Liquidity Management and Profitability of Deposit Money Banks in Nigeria

Abstract

This study examined the cause-effect relationship between liquidity management and the profitability of Deposit Money Banks in Nigeria for a period of thirty years (1994 - 2023). Liquidity management was represented with loan-to-deposit ratio, lending and deposit rates while return on asset (ROA) was used to measure bank profitability. Data were sourced from Central Bank of Nigeria (CBN) statistical bulletin and the World Bank (Development Indicators). The set of data generated was analyzed using descriptive analysis, ADF unit root test, ARDL short and long run analysis, bounds test, ECM estimation and a couple of post estimation test. The study revealed that loan-to-deposit ratio has a negative insignificant effect on the ROA, lending rate has an inverse insignificant influence on DMBs’ ROA, and the effect of deposit rate on the ROA of Nigerian banks is significant and positive. The study deduced as such that there is a negative insignificant cause-effect relationship between liquidity management and profitability of DMBs in Nigeria. Mainly, the study recommended that it is advisable for banks to adopt a situational approach in managing their liquidity. They should not go with only one or two approaches as liquidity problems are dynamic. This practice has the potential of attracting more funds from shareholders because a liquid bank is a performing bank. Also, there is need for a balanced trade-off between profitability and liquidity in order to arrest the ugly trend of banks winding-up from time to time. While pursuing profitability is a noble objective, liquidity is what keeps the doors of the bank open.