Abstract
This research
seeks to examine the impact of liquidity on profitability of deposit money
banks in Nigeria. The study spanned from 2011-2021 which is 10 years study. The
independent variables used for the study are liquidity ratio, current t ratio
(CR), quick ratio (QR) and net-working capital NWR) while the dependent
variable is returns on equity, the aggregate of all the variables for ten (10)
deposit money banks in Nigeria. The study used non-probability sampling
technique due to the fact that the selection of the items in the sample is
based on judgment of the researcher. Further the judgment was based on
profitability turnover of deposit money banks in Nigeria. Thus, the sample size
of the study covers ten (10) Deposit Money Banks in Nigeria: First Bank of
Nigeria, Zenith Bank, Guaranty Trust Bank, Fidelity Bank, Access Bank, Diamond
Bank, Eco Bank, United Bank for Africa, Skye Bank, and Wema Bank. Additionally
the sample size of only ten (10) deposit money banks was chosen on the basis of
their high performance over time. The two variables degree of association was
established by correlation analysis. The two variables are random samples and normal
distribution (possibly after transformation). Pearson’s Correlation analysis
was used to show the relationship between the two variables. Multiple linear
regressions were the equation used in the study and the Ordinary Least Squares
was the estimation method used to establish the association between liquidity
and profitability. From the descriptive and regression analysis obtained, the
results indicate that there exists a positive relationship between liquidity
and profitability of commercial banks in Nigerian. R which represents the
simple correlation between the variables is at 25%, which indicate a weak
positive relationship. R2 shows how much of the total variation in the
dependent variable can be explained by the independent variable and in this
case, a percentage of 6.4% can be explained, which is low. The analysis of
variance table shows that the regression model predicts the dependent variable
significantly well since the p value is 0.004 which is less than 0.05.This
confirms that the model is a good fit for the data. The coefficient table above
gives us the information to predict return on equity from liquidity ratio,
current ratio, quick ratio and networking capital. The constant coefficient is
1.566, which indicates that when the liquidity ratio, liquidity ratio, current
ratio, quick ratio and networking capital are zero, the return to equity is
1.566.The model was found to be fit at 95% level of confidence since the
F-value of 4.669 is higher than the critical value. This indicates that the
multiple regression models are a suitable predicting model for explaining how
the selected independent variables affect the profitability of banks in
Nigeria. Based on the critical evaluation of the above findings, we hereby make
the following recommendations with the sincere conviction that they will help
to reduce if not totally eradicate the problems associated with liquidity
management and profitability in deposit money banks in Nigeria; there is need
for banks to engage competent and qualified personnel the right personnel will
ensure that the right decisions are made especially with the optimal level of
cash and to keep, deposit money banks need to be more aggressive in the area of
profit enhancement and finally Banks should adopt optimum liquidity model for
maximum return on equity, survival, stability, growth and development of
banking system in Nigeria
Table
of Contents
Contents Page
Title page - - - - - - - - -
Certification - - - - - - - - - ii
Dedication - - - - - - - - - iii
Acknowledgement - - - - - - - - iv
Abstract - - - - - - - - - - - v
List of Tables- - - - - - - - - - vi
Table of contents - - - - - - - - vii
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study - - - - - - - 1
1.2 Statement of the Problem - - - - - - - 2
1.3 Objectives of the study - - - - - - - 3
1.4
Research Hypotheses - - - - - - - - 4
1.5
Scope of the Study - - - - - - - 4
1.6
Significance of the Study - - - - - - - 5
1.7 Definition of Terms - - - - - - - 5
CHAPTER TWO
LITERATURE REVIEW AND CONCEPTUAL
FRAMEWORK
2.1
Introduction - - - - - - - - - 7
2.2.1
The Concept of Liquidity - - - - - - - 7
2.2.2
Components of Liquidity - - - - - - - 9
2.2.3
Objectives of Liquidity Management - - - - - - 10
2.2.4
Sources of Liquidity - - - - - - - - 11
2.2.4 Liquidity Risks of Deposit
Money Banks in Nigeria - - - - 13
2.2.4.1 Factors
Affecting Liquidity Risk - - - - - - 18
2.2.4.2 Factors Influencing Liquidity - - - - - - 19
2.2.4.3 Instruments for Liquidity Management - - - - - 30
2.3 The Management of Liquidity
in Deposit Money Banks - - - - 32
2.4 Deposit Money Banks Profitability - - - - - - 32
2.5 Liquidity and Profitability Deposit of Money Banks - - - - 41
2.6 Theoretical Framework - - - - - - - - 41
2.6.1
Self-liquidity Paper Theory - - - - - - - 42
2.6.2 Liquidity-Profitability
Trade-off Theory - - - - - 42
2.6.3 Asset Theory - - - - - - - - - 44
2.6.4 Shiftability Theory - - - - - - - - - 45
2.6.5 Commercial Loan Theory - - - - - - - 46
2.6.6 Anticipated Income Theory - - - - - - - 46
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction - - - - - - - - - 47
3.2 Research Design - - - - - - - - - 47
3.3 Sources and Method of Data
Collection - - - - - - - 47
3.4 Population of the Study - - - - - - - - 47
