See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/357747004

LIQUIDITY MANAGEMENT AND FINANCIAL PERFORMANCE OF DEPOSIT

MONEY BANKS IN NIGERIA

Article  in  NDA journal · September 2021

CITATION READS

1 1,144

2 authors, including:

Kehinde Ajose
McPherson University
9 PUBLICATIONS   47 CITATIONS   

SEE PROFILE

Some of the authors of this publication are also working on these related projects:

Impact of Corporate Governance on the Financial Performance of Money Deposit Bank in Nigeria View project

All content following this page was uploaded by Kehinde Ajose on 11 January 2022.

The user has requested enhancement of the downloaded file.

Nigerian Defence Academy Journal of Economics and Finance Vol 5 Issue 2 September 2021

LIQUIDITY MANAGEMENT AND FINANCIAL PERFORMANCE OF DEPOSIT MONEY BANKS IN

NIGERIA
1
Ajose Kehinde G., 2 Balogun Solape.
Department of Accounting and Finance
1
Mcpherson University, Seriki Sotayo, Ogun State, Nigeria
Ajosekehinde20@gmail.com

Abstract
This study investigated the Impact of Liquidity Management on the Financial Performance of Deposit Money Banks
in Nigeria for a period of 10 years from 2011 to 2020. The study used secondary data collected from the annual
reports of deposit money banks listed on the Nigerian Stock Exchange.The study used return on asset, return on equity
and net profit margin to measure financial performance. Liquidity ratio, loan to deposit ratio, cash reserve ratio and
deposit rate were used as proxies for liquidity management. The research population was all the 22 licensed deposit
money banks in Nigeria, out of which a sample size of seven deposit money banks were chosen using purposive
sampling. The study adopted ex post facto research design. Panel least Square Regression Technique was employed
to discover the relationship between the variables. The findings show that liquidity management has a positive and
significant effect on the financial performance of deposit money banks in Nigeria. The study recommended that all
banks should maintain reasonable proportion of their assets in liquid form as this has implication on performance
and as well work towards improving their overall state of liquidity so as to have favorable returns on performance
and also, they are to work towards improving their overall state of liquidity so as to have favorable returns on
performance.
Keywords: Financial Performance, Liquidity, Liquidity Ratio, Return on Asset, Return on Equity.

1. Introduction

The success of any profit-making enterprise is essentially accustomed to the subsistence of liquidity. The existence
and expansion of a business is fully subjected to the systematic management of its liquidity (Mogotsinyana, Mashoko,
& Sathyamoorthi, 2020). Liquidity is essential to banks since a wide portion of their liabilities are payable on demand
(deposits) but generally the more liquid an asset is, the lesser it yields (Dzapasi, 2020). Basel Committee on Banking
Supervision (2008) stated that the liquidity of a bank can be described as the agility of a bank in funding the growth
of asset and taking care of obligations when they fall due. Liquidity Management in the Nigerian Economy captivated
much awareness around April in 2001 when the Central Bank of Nigeria devalued Nigerian Naira by 5 percent in two
days at the Interbank Foreign Exchange Market. (Uhagiro, 2008).
Maintaining Liquidity is a basic day-to-day process that requires managers to monitor and predict cash flows in order
to ensure that there is maintenance of sufficient liquidity all the time (Lazaridis & Tryfonidis, 2006). In addition,
Liquidity Management entails having sufficient cash balance and cash equivalent balances to settle the demands of
the customers when due and also to ensure that money is readily accessible for daily operations of the business
(Bhattacharyya & Sahoo, 2011).
Financial performance of a firm can be examined in terms of profitability, growth of dividend, sales turnover, return
on investment among all others (Stanley & Ali, 2016). The increment of financial performance will give rise to
improved operations of organizations (Panagiotis & Konstantinos, 2008). Liquidity management and financial
performance are the two considerations governing the investment of a bank and if they clash, it is difficult to reconcile
them. If the management of a bank has interest in making profit, they will possibly invest in assets that are highly
profitable but which may not easily be convertible to cash (Uhagiro, 2008).
As each deposit money bank attempts to maximize its profits, on the other hand, it must have the ability to meet the
financial obligations of its depositors by holding a sufficient amount of liquidity. In order to accomplish this delightful
balance between profitability and liquidity, banks should discover the ideal amount of cash that will permit them to
attain the balance between profitability and liquidity together, because every level of liquidity has various effects on
the levels of profitability.
2. Literature Review

