LIQUIDITY AND PERFORMANCE: EVIDENCE FROM THE DEPOSIT MONEY BANKS IN NIGERIA

Abstract

The decline in financial performance and inability of some deposit money banks in Nigeria to meet the minimum threshold in liquidity requirements stimulated the interest to examine the possible effect of liquidity on performance of these banks. Hence, the study examined the performance of the banks from financial and operational dimensions. Secondary data was used for this study and the data was sourced from the audited financial reports of the sixteen quoted DMBs in Nigeria as at December 2018. The analytical method employed to analyze the data was the System Generalized Method of Movement (GMM) estimator. The empirical results showed that among the proxies for liquidity (liquidity ratio, cash reserve ratio, loan to deposit ratio), only cash reserve ratio was significant and consistent on both dimensions of performance. The results equally showed that size has a significant positive relationship on financial performance and negative relationship on operational performance. Thus, based on these findings, the study concluded that cash reserve ratio and size are major drivers of banks’ performance. Consequently, this study recommended that the regulatory authority (CBN) can employ cash reserve ratio as a tool for controlling the flow of currency in circulation since its effect is consistent on both dimensions of performance. In addition, banks need to expand their operation by reaching out to more customers since size has a significant relationship on profitability.