3.5 Sample Size and Sampling
Technique - - - - - - 48
3.6 Technique for Data Analysis - - - - - - - 48
3.7 Model Specification - - - - - - - - 49
CHAPTER
FOUR
RESULTS
AND DISCUSSION
4.1
Descriptive Statistics - - - - - - - - 50
4.2 Correlation - - - - - - - - - 51
4.3
Summary of Regression Analysis - - - - - - - 52
4.4
Interpretation of the Findings - - - - - - - 54
CHAPTER FIVE
SUMMARY,
CONCLUSION AND RECOMMENDATIONS
5.1
Introduction - - - - - - - - - 56
5.2
Summary - - - - - - - - - 56
5.3
Conclusion - - - - - - - - 57
5.4
Recommendations - - - - - - - - 58
References
- - - - - - - - - - 58
List of Tables
Table 4.1:
Descriptive Statistics - - - - - - - 50
Table 4.2:
Analysis of Variance - - - - - - - 51
Table 4.3:
Regression Model summary - - - - - - 52
Table 4.4:
Regression Coefficients Results - - - - - - 53
CHAPTER
ONE
INTRODUCTION
1.1 Background
to the Study
In every system, there are major
components that are paramount for the survival of the system. This is also applicable
to financial system; as financial intermediation is considered a major function
of Deposit Money Banks in Nigeria. By execution of this function, funds are
collected from the surplus units of the society which can be withdrawn on
demand or channeled to the investment units who are in need of such fund. Thus,
there is a gap of filling the demands of the depositors of the fund and lending
to the deficit economic units and these must be matched in a manner that no
financial shocks will be created in the system. In the opinion of scholars, such as Otekunrin,Nwanji, Agba, Olowooker,
Fakile, Lawal, Ajayi and Falaye (2018), a bank’s capability of meeting
customers’ withdrawal needs and other cash flows is an indication of its
liquidity management. Due to the liquidity challenges and their attendant
negative effects on profitability in Nigerian banks two decades ago, the
Central Bank of Nigeria (CBN) undertook a re-capitalization exercise in the
sector in 2005. Consequently, today, the study of liquidity management has
become more relevant and pronounced in the subsector. Liquidity represents the
capability of a business organization to finance increase in assets and to
equally meet required and unforeseen cash and deposit obligations at a
reasonable cost and without incurring unacceptable losses (Margaretha &
Spartina, 2016; Shaibu & Okafor, 2020). It can be inferred from the
foregoing that the composites of liquidity management include cash ratio and
loan ratio.
Drawing from this statement and
in accordance to Bhattacharyya and Sahoo (2011), liquidity management
encompasses maintenance of enough cash balance and its equivalent balances to
satisfy the needs of the customers at any point in time as well as ensuring
that money is also available to execute the daily operations of the bank. In the
process of performing these functions, the banks should be able to make profit
for their investors and major and other stakeholders who are very essential for
its continued existence and operations. However, achieving profitability
demands striking a balance between liquidity and how it is managed. Liquidity in
banks can be said to be analogous to the circulation of blood in the human body
system; lack of blood weakens the system but the system would be sound where
the blood is at the optimum level. Consequent to this, Akinwumi, Essien and
Adebgoyega (2017) suggested liquidity and profitability to two diverse
indicators at opposite continuum which put banks at risky position. Consequently,
a trade-off should be maintained between inadequate liquidity and excess
liquidity as either of the two has profound effect on the banks performance in
terms of profitability (Padache, 2006).
The
importance of liquidity management cannot be overemphasized and this is the
reason behind the Central Bank’s various reforms which are intended to ensure
system stability and restoration of confidence in the Nigerian financial
system. Much as profit is very essential for the going concern of banks,
liquidity management also remains an indispensable task for the attainment of
profitability in an entity.
Liquidity
management as the independent variable consists of capital adequacy ratio,
liquidity ratio, current ratio and bank size as control variable while profitability
is the dependent variable proxied by return on
equity.
1.2
Statement of the Problem
Banks
are primarily established like all other business entities to maximize profit
for the investors are to meet the financial demands of other stakeholders. The
achievement of the profit depends on the financial health status of the banks
which is primarily determined by the ability of the banks to hold sufficient
liquid assets in the right proportion so that all regulatory requirements would
be complied by while at the same time continuing the normal operations of
paying their depositors on demand and making investment that will also poster
their profitability objective. Much as lack of liquidity portends risks to the
banks, excess liquidity is also at a peril to the banks. Risks are associated
with losses or inability to generate profit with the negative attendant effect
on the going concern status of the firms. It is therefore pertinent that
deposit money banks manage their liquidity in such a manner that a trade-off
would be struck between liquidity and investment such that sudden shocks that may bring the corporate life of the
organizations to an end would be avoided.