CONCEPTUAL REVIEW

Concept of Liquidity
Liquidity has no generally accepted definition. Adler (2012) argued that the lack of a commonly agreed definition is
as a result of the concept of Liquidity emerging from various economic perspectives. Liquidity is a very demanding

267
Nigerian Defence Academy Journal of Economics and Finance Vol 5 Issue 2 September 2021

factor for the smooth running of banking businesses; expansion and survival of all banks is dependent on Liquidity.
The term has divergent definitions to various people and institutions. Liquidity is of greatest relevance, being a
fundamental matter of banking (Uhagiro, 2008). It is the ability to meet maturing obligations in a timely manner.
Liquidity is used to give the description of a business by the value of liquid assets the company has; the more the
liquid assets, the higher the liquidity of the company (Vossen, 2010).
According to Olagunju, Adeyanju and Olabode (2011), liquidity was defined as the capability of an entity to settle its
short-termed obligations or the ability of an entity to change its assets to cash. Therefore, the liquidity of a bank is the
capability of a bank to keep adequate funds in order to pay for its fully-developed commitments at a suitable price.
Liquidity has a vital part in the successful operation of a business.

Sources of Liquidity
There are two principal sources of liquidity that have been identified by Nzotta (2004). They include the stored
liquidity and purchased liquidity.
a) The Stored Liquidity
This refers to liquidity in form of assets and is made up of assets in which funds are invested in temporarily with
assurance that they will mature when the need for liquidity arises. There are different types of stored liquidity and
some of them include:
i. Cash and balances due to other banks
ii. Cash balance with Central Bank of Nigeria (CBN)
iii. Short-term government securities

b) The Purchased Liquidity

This focuses on liabilities in order to meet funding needs. The types, amongst others, include the following:
i. Borrowings from the Central Bank of Nigeria
ii. Large time deposits of state government and local authorities.

Concept of Liquidity Management

Liquidity management is essential for the outstanding performances of all business entities, particularly to financial
institutions due to the fact that customer confidence of the banks is to a large extent dependent on the accessibility of
funds in good time. Inadequacy of liquidity can destruct the proper operations of banks even as they might be
unsuccessful to meet the financial demands of the customers in time. This would result to tight relationship with their
customers, and so it is of vital importance to formulate policies for the efficiency of liquidity management. This is
possibly in the form of suitable courses of actions for the evaluation, control and management of liquidity (Andrew &
Osuji, 2013).
Bhattacharyya and Sahoo (2011) opined that liquidity management includes the conservation of adequate cash balance
and its corresponding balances to give satisfaction to the needs of the customers at any moment and in addition,
making sure that money is also at hand to carry out the day-to-day functions of the bank. In the course of discharging
these functions, the banks ought to be able to make profit for all stakeholders who are necessary for its continuous
existence and running. Nevertheless, attaining profitability requires the stabilization of liquidity and how it is being
managed.

The Concept of Financial Performance of Deposit Money Banks in Nigeria

Financial performance is the financial condition of a company over a certain period of time. It is measured using
different business-related formulas that enable users to calculate specific details in relation to a company’s potential
effectiveness. Financial performance gauges the ability of the management in utilizing the resources of the
organization.
Financial performance is examined differently by the users. For internal users, it is examined to assess their respective
companies’ welfare and position among other standards. For external users, financial performance is evaluated to
indicate likely investment opportunities and to discover if a company is profitable.

LIQUIDITY MANAGEMENT FINANCIAL PERFORMANCE

268
Nigerian Defence Academy Journal of Economics and Finance Vol 5 Issue 2 September 2021

Liquidity Ratio
(LQR) Return on Assets
Loan to Deposit (ROA)
Ratio (LDR)
Cash Reserve Return on Equity
Ratio (CRR) (ROE)
Deposit Rate Net Profit Margin
Independent
(DR)Variable (NPM)
Dependent Variable
Figure 1: Conceptual Model

