Liquidity Ratios and Financial Performance of Selected Money Deposit Bank in Nigeria

Abstract

This study investigated the effect of liquidity management on the financial performance of deposit money banks in Nigeria, focusing on key liquidity indicators and profitability measures. An ex post facto research design was employed, utilising secondary data extracted from the audited annual reports and financial statements of selected banks between 2020 and 2024. Liquidity management was measured using the current ratio (CR), loan-to-deposit ratio (LDR), and deposit-to-asset ratio (DAR), while financial performance was proxied by return on assets (ROA), return on equity (ROE), and net interest margin (NIM). The study applied panel data analysis and conducted diagnostic tests, including the Hausman specification test, to select the most appropriate estimation model. Findings revealed that liquidity ratio had a positive and statistically significant effect on ROA, ROE and NIM with p-value of F-statistics less than 5% level of significance, indicating that stronger deposit-based funding enhances bank profitability. The study concluded that effective liquidity management, combined with prudent risk management and optimal leverage, is critical for sustaining bank performance. It recommended that banks balance liquidity and profitability through efficient asset–liability management, improved credit appraisal, and adherence to regulatory guidelines.