Liquidity
management has been identified in this paper to be associated with the
maintenance of capital adequacy ratio, liquidity ratio, cash ratio while log of
total assets was introducing as a control variable.
Several
studies have been carried out by scholars with mixed results; some hold that
liquidity management and performance are positively related while others found
negative association between liquidity management and performance. A good
number of the works conducted in this area lacks currency. This study is
therefore carried out to provide further verification on the relationship between
liquidity management and specifically the profitability of Deposit Money Banks in Nigeria.
1.3
Objectives of the study
The
main objective of the study is to examine the impact of liquidity on
profitability of Deposit Money Banks in Nigeria. Other specific objectives are
to:
i.
Examine the impact of Current Ratio on Return on Equity of
Deposit Money Banks in Nigeria.
ii.
To examine the impact of Quick Ratio on Return on Equity of
Deposit Money Banks in Nigeria.
iii.
To examine the impact of Net Working Capital on Return on
Equity of Deposit Money Banks in
Nigeria.
1.4 Research Questions
Based
on the statement of the problem and the objectives of the study, the following research
questions are posed:
i.
What is the impact of Current Ratio on Return on Equity of
profitability Deposit Money Banks in
Nigeria?
ii.
To what extent does Quick Ratio affect the Return on Equity of
Deposit Money Banks in Nigeria?
iii.
What is the impact of Net Working Capital on Return on Equity
of Deposit Money Banks in Nigeria?
1.4 Research Hypotheses
Based
on the research questions of the study, the following null hypotheses are
formulated:
HO1:
Current Ratio has no significant impact on Return on Equity of Deposit Money Banks in Nigeria.
HO2:
Quick Ratio has no significant impact on Return on Equity of Deposit Money Banks in Nigeria,
HO3:
Net Working Capital has no significant impact on Return on Equity of Deposit
Money Banks in Nigeria.
1.5 Scope of the Study
Generally,
the study focuses on the impact of liquidity on profitability of Deposit Money
Banks in Nigeria within the period 2012-2021, which is for ten-year period in
which a secondary data will be used as a means for sourcing
data. Also, the study covers
ten (10) Deposit
Money Banks in Nigeria: First Bank of Nigeria, Zenith
Bank, Guaranty Trust Bank, Fidelity Bank, Access Bank, Diamond Bank, Eco Bank,
United Bank for Africa, Skye Bank, and Wema Bank. Also, the variables to
measure liquidity management will be limited to: Current ratio, Quick ratio, Net
Working Capital, Cash Ratio and Debt Ratio.
Therefore, the study will critically examine the component of profits and
liquidity of Deposit Money Banks in Nigeria.
1.6 Significance of the
Study
The
importance of the study is to document the impact of Liquidity management on
the Profitability of Deposit Money Banks
in Nigeria.
Also,
it will contribute to human knowledge and complement other literature in the
field of accounting, economics and banking.
The results of this study will
also be significant in revealing the level
of attachment of the Deposit
Money Banks to the monetary policies
(liquidity ratios) established by the Central Bank of Nigeria and this will help the Nigerian Deposit Money
Banks in setting an optimum liquidity ratios and cash ratios that will not be
harmful to the operation and survival of the Deposit Money Banks in Nigeria.
The study will also help bank
operators to evaluate how effective liquidity management and credit policy
guidelines will affect profitability level. Also it will reveal that the impact
bank credit will play on banks liquidity and finally minimize the effect of
insufficient as well as help in providing effective liquidity formulations.
1.7 Definition of Terms
Liquidity: refers
to the ease with which an asset, or security, can be converted into ready cash
without affecting its market price
Profitability: is the ability of an entity to generate profit.
Deposit Money
Banks: are resident Depository corporations that
have liabilities in the form of customers deposits payable on demand,
transferable by cheque or otherwise usable for making payments.
Cash ratio: Cash
Ratio is the amount of cash and short term equivalents a company has over
current liabilities. The cash ratio is an effective and quick way to determine
if a company could have potential short-term liquidity issues.
Cash Ratio = Cash + Cash equivalents / Current Liabilities
Current ratio: It
measures whether or not a firm has enough resources to meet its short-term
obligations. It compares a firm's current assets to its current liabilities.
CR = Current
Ratio = Current
assets/Current liabilities
Debt ratio: A
financial ratio that measures the extent of a company’s or consumer’s leverage.
The debt ratio is defined as the ratio of total long-term and short-term debt to total
assets, expressed as a decimal
or percentage.
DBTR = Debt Ratio = Total liabilities / Total Assets
Quick ratio: The
quick ratio is an indicator of a company’s short-term liquidity. The quick ratio
measures a company’s ability to meet its short-term obligations with its most
liquid assets.
QR = Quick
Ratio = Cash + marketable securities +
receivables/current liabilities.
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