THEORETICAL REVIEW

Liquid Assets Theory

This theory has to do with the management of assets. It states that banks must search for excess returns, lessen risk
that could occur and make enough arrangements by holding liquid assets. This theory is on the side of the necessity
for holding short term assets to decrease the outcome of uncertainties in the operations of banks. It is the duty of banks
to lend to borrowers who are prepared to pay high interest and are not likely to back out on their loans, and also
increase liquidity needed with the absence of bearing high costs.
Banks are by no means solely financed by their assets but are mostly funded by collateral loans which cannot be
counted on during a period of financial crisis. This refers to loans that gives the lender the order to claim specific asset
and a general demand on the other assets owned by the debtor. The total of liquid assets to be held relies on the bank’s
clear requirement for liquidity, the stock exchange conditions and financial policies. The notion of the management
of asset has some problems facing it. It places full attention on the part of assets on the statement of financial position
which makes the concept badly deficient in the current stock markets. In addition, it fails to take into consideration
the fact that huge returns are linked with high risks.

Shiftability theory
The Shift-ability theory was propounded by Harold G. Moulton in 1915. The theory holds that the liquidity of a bank
depends on their ability to shift its assets to another financial institution at a reasonable price. It proposed that banks,
rather than relying on the liquidity of these assets in the course of distress, ought to be able to shift these assets to a
more liquid bank. Banks should invest a portion of their funds in buying securities and also credit instruments which
have secondary market in order for them to be converted into cash when the need arises to settle decreasing liquidity.
This theory places emphasis on selling the assets of a bank as a better means for investments. It acknowledges the less
relevance of temporary self-liquidating loan (Edem, 2017).

Commercial Loan Theory

The theory states that funds generated by banks are supposed to be invested in short-term self-liquidated loans for the
purpose of net working capital. It is also referred to Real Bill Doctrine. It supports that the movement of goods should
be funded throughout the production cycle (Edem, 2017). The theory has some limitations that affects it like lack of
consistency with the need for economic development, exception of long lasting loans, a major emphasis on the
maturation of bank assets instead of profitability, the elimination of stable demand deposit which assists banks to
accept long term credit, among others.
The theory says that deposit money banks should promote solely the short-termed self-liquidating productive loans to
business entities. Real bill doctrine is an effective way of preventing inflation (Sproul, 2018). The theory discourages
banks from expanding long-term loans.
Empirical Review

269
Nigerian Defence Academy Journal of Economics and Finance Vol 5 Issue 2 September 2021

Afolabi and Williams (2019) carried out a research in order to assess the financial performance of Deposit Money
Banks in relation to liquidity management among listed banks in Nigeria. The financial reports for the duration of
2009-2018 were used as the main source of data gathering for the 15 sample firms. The study observed that there are
both positive and negative impacts of liquidity management on the financial performance of deposit money banks in
Nigeria. The study concluded that liquidity management affects the financial performance of deposit money banks in
Nigeria.
Tafirei and Farai (2017) embarked on a research to establish the current liquid management practices of banks in
South Africa by assessing whether the banks have targeted levels of liquidity which they aim to achieve and also by
establishing the set of variables that drive bank liquidity ratios. The study took into consideration a sample of six
commercial banks operating in South Africa from 1993-2009. The study therefore came to a conclusion that the South
African banks have positively managed their liquidity, and to a limited extent, adjust their liquidity levels in an attempt
to reach optimality.
Wuave, Henry and Paul (2020) examined the impact of liquidity management on the financial performance of banks
in Nigeria for the period of 2010-2018. The study used data of five deposit money banks listed on the Nigeria Stock
Exchange. The variables used to measure liquidity management were Liquidity ratio, Loan to deposit ratio, Cash
reserve ratio and Deposit ratio while Return on assets, return on equity and return on net interest margin were the
proxies used for financial performance. The study discovered that Liquidity management has a significant impact on
financial performance of deposit money banks in Nigeria.
Edem (2017) carried out a study to discover the empirical evidence of the impact of liquidity management on the
financial performance of deposit money banks in Nigeria using the secondary data of the entire deposit money banking
industry between 1986 and 2011. Research reveals that there exists both positive and negative impact of liquidity
management on financial performance of deposit money banks in Nigeria.
Stanley and Ali (2016) conducted a survey of liquidity management factors affecting the financial performance of
commercial banks in Mogadishu, Somalia. The target population for the study was 112 employees of commercial
banks in Modagishu and a sample size of 87 respondents was selected using Slog Van’s formula. The study indicated
that liquidity management significantly influences the financial performance of commercial banks in Modagishu,
Somalia.
Sathyamoorthi, Mapharing and Mashoko (2020) analyzed the relationship that exists between liquidity management
and financial performances of commercial banks in Botswana. The study sourced data from all the 9 commercial
banks in Botswana from 2011 to 2019. The study applied descriptive statistics, correlation and regression to analyze
the data. The study showed both significant and insignificant relationships between liquidity management and
financial performance.
Dzapasi (2020) sought to determine the effect of liquidity management on the financial performance of banks in a bad
economy. This research drew a sample of the 5 leading banks in Zimbabwe. The research discovered that there is a
strong positive relationship between liquidity management and financial performance of banks in Zimbabwe.
Obim, Takon and Mgbado (2020) examined the effect liquidity has over the profitability of banks. The sourced data
was from the Central Bank of Nigeria statistical bulletin. The results of the examination showed that there are positive
and negative effect between liquidity and the profitability of banks in Nigeria. The study also made a recommendation
that banks should employ qualified personnel so as to enable the adoption of right decisions in relation to the optimality
of liquidity.
Demirgunes (2016) evaluated the possible impact of liquidity on financial performance by making use of the time-
series data of the Turkish retail industry in 1998. After the analysis, the study concluded that there is a significant
positive relationship between liquidity and financial performance.

