loan to deposit ratio on the financial performance of listed Deposit Money Banks in Nigeria.
III.
Examine the impact of cash reserve ratio
on the financial performance of listed
Deposit Money Banks in Nigeria.
IV.
Access the impact of return on
equity on the financial performance of
Deposit Money Banks in Nigeria.
1.4 Research Hypothesis
In
line with the stated objectives, the following null hypotheses were formulated
to guide the study.
Ho1:
There is no significant relationship between current ratio and financial
performance of listed Deposit Money Banks in Nigeria.
Ho2:
There is no significant relationship between loan to deposit ratio and
financial performance of Deposit Money Banks in Nigeria.
Ho3:
There is no significant relationship between cash reserve ratio and the financial performance of listed deposit money banks in Nigeria.
Ho4:
There is no significant relationship between return on equity and the financial
performance of deposits money banks in Nigeria.
1.5 Significance of the Study
The study is beneficial
to the banking community, monetary authorities and future researchers. The
study helps the banking community to determine the appropriate level of
liquidity that should be held to ensure the smoothing running of their
operations. The study equally informs the banking industry to ascertain the
optimal amount of liquidity needed to settle short-term obligations whenever it
arise. To the monetary authorities, the study will help the Central Bank of
Nigeria to see the need to liquidity ratio, in order to enhance the performance of the banking community for
sustainable economic development. To future researchers, the study served as a
body of reserved knowledge that can be consulted for further investigations on
liquidity management and bank performance.
1.6 Scope of the Study
The
study examines the impact of liquidity on the financial performance of Deposit
Money Banks in Nigeria. The study will be limited to listed DMBs on the floor
of Nigerian Stock Exchange (NSE) as at 31st December, 2022. The
study will covered the period of five years from 2014 to 2022. This period is
considered long enough for the study. The period of study also evalops
economics activities before, during and after the economic recession in
Nigeria.
1.7 Limitation of the Study
In carrying out this research it is evident
that there is limitation that will fall short of what has been an established
interpretation of the findings one of the limitations are unavailability of
text of the subject, also my inability to reach the study subjects, and discuss
personally with them which I feel will bring out the best result. But that
cannot be possible due to lack of adequate mobility and finance. The researcher
intends to use questionnaire to be distributed and people to be able to cover
enough organizations to make my findings reliable.
1.8 Definition of Key Terms
Banking:
is an industry that deals with credit facilities, storage for cash,
investments, and other
financial transactions. The banking industry is one of the key drivers of most
economies because
it channels funds to borrowers with productive investments.
Capital Employed:
Capital employed, also known as funds employed, is the total amount of
capital used for the acquisition of profits by a firm or project. Capital
employed can also refer to
the value of all the assets used by a company to generate earnings.
Financial Performance:
identifies how well a company generates revenues and manages its
assets, liabilities, and the financial interests of its stakeholders and
stockholders. There are many
ways to measure financial performance, but all measures should be taken in
aggregate.
Liquidity management:
is the proactive process of ensuring a company has the cash on hand to
meet its financial obligations as they come due. It is a critical component of
financial performance as it directly impacts a company's working capital.
Panel data:
is a collection of quantities obtained across multiple individuals that are
assembled
even intervals in time and ordered chronologically. Examples of individual
groups include
individual people, countries, and companies.
Profitability:
is a situation in which an entity is generating a profit. Profitability arises
when the aggregate amount of revenue is greater than the aggregate amount of
expenses in a
reporting period.
Return on Assets (ROA):
refers to a financial ratio that indicates how profitable company is in
relation to its total assets. Corporate management, analysts, and investors can
use ROA to
determine how efficiently a company uses its assets to generate a profit.
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