EFFECT OF LIQUIDITY ON THE PROFITABILITY OF

COMMERCIAL BANK IN NIGERIA

ABSTRACT

Liquidity management is a fundamental aspect of the financial

stability and operational effectiveness of commercial banks.
Ensuring adequate liquidity allows banks to meet their short-
term obligations, support lending activities, and avoid
potential solvency issues. This research investigates the effect
of liquidity management on the performance of commercial
banks in Nigeria from 2001 to 2016. The research will look
into how liquidity ratios—such as the liquidity coverage ratio
and the loan-to-deposit ratio—affect performance indicators
including profitability, asset quality, and overall financial
stability. Through a comprehensive analysis of historical data,
this study aims to highlight the significant relationship
between effective liquidity management and enhanced bank
performance providing insights into the practices that
contribute to financial health and operational success in the
Nigerian banking sector.

Keywords: Liquidity management, bank performance,

commercial banks, Nigeria, financial stability, profitability,
asset quality, operational effectiveness.

1
 CHAPTER ONE
GENERAL INTRODUCTION

1.1 Background of the study

In every system, it comprises of the financial system,

financial instrument and financial intermediaries that aid in

the deposit mobilization and credit creation mechanisms for

the borrowers (investors) of fund to aid both economic and

financial growth.(Wilner 2000).it the prospects of money

creation and money destroying prospects of the

intermediaries. Financial intermediaries(banks) have to take

proper consideration of the two levels of performance

parameters of liquidity and profitability. The proper

management or effective utilization of the savings deposit of

the surplus supplying unit will aid profitability and liquidity

vice-versa.(Olagunji,Adegunju,and Olabode 2011).

The effect of liquidity position in management of financial

institution and other economic unit have remained fascinating

and intriguing, though very elusive in the process of in

investment analysis visa- visa bank portfolio management.

There appears to be an interminable argument in the literature

2
over the years on the roles, meaning and determinants of

liquidity and credit management. The Nigeria financial

environment has noticed increase in credit which has become

a problem to the country. Credit control described as to

maximize the value of the firm by achieving a trade a trade-off

purpose of credit control is not to maximize sales or to

minimize the risk of bad debt. In fact the firm should manage it

credit in such a way that sales are expanded to an extent to

which risk remains within an acceptable unit. These costs

include the credit administration expenses bad debt, losses

and opportunity cost of the fund field up in receivables, the

aim of liquidity management should be to regulate and control

these cost that cannot be eliminated together.

According to Begg, fisher and Rudiger (1991:130) liquidity

refers to the speed and certainty with which an asset can be

converted back into money (cash, income) whenever the Asset

holder desires, money itself is the most liquidity asset o all

liquidity management seeks to ensure attainment of the short

term objective. A liquid bank is one that stores enough liquid

assets and cash together with the ability to raise funds quickly

3
from other source to enable it meet its payment obligation and

financial commitment in a timely manner.

Therefore according to Ngwu (2006:36) liquidity

management is the act of storing enough funds and raising

funds quickly from the market to satisfy depositor loan

customer and other parties with a view to maintain public

confidence.Liquidity is status quo that a bank are able to meet

it short-term obligations to his depositors and creditors. The

liquidity position of a bank can be measured on the current

ratio(relationship between current asset and current liabilities)

and quick ratios(relationship between liquid asset and current

liabilities).The short of fund by deposit money banks will lead

to inability to pay credible creditors, cause insolvency threats,

loss of customer confidence and deposit flight. A high current

ratio indicated by the financial statement of the banks will

enhance public confidence and stimulate the ability of bank to

use their deposit in portfolio investment so has to generate

low cost and risk diversified returns on their investment.

Liquidity is sub-divided into various components are Current

ratio, Liquid ratio and net working capital ratio. This are the

4
parameter which is used to show the idle fund available which

is used to meet short term obligation( Umobong 2010).

Profitability is a measure of the amount in which a banks

return on investment exceed its cost of investment or holder

fund and public deposits. For firm it is the gross profit margin

and net profit margin that depicts their profitability position .