3. Methodology
The study was quantitative in nature. The population for this study include money deposit bank listed on the
Nigerian Stock Exchange. Purposive sampling technique was adopted to select seven (7) deposit money banks
listed on the Nigerian Stock Exchange market. This was due to the fact that data needed were not sufficient in the
annual reports of all the listed money deposit bank, hence the use of the seven (7) deposit money bank. The
deposit money bank are Access Bank, First Bank, Guarantee Trust Bank, United Bank for African, Zenith Bank,
Eco Bank, Polaris Bank. The data used for this study were secondary data derived from the annual financial
statements reports of the selected deposit money bank. The period considered for this study is from 2011 to 2020
i.e. seven (7) years. The study involves time series and cross sectional data. Panel Least Square data regression
analytical technique was used to observe all variables for the period. The dependent variable, Financial
performance was measured using Return on Equity (ROE) and Return on Asset (ROA) while the independent

270
Nigerian Defence Academy Journal of Economics and Finance Vol 5 Issue 2 September 2021

variable, Liquidity Management was measured by Liquidity Ratio (LR), Loan to Deposit Ratio (LDR), Cash
Reserve Ratio (CRR), and Deposit Rate (DR).

Model Specification
The multiple linear regression analysis model which would be used is given as:
Y = f(X)…………………….Model 1
Where;
Y= Independent Variable
X= Dependent Variable
X= f(x1, x2, x3, x4)…………Model 2
The model expresses banks’ Financial Performance as a function of Liquidity Management.
Y= β0 + β1 + β2+ β3+ β4 + ε…………………..Model 3
ROA= β0 + β1 (LQR) + β2 (LDR) + β3 (CRR) + β4 (DR) + ε ………………….Model 4
ROE= β0 + β1 (LQR) + β2 (LDR) +β3 (CRR) + β4 (DR) + ε................................Model 5
NPM= β0 + β1 (LQR) + β2 (LDR) + β3 (CRR) + β4 (DR) + ε …………………...Model 6

Where;
ROA= Return on Assets
ROE= Return on Equity
NPM= Net Profit Margin
LQR= Liquidity Ratio
LDR= Loan to Deposit Ratio
CRR= Cash Reserve Ratio
DR= Deposit Rate
β = Unknown Population Parameter
ε = Error Term Estimate

4. Data Presentation and Results

Unit Root Test

Table 4.1: Unit Root Test Using Augmented Dickey Fuller (ADF) 2011-2020.
Variables ADF-Statistic Critical Values Order of Integration

271
Nigerian Defence Academy Journal of Economics and Finance Vol 5 Issue 2 September 2021

ROA -4.358594 1% = -3.689194

(0.0019) 5% = -2.971853 Stationary at first difference
10% = -2.625121
ROE -6.256010 1% = -4.323979
(0.0003) 5% = -3.580628 Stationary at second difference
10% = -3.225334
NPM -7.655165 1% = -4.323979
(0.0000) 5% = -3.580628 Stationary at first difference
10% = -3.225334
LQR -5.029926 1% = -4.374307
(0.0055) 5% = -3.603202 Stationary at first difference
10% = -3.238054
LDR -4.526936 1% = -3.974906
(0.0005) 5% = -2.403208 Stationary at second difference
10% = -3.638052
CCR -6.034427 1% = -4.374307
(0.000) 5% = -3.603202 Stationary at first difference
10% = -3.238054
DR -8.722834 1% = -4.274908
(0.0000) 5% = -3.704205 Stationary at second difference
10% = -3.919056
Source: Researcher’s computation (2021) using E-views 9

