Determinants of Bank Liquidity in Nigeria

Abstract

This study examined the determinants of bank liquidity in Nigeria using annual time series data spanning the period 1981 to 2024. The Autoregressive Distributed Lag (ARDL) modelling approach was employed to estimate both the short-run and long-run relationships among the variables. The empirical results revealed that the cash reserve ratio (CRR) has a negative but statistically insignificant effect on bank liquidity in both the short run and long run, suggesting that reserve requirements do not significantly constrain liquidity in Nigeria. In contrast, net interest margin (NIM) exhibited a negative and statistically significant effect on liquidity, indicating that higher profitability margins are associated with reduced liquidity levels. The monetary policy rate (MPR) also showed a negative but weakly significant effect, implying that tighter monetary policy reduces liquidity conditions in the banking sector. The error correction term was negative and statistically significant, indicating a high speed of adjustment to long-run equilibrium following short-run shocks. The study concludes that bank liquidity in Nigeria is driven more by market-based factors such as profitability and monetary policy conditions than by regulatory measures like reserve requirements. Based on these findings, the study recommends that monetary authorities adopt a balanced policy approach that integrates regulatory tools with market-based instruments, while banks should strengthen internal liquidity management practices to ensure financial stability.