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Effect of liquidity management on financial performance of deposit money banks in Nigeria

Abstract

This study examined the effect of liquidity management on the financial performance of deposit money banks in Nigeria. The study was motivated by the critical role liquidity plays in enabling banks to meet deposit withdrawals, settle financial obligations, maintain public confidence, and sustain profitable operations. Poor liquidity management may expose banks to financial distress, while excessive liquidity may reduce profitability by limiting the funds available for income-generating investments. The study aimed to determine the effect of liquidity ratio, loan-to-deposit ratio, cash reserve ratio, and current ratio on the financial performance of selected deposit money banks in Nigeria.

The study adopted an ex-post facto research design and relied on secondary data. The population comprised deposit money banks listed on the Nigerian Exchange Group, while a sample of banks with complete and consistent financial information was selected for the study. Data were obtained from the audited annual reports and financial statements of the selected banks, Central Bank of Nigeria publications, Nigerian Exchange Group reports, and other relevant financial records. Financial performance was measured using indicators such as return on assets, return on equity, and net interest margin. The data were analysed using descriptive statistics, correlation analysis, and panel regression techniques.

The findings revealed that liquidity management significantly influences the financial performance of deposit money banks in Nigeria. The study found that an appropriate liquidity ratio enables banks to meet short-term obligations while maintaining profitable operations. The loan-to-deposit ratio was also found to affect profitability by determining the extent to which customer deposits are converted into interest-earning loans. However, excessive liquidity and high cash reserve requirements were associated with reduced returns because they limited the amount of funds available for lending and investment. The findings further showed that ineffective credit management, non-performing loans, economic instability, and regulatory pressures constrain the ability of banks to maintain an optimal balance between liquidity and profitability.

The study concluded that effective liquidity management is essential for the financial stability and profitability of deposit money banks in Nigeria. It recommended that bank management should maintain an optimal liquidity position, strengthen cash-flow forecasting, improve credit risk management, monitor loan-to-deposit ratios, and comply with regulatory liquidity requirements without holding excessive idle funds. Regulatory authorities should also maintain policies that promote both banking stability and sustainable financial performance.

Keywords: Liquidity Management, Financial Performance, Deposit Money Banks, Liquidity Ratio, Loan-to-Deposit Ratio, Return on Assets, Return on Equity, Nigeria.