The results of the Stationarity (unit root) test indicate that ROA, NPM, LQR and CRR were stationary at first difference
while ROE, LDR and DR stationary at second difference. Therefore, it implied that all variables are stationary at the
different levels. The descriptive statistics of the result is presented in the table below:

Descriptive Statistics
Descriptive Statistics of the Return on Assets (ROA), Return on Equity (ROE), Net Profit Margin (NPM), Non-
Performing Loans Ratio (NPLR), Liquidity Ratio (LQR), Loan to Deposit Ratio (LDR), Cash Reserve Ratio (CRR)
and Deposit Rate (DR) in the study between 2011–2020.

CRR DR LDR LQR NPM ROA ROE

272
 Nigerian Defence Academy Journal of Economics and Finance Vol 5 Issue 2 September 2021

Mean 38444702 5.31E+08 0.441090 1.30E+08 25,316,998 0.035470 6.129291

Median 1094917. 6.59E+08 0.436105 1.05E+08 7322322. 0.035567 5.891100
Maximum 3.61E+08 2.88E+09 0.614863 7.02E+08 1.78E+08 0.070100 12.90060
Minimum -939918.0 1216511. 0.046100 182315.0 1793.000 -0.000200 -1.013400
Std. Dev. 78691934 5.99E+08 0.090207 1.66E+08 44520776 0.016586 3.173337
Skewness 2.732114 1.401936 -0.952383 1.669461 2.305424 0.042223 0.131784
Kurtosis 9.856374 5.527212 6.782439 5.322049 7.439524 2.506976 2.379546
Jarque-Bera 220.9945 40.96444 51.56306 47.55339 117.7867 0.719335 1.306490
Probability 0.000000 0.000000 0.000000 0.000000 0.000000 0.697908 0.520355
Sum 2.65E+09 3.66E+10 30.43524 8.97E+09 1.75E+09 2.447398 422.9211
Sum Sq. Dev. 4.21E+17 2.44E+19 0.553335 1.88E+18 1.35E+17 0.018706 684.7646
Observations 69 69 69 69 69 69 69
Source: Researcher’s computation (2021) using E-view Statistical Software 9.0

From the descriptive Statistics above, it shows that the average mean value of Return on Equity (ROE) to be 6.129291 shows
probability value of 0.520355 > 0.05 level of significance; average mean value of Return on Assets (ROA) to be 0.035470
with probability of 0.697908 < 0.05 level of significance; while average mean value of Net Profit Margin (NPM) to be
25,316,998 with probability of 0.000000 < 0.05 level of significance; Liquidity Ratio (LQR) to be 1,300,000.00 with
probability of 0.000000 < 0.05 level of significance; Loan to Deposit Ratio (LDR) to be 0.441090 with probability of 0.000000
< 0.05 level of significance; and average mean value of Deposit Rate (DR) to be 5,310,000.00 with probability of 0.000000 <
0.05 level of significance and lastly, average mean value of Cash Reserve Ratio (CRR) to be 38,444,702 with Probability of
0.00000 < 0.05 level of significant. The above results show that some of the variables concerned were satisfactory and accurate
for the research analysis under the probability which shows that they were statistically significant at 5 percent level of
significance.

Panel Least Square (Regression Analysis) I

Estimation Command:
=========================
LS(?) ROA C LQR LDR CRR DR

Estimation Equation:
=========================
ROA = C(1) + C(2)*LQR + C(3)*LDR + C(4)*CRR + C(5)*DR

Substituted Coefficients:
=========================
ROA = 0.0259199566335 - 1.17476567073e-11*LQR - 0.00327858032088*LDR - 1.00698010501e-10*CRR +
3.08782704502e-11*DR
Dependent Variable: ROA
Method: Panel Least Squares
Date: 07/12/21 Time: 23:57
Sample: 2011 2020
Periods included: 10
Cross-sections included: 7
Total panel (unbalanced) observations: 69

Variable Coefficient Std. Error t-Statistic Prob.

