Determinants of Bank Liquidity in Nigeria

Abstract

The research examined determinants of bank liquidity in Nigeria by exploring yearly time series data spanning the period 1981 to 2024. Autoregressive Distributed Lag (ARDL) modelling approach was explored to estimate both the short and long period connections among the variables. Outcome from empirical analysis exposed that the cash reserve ratio (CRR) has a negative weak influence on bank liquidity in both short and long duration, suggesting that reserve requirements do not significantly constrain liquidity in Nigeria. In contrast, net interest margin (NIM) exposed negative significant influence on liquidity, showing that higher profitability margins are associated with reduced liquidity levels. Monetary policy rate (MPR) also showed a negative but weakly significant influence, implying that tighter monetary policy reduces liquidity conditions in the banking sector. Error correction term exposed strong negative influence, revealing a swift return to long period equilibrium following temporary 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. It is recommended 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.