Exploring the Maturity Transformation Upside Potentials and Performance of Deposit Money Banking in Nigeria

Abstract

This study evaluated the upside potentials inherent in maturity transformation and its impact on the performance of Deposit Money Banks (DMBs) in Nigeria. Maturity transformation, defined as the process by which banks convert short-term deposits into long-term loans and investments, remains central to financial intermediation and profitability. However, it exposes banks to credit, liquidity and interest rate risks, particularly within volatile macroeconomic environments. The study used data from the Nigerian Deposit Insurance Corporation where credit risk proxied by non-performing loan to total loan (non–performing loans) and average liquidity ratio as explanatory variables, while return on assets (a proxy of bank performance) as dependent variable, spanning from 1990 to 2023. Autoregressive Distributive Lags (ARDL) was engaged to estimate the models established. After the analysis it was found that non-performing loans (credit risks) significantly exerted bank return on asset; proxy of deposit money banks performance, while, average liquidity ratio insignificantly impacted return on asset. The researchers suggest among others that the Central Bank of Nigeria should continue to refine liquidity and capital adequacy requirements to ensure that banks do not overextend maturity mismatches in pursuit of profits. Regular monitoring and enforcement of prudential guidelines are essential.