Relationship

This study had attempted to investigate liquidity management and commercial banks

profitability with focus on commercial banks. Findings from the testing of hypothesis

indicates that there is significant relationship between liquidity and profitability. That

means profitability in commercial banks is significantly influenced by liquidity and vice

versa. This is indicated by 1.55 of Pearson correlation method, which confirmed the

positive relationship between the two variables. In support of the findings, 84 percent of

the respondents indicated that the effect of liquidity ratio on profitability is high while 16

percent indicated a moderate effect. It was also revealed that profitability will be

optimized only when liquidity is effectively and efficiently managed i.e. when the

commercial bank is able to meet its financial obligations and at the same time

maximizes its profits. A situation where the commercial banks maintain more than the

required liquidity level, the result will be huge stock of idle stock in the vault at the

expense of profitability. This was exactly the situation for most of the studied

commercial banks. One can then conclude that the declared profits after tax of these

commercial banks within the period under study where below optimum level because of

excess idle cash they maintained.

Based on the analysis carried out, using Pearson correlation co-efficient. It is noted that

bank liquidity has significant relationship on return of equity and return on asset. That is,

it can be concluded that liquidity play a crucial roles on profitability of banks in Nigeria.

The empirical results indicated that there is statistical significant relationship between

profitability and liquidity when return on equity is used as a measure of profitability but
the relationship becomes less significant if profitability is proxy by return on asset. Thus,

the liquidity management of Nigerian banks maximizes returns to shareholders but it is

producing less than optimal in terms of efficient utilization of assets.

The paper deduced that there is a direct correlation between Bank’s liquidity and

profitability. The study shows that the role of liquidity has been a great influence on

Banks profitability. Efficiency in liquidity management therefore, will help to ensure that

Banks’ liquid funds are adequate for its operations at any given time and hence, boost

their profitability because liquid funds are converted to loanable funds and advances to

customers from which eventually profits are generated in form of interest for the Banks.

It is therefore of note that the monetary authority should not impose regulations that can

jeorpardise the liquidity of Nigerian Banks since a rise in Banks liquidity will help boost

bank’s profit and hence assist the banks to grow to standard as expected in the

economy.

Impact

This research study aimed to investigate the Efficacy of Liquidity Management and

Banking Performance in Nigeria. For this reason we formulated two null hypotheses

which have been tested in section 4. In hypothesis 1, Ho1, which states that ‘There is

no relationship between efficient Liquidity management and Profitability’, the computed

Pearson product-moment correlation coefficient, (r) read 0.861. From our decision rule,

the closer r is to 1, the stronger is the positive correlation while the closer r is to 0, the

weaker the correlation, we deduce that there is a strong positive correlation between

efficient liquidity management and banking performance, in this case profitability. With
correlation coefficient (r) as high as 0.861, we therefore reject the null hypothesis (Ho)

and accept the alternate hypothesis (H1).

For one, the results show that liquidity management of commercial banks have a

significant impact on the profitability of returns to shareholders but has a weak impact

on the profitability of returns to asset. These results suggest that despite the huge profit

declared by Nigerian commercial banks annually; their liquidity management does not

optimize the use of assets.

Drawing from the above, we can infer that the current liquidity management approach of

commercial banks need to be evaluated and redesigned to increase their profitability

beyond present levels. Although there is a need to be cautious in the redesign of the

banks liquidity management because it should not over focused on profitability at the

expense of the all important issue of liquidity.

In conclusion, both the liquidity and the profitability levels of the listed banks were

decreasing within the period 2005-2010. There was a weak positive relationship

between the liquidity and the profitability of the listed banks. These findings support

Bourke (1989) who found some evidence of a positive relationship between liquid

assets and bank profitability for 90 banks in Europe, North America and Australia from

1972 to 1981. In view of the fact that liquidity has some amount of bearings on the

profitability of a bank, it is important that banks manage their liquidity very well. When

banks hold adequate liquid assets, their profitability would improve. Adequate liquidity

helps the bank minimise liquidity risk and financial crises.