The profitability and liquidity are effective illustration of the

corporate health and performance of the commercial

banks(Ejelly 2004).However, liquidity and profitability are

liked to be two side of a coin, which have opposing objectives,

but must be maintained simultaneously by banks.

However, profitability and liquidity as performance

indicators are very important to the major stakeholders;

shareholders, creditors; and tax authorities. The shareholders

are interested on the return on investment which indicates

banks profitability. Surplus supplying unit(Depositors) are

concerned with the current ratio (liquidity status) of their

banks, because it the liquidity status of their determine

withdrawal needs either on time or current deposit accounts.

Bank’s profitability also have the interest of the tax authorities

5
to meet ,it the profitability level of the banks that spells out

their tax obligations.(Olagunji et al 2011).

According to Charumathi (2008), in order for bank to

maximize their profitability level and also have liquid fund to

meet their current liabilities. The bank have to manage,

maintain and monitor their portfolio opportunities by curbing

the risks which there are usually exposed to like counterparty

risk, default risk, interest rate risk, and operation risk so has

to be able to remain liquid for the short term obligation.

The nexus between profitability and liquidity can be

explained as the notion where a bank level of liquidity is

high(pegging down investable funds) will have low-liquidation

risk,but will be opened up to low level of profitability(low

investment mechanism).Conversely a bank operating at a low-

level of liquidity(freeing investable funds)may face high

liquidation risk, but have a higher profitability status.

In Nigeria context, the external environment is very

competitive for business most especially the banks, having one

customer and chasing their proceeds. This environment

increases the competitive prospects among deposits money

banks ,that it is only the bank that have effective management

6
and innovative efficiency that tends to pull in scarce deposits

or savings from the populace investment activities. It is this

activity of the banks to also reduce their counterparty risk that

aid them to strike the balance between liquidity and

profitability.

The prejudice of insufficient liquidity management of

bank in Nigeria was brought to visible eyes when the bank

began to lose the trust they earned in their customers, during

the liquidation and distress era of the late 1980’s and 1990’s

lingered up to the re-capitalization era in 2005 in which banks

were mandated to increase their capital base from N2 billion

to as astronomical N25 billion.The policy by CBN was believed

to rectify bank liquidity problem and stabilize the economy.

(Fadare 2011).

After, five years of repositioning the bank against

liquidity shortage; the Central Bank of Nigeria in 2009 came

on a reliving mission of five illiquid banks. The global financial

Crisis of 2008 had a strong blow on all financial sector of the

world. These propel the unconventional and conventional

measures to inject illiquidity into the system. Towards the

rescue mission in 2009,the CBN injected N620billion to save

7
the five banks that were operating negative shareholders fund.

The Asset Management Corporation of Nigeria (AMCON) was

set up has part of the unconventional measure to solve the

illiquidity crisis, to buy out the bad debt of the affected five

banks.

From an academic perspective, the literature on the twin

concepts of liquidity and profitability is broad and varied.

However, until recently especially in 2013, the empirical

evidence within the Nigeria context had been rather scanty. In

addition, some of the studies carried out on Nigeria such as

Olagunji et al. (2011) made use of questionnaires. The results

of such studies need to been taken with caution because of

biased responses based on the position/prejudice of the

respondents. Some others such as Uremadu (2012) made use

of time series data with aggregate macro-economic variables

of the banking system. This implies the data were not drawn

from the actual financial statements of the commercial banks.

This study will aid to add to the compendium of knowledge of

the relationship that exist between liquidity management and

bank performance of commercial banks in Nigeria.

1.2 Statement of the Problem

8
Banking System is the heart beat of every economy system and

many factors affect and determine it’s performance. Liquidity

as one of these determinants performs a crucial function in the

successful operation of a business firm and it is mostly

important to make it known that a bank is liquid when it has

the ability to settle obligations instantly. The problem of this

performs parameters may be because of the profit intensity of

the bank their by affect the liquidity (Smith 1980).