C 0.025920 0.007231 3.584577 0.0007

LQR -0.017000 8.38E-12 -1.401601 0.1659

273
Nigerian Defence Academy Journal of Economics and Finance Vol 5 Issue 2 September 2021

LDR -0.003279 0.015548 -0.210867 0.8337

CRR -0.101000 3.39E-11 -2.971417 0.0042
DR 0.309000 4.47E-12 6.904487 0.0000

R-squared 0.603894 Mean dependent var 0.035470

Adjusted R-squared 0.579138 S.D. dependent var 0.016586
S.E. of regression 0.010760 Akaike info criterion -6.156307
Sum squared resid 0.007409 Schwarz criterion -5.994415
Log likelihood 217.3926 Hannan-Quinn criter. -6.092079
F-statistic 24.39325 Durbin-Watson stat 0.560671
Prob(F-statistic) 0.000000

Source: Researcher’s computation (2021) using E-view Statistical Software 9.0

The Durbin Watson statistic is a number that tests for autocorrelation in the residuals value from a statistical regression
analysis. The Durbin-Watson statistic is always between 0 and 4. A value approaching 2 means that there is no
autocorrelation in the sample. Values approaching 0 indicate positive autocorrelation and values toward 4 indicate negative
autocorrelation. From the estimation, the Durbin Watson statistics is (0.560671), this implies that there is positive serial
correlation or autocorrelation in the regression residual. While the F-statistics value is (24.39325) with a probability or
significance level of P-value 0.000000 < 0.05 shows that the overall analysis of variance of the model is of good fit; this
confirming that explanatory variables were fundamental explaining the variation in the dependent variable.
In conclusion, since at the overall level, liquidity ratio, loan to deposit ratio, cash reserve ratio and deposit rate
significantly have changes on return on assets, therefore, H1 that says, “Liquidity Management has a relevant
impact on Return on Asset of Deposit Money
Banks in Nigeria”, is accepted since at overall, the explanatory variables have significant effect on the explained
variable.

Panel Least Square (Regression Analysis) II

Estimation Command:
=========================
LS(?) ROE C LQR LDR CRR DR

Estimation Equation:
=========================
ROE = C(1) + C(2)*LQR + C(3)*LDR + C(4)*CRR + C(5)*DR

Substituted Coefficients:
=========================
ROE = 8.41286903124 - 4.60744712622e-09*LQR - 7.08399557045*LDR + 1.47718099182e-09*CRR +
2.60493143009e-09*DR

Dependent Variable: ROE

Method: Panel Least Squares

274
Nigerian Defence Academy Journal of Economics and Finance Vol 5 Issue 2 September 2021

Variable Coefficient Std. Error t-Statistic Prob.

C 8.412869 1.718352 4.895894 0.0000

LQR -4.610009 1.99E-09 -2.313224 0.0239
LDR -7.083996 3.694825 -1.917275 0.0597
CRR 1.480009 8.05E-09 0.183426 0.8550
DR 2.600009 1.06E-09 2.451089 0.0170

R-squared 0.388954 Mean dependent var 6.129291

Adjusted R-squared 0.350764 S.D. dependent var 3.173337
S.E. of regression 2.556922 Akaike info criterion 4.785190
Sum squared resid 418.4224 Schwarz criterion 4.947081
Log likelihood -160.0890 Hannan-Quinn criter. 4.849417
F-statistic 10.18463 Durbin-Watson stat 0.351998
Prob(F-statistic) 0.000002

From the estimation, the Durbin Watson statistics is (0.351998), this implies that there is positive serial correlation or
autocorrelation in the regression residual. While the F-statistics value is (10.18463) with a probability or significant level
of P-value 0.000002 < 0.05 shows that the overall analysis of variance of the model is of good fit; this confirming that
explanatory variables were fundamental explaining the variation in the dependent variable.
In conclusion, since at the overall level, liquidity ratio, loan to deposit ratio, cash reserve ratio and deposit rate significantly
have changes on return on equity, therefore, H1 that says, “There is a significant effect of Liquidity management on return
on equity of Deposit Money Banks in Nigeria”, is accepted since at overall, the explanatory variables have significant effect
on the explained variable.