The study examined the effect of liquidity management on profitability of ten deposit

money banks in Nigeria for the financial years, 2008-2017. This represented 100 firm-

year observations. The major finding of this study is that two liquidity management

variables (current ratio and liquidity ratio) have direct impact on the profitability of the

selected banks during the period of study. However, the study could not provide

empirical evidence in support of the other two liquidity management proxies (loan to

deposit ratio and deposit to asset ratio) as important liquidity management proxies that

could influence the profitability of banks.

Furthermore, since bank’s optimal liquidity level is likely to vary over the business cycle,

typically rising when there are higher expected costs of distress, the relationship

between liquidity and profitability is likely to be highly cyclical, becoming more positive

during the periods of distress as banks that increase their liquidity improve their

profitability (Osborne, et al. 2012). Thus, there may be a positive or negative

relationship between liquidity and profitability in the short-run depending on whether a

bank is above or below its optimal liquidity level.

Bordeleau and Graham (2010), discusses the relationship between bank liquidity

and profitability by comparing US and Canada banks, indicates that although liquidity

assets tend to gain less profit, the behaviour of banks increasing liquidity assets

against default or bankruptcy may lower the cost produced due to mismatching of

assets and liabilities and offset the profit loss caused by owing more liquidity assets,

hence there is a positive relationship between bank liquidity and profitability to

some extent. But when the liquidity assets banks hold exceeds the threshold, too

much liquidity may cause idle use of bank funds, which leads to inefficiency of
financial operations and investment management, and in this circumstance the

relationship of liquidity and profitability becomes negative.

Profitability and liquidity are powerful tools that are useful for efficient and effective

financial intermediation as the two variables depict the strength of the sector. While

liquidity measures the extent at which bank can respond to withdrawal need of

depositors, attend to loan request from borrowers and also being able to meet

up with daily obligations. Profitability on the other hand depicts the will of banks

to generate positive net return from successful operation. The going concern status as

well as shareholders wealth maximization are significantly anchored on profitability

and as such, banks activities particularly the operating activity should be

conducted in a manner that is compatible with profit making so as to sustain its

going concernand as well compensate the shareholders in form of dividend payment

or improvement in market price per share which has a far reaching effect on

motivating them to invest more in the banking sector (Nuhiu, Hoti & Bektashi,

2017).

Based on the research findings, the researcher concluded that, there is an effect of the

liquidity management on profitability in the Jordanian commercial banks as measured

by ROE or ROA, where the effect of the investment ratio and quick ratios on the

profitability is positive when measured by ROE, and the effect of capital ratio on

profitability is positive as measured by ROA, and the effect of the other independent

variables on the two measures of profitability (ROE and ROA) is negative, the

researcher thinks that this negative effect is due to the increased volume of untapped

deposits at the Jordanian commercial banks.

Imad et al. (2011) studied a balanced panel data set of Jordanian banks for the purpose

of investigating the nature of the relationship between the profitability of banks and their

liquidity level for ten banks over the period 2001 to 2010. Using two measures of bank’s

profitability: the rate of return on assets (ROA) and the rate of return on equity (ROE),

the results showed that the Jordanian bank’s liquidity explain a significant part of

the variation in banks’ profitability. High Jordanian bank profitability tends to be

associated with well-capitalized banks, high lending activities, low credit risk, and the

efficiency of credit management. Results also showed that the estimated effect of size

did not support significant scale economies for Jordanian Banks.

Mendoza and Rivera (2017) studied the effect of credit risk on the profitability of

rural banks in Philippines and found that credit risk has a negative relationship

with the

bank’s profitability. They measured the profitability level using Return on Asset

(ROA) and measured the credit risk by using Nonperforming Loan Ratio (NPLR).

According to the study conducted by Pardillo et.al. (2018), the result shows that cash

ratio and current ratio significantly affects ROA. In the study they find that for every unit

increase in current ratio ROA decreases by -0.004 units while for every unit increase in

cash ratio ROA increases by 0.006 units. In contrast, both liquidity ratios have no effect

on ROE. Through the OLS Panel Robust Regression results shows that Current Ratio

as a measure of liquidity significantly affects both Return on Assets and Return on

Equity.