Liquidity management and bank performance are key

factors in determining the development, survival,

sustainability, growth and performance of a banking system

and the ability to handle the trade-off between the two is a

source of concern for bank managers. For instance, banks

make loans that cannot be sold quickly at a high price and also

issue demand deposits that allow depositors to withdraw any

time. Such a mismatch of liquidity, in which a bank’s liabilities

are more liquid than its assets, causes problems for banks

when too many depositors attempt to withdraw at once as it

affects bank liquidity position. Many banks have investment in

safe and high yielding illiquid assets but are tied up in loans.

9
 Therefore, the firm continuously maintain a balance not

too high liquidity (idle funds) and not to low investment

returns (profitability) (smith1980). it is worthy of note that

liquidity has a relationship in with bank financial performance

according to Lartey, Antui and Bondi (2013) in Ghana.

Purbaningish (2014) in Indonesia, Mashin (2011), Dezfoulu et

al(2014).

On the other hand insufficient liquidity might damage the

firm’s goodwill reduce firm’s firm’s credit standings and these

might lead to forced liquidation of firm assets. Also

profitability which also is the classical motive of an

enterprises that is the return on viable investment. It is the

profit from the investment that may aid liquidity prospects of

banks.

Mistakes in liquidity management and implementation

can affect bank operation and might exhibit long-term effect

on the economy. Profitability does not translate to liquidity in

all areas. A banking be profitable and being not liquid. So

liquidity should be measures in order to obtain and optimal

level that is a level that avoid excess liquidity which may mean

lack of business idea by management.

10
However, this study is set to provide empirical evidence and

theoretical evidence on liquidity management and bank

performance.

1.3 Objective of the study.

The broad objective of study is to examine the effect of

liquidity management on bank performance of commercial

bank in Nigeria The specific objectives include;

(i) To determine the nature and extent of relationship

between liquidity and profitability

(ii) To determine the effect of loan to deposit ratio and

asset quality on the net interest margin of commercial

banks

(iii) To assess the effect of liquidity ratio on the net interest

margin of commercial banks

1.4 Research Question.

(i) What is the nature and extent of relationship between

liquidity and profitability

(ii) What is the effect of loan deposit ratio and asset

quality on the net interest margin of commercial banks

(iii) What is the effect of liquidity ratio on the net interest

margin of commercial banks.

11
1.5 Research Hypothesis

Based on the research question above, the following

hypothesis was formulated.

Hypothesis one

H0= Liquidity has no casual effect on commercial bank

profitability

H1= Liquidity has casual effect on commercial bank

profitability

Hypothesis two;

H0= Loan deposit ratio and Asset quality has no casual

effect on net interest margin of commercial banks

H1= Loan deposit ratio and Asset quality has casual effect

on net interest margin of commercial banks

Hypothesis three;

H0= Liquidity ratio has no casual effect on net interest

margin of commercial bank performance

H1= Liquidity ratio has casual effect on net interest margin

of commercial bank performance.

1.6 Significance of the Study.

The study on the liquidity management and commercial

bank performance is literally buoyant in empirical studies.

12
Prominent studies on this area has been carried out in

developing countries and developed countries such as China

and Britain .While much study existed in the developing

countries due to the low level of capital accumulation.

However, the findings of this study will be beneficial to

different stakeholders group such as; managers, depositors,

investors, analyst, educators, and the regulatory bodies. The

findings of the study might be useful to managers to take

adequate and effective decision to nexus liquidity and

profitability measurement, of banks, in-order to guide against

insolvency threats. Additionally, the findings of this result may

be useful for government bodies to aid or control commercial

banks; via the interest rate, position so has to enhance growth.

Investors could the findings to assess the needed fund for

the investment opportunities and reduce the likely adverse

selection and moral hazard problem in assessing loan for

business. Financial analyst can also use the finding to increase

their margin in the performance themselves before contracting

business from the commercial bank in Nigeria.

Supply Sector Unit is the savings side of the economy

which has the deposit which the bank changes into fund for

13
the investor (Deposit) side the economy. The depositors could

use the finding of this study to know the relationship between

their deposit and the sustainability of the commercial banks

liquidity measurement.

1.7 Scope of the Study

The study is set to examine the effect of liquidity management

on commercial bank performance in Nigeria. However, the

study selected top 10 commercial banks(cut across 10 sectors)

listed on the Nigeria Stock Exchange during the period 2009

to 2016.This period have experienced restructuring or

distress and also some quiet soundness within the early

period. Additionally the variable to be used is a bit non-

conventional in terms of profitability measures (Net income

Margin).

14
 CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

Liquidity is considered as the success of as bank,

therefore ay ineffectiveness in its management consuetude’s a

huge problem i.e. it encounter a huge problem that affect the

affairs of the financial institution. This problems is therefore

analyses here as the basis for this research study. The analysis

commence from the era of banking in inception in Nigeria

through it growth stages and till what is it today. The initial

bank failures recorded were principal dues to inefficiencies in

the management of the liquidity of such bank which in one way

or the other had something to do with either liquidity

inadequacy and the relative inefficiency in their management.

As an institutional problem, it has persisted over the years, in

15
determining the survival or otherwise of banks. Although it

must be said that some relative degree of banking it is

believed that any banking institutions that is properly

managed and has adequate liquidity should be able to swim

above troubled waters. Problems sometimes also evolve from

banks inordinate urge to make phenomenal profit. In the

process of doing this there is the tendency for these banks to

get carless in the resources utilization and particularly their

management of liquidity. The resultant effect is usually loss

substance and consequently, loss accumulation, a situation

which can lead to banking failure. The marginal loans in the

banking system calls to mind the important factor that national

government of all` time preoccupy themselves with banks.

This shows the degree of importance attached to liquidity and

its management by these governments and deviation from its

ratio or inadequacy of it management always spells trouble for

the banking concerned. Other of attendant consequences to a

bank includes loss of confidence in the particular bank its

inability to fulfill both its short term and long-term obligation,

lack of trust on the part of depositors and other customers

alike; and the concomitant reduction in level of operations.

16
 This section review relevant concepts such on liquidity

management and bank performance. Relevant theories will be

reviewed such as commercial loan theory, anticipated income

theory, liquidity-profitability trade-off theory .asset theory,

shift ability theory, in which the first three mentioned theory

will be the theoretical framework of the study. it will also

provide empirical literature review on prior studies. The gap

analysis will also be depicted in this section.

2.1 Conceptual Framework

2.1.1 Concept of Liquidity Management

Liquidity Management has attained a germane position in the

bank management structure, due to its crucial nature

highlighted by recent market turmoil. it also refers to the

planning and control necessary to ensure that the organization

maintaining enough liquid assets either as an obligation to the

customers of the organization so as to meet some obligation

incidental to the survival of the business or as a measure to

adhere to monetary policies of the central bank.

The concept of liquidity which can be defined as the state

or condition of a business organization which guarantee its

17
ability to honor and meet its maturing obligation. it is a

financial term that mean amount of idle fund for investment. In

recent times most of the capital with banks his almost in credit

form and not cash. Liquid assets should be attributable to easy

marketability and transferability. This employs that they

should redeemable prior to maturity and converted to cash

easily so has to aid commercial bank current ratio requirement

and obligation. According to business dictionary; it the ability

to ease out with cash, means having higher convertibility to

liquidity.

According to GAAP (2013) liquidity can further be termed

as bank’s capacity to fund increase in assets and meet both

expected and unexpected cash and collateral duties at a cost

reasonable and eliminating unacceptable losses. An ineffective

management of the strategic board of the commercial banks

will results into serious impairment of banking and contagious

effect on the economy. In simple term “LIQUIDITY” it is banks’

ability to immediately meet cash, cheques and other

withdrawals obligations after portfolio investment and

legitimate new loan demand while abiding by existing reserve

requirement.

18
 Liquidity Components are the components which the

management play around with both implicitly and explicitly so

as to attain their going concern prospects they include;

 Vault cash

 Balances held with CBN

 Balances held with other bank in Nigeria

 Balance held with officers and branch outside Nigeria

 Money at call In Nigeria

 