Panel Least Square (Regression Analysis) III

Estimation Command:
=========================
LS(?) NPM C LQR LDR CRR DR
Estimation Equation:
=========================

Variable Coefficient Std. Error t-Statistic Prob.

C 3004557. 12812149 0.234508 0.8153

LQR 0.236347 0.014851 15.91464 0.0000
LDR -6543896. 27548864 -0.237538 0.8130
CRR 0.166646 0.060046 2.775316 0.0072
DR -0.022446 0.007924 -2.832688 0.0062

R-squared 0.827416 Mean dependent var 25316998

Adjusted R-squared 0.816630 S.D. dependent var 44520776

From the estimation, the Durbin Watson statistics is (0.966693), this implies that there is positive serial correlation or
autocorrelation in the regression residual. While the F-statistics value is (76.70853) with a probability or significant level

275
 Nigerian Defence Academy Journal of Economics and Finance Vol 5 Issue 2 September 2021

of P-value 0.000000 < 0.05 shows that the overall analysis of variance of the model is of good fit; this confirming that
explanatory variables were fundamental explaining the variation in the dependent variable.
In conclusion, since at the overall level, liquidity ratio, loan to deposit ratio, cash reserve ratio and deposit rate significantly
have changes on net profit margin, therefore, H1 that says, “Liquidity management has a significant impact on net profit
margin of the Deposit Money Banks in Nigeria”, is accepted since at overall, the explanatory variables have significant
effect on the explained variable.
CONCLUSION AND RECOMMENDATIONS
The study analyzed the impact of liquidity management on the financial performance of deposit money banks in
Nigeria. Arising from the findings, the major conclusion of the study is that liquidity management has significant
positive effect on financial performance of deposit money banks in Nigeria.
Arising from the findings, the followings were recommended,
ROA: We found significant positive effect of liquidity management on ROA. We recommend that all banks should
maintain reasonable proportion of their assets in liquid form as this has implication on performance.
ROE: Liquidity management has significant positive effect on ROE. We therefore recommend that banks should work
towards improving their overall state of liquidity so as to have favorable returns on performance.
NPM: We found that liquidity management has significant effect on net profit margin of Nigerian listed deposit
money banks. We therefore recommend that banks should have more realistic credit policy which would narrow the
gap minimization of cash flows as well as reduction of cash conversion period which has the potential of improving
liquidity.

REFERENCES
Andrew , O. A., & Osuji, C. C. (2013). The Efficacy of Liquidity Management and Banking Performance in Nigeria.
International Review of Management and Business Research, 2(1), 223-226.
Bhattacharyya, I., & Sahoo, S. (2011). Comparative Statics of Central Bank Liquidity Management: Some Insights.
International Advances in Economic Research.
Dzapasi, F. D. (2020). The Impact of Liquidity Management on Bank Financial Performance in a subdued economic
environment: A case of Zimbabwean Banking Industry. PM World Journal, IX(I), 2.
Edem, D. B. (2017). Liquidity Management and Performance of Deposit Money Banks in Nigeria (1986-2011): An
Investigation. International Journal of Economics, Finance and Management Sciences, 5(3), 146-147.
Lazaridis, I., & Tryfonidis, D. (2006). The Relationship between Working Capital Management and Profitability of
Listed Companies in the Athens Stock Exchange. Journal of Financial Management and Analysis, 19(1).
Mogotsinyana, M., Mashoko, D., & Sathyamoorthi, C. R. (2020). Liquidity Management and Financial Performance:
Evidence from Commercial Banks in Botswana. International Journal of Financial Research, 11(5), 399-
402.
Panagiotis, L., & Konstantinos, S. S. (2008). Factors Affecting Firms' Financial Performance: The Case of Greece.
University of Peloponnese Press.
Sproul, M. F. (2018). The Real Meaning of the Real Bills Doctrine. Munish Personal RePEc Archive.
Stanley, K., & Ali, A. S. (2016). Effect of Liquidity Management on Financial Performance of Commercial Banks in
Modagashi, Somalia. International Journal for Research in Business, Management and Accounting, 2(5),
101-104.
Uhagiro, L. C. (2008). Evaluation of the Impact of Liquidity Management on Banks Performance in Nigeria. Federal
University of Technology, Owerri.
Vossen, B. v. (2010). Bank Liquidity Management. Business/Business Adminstration, 2.

276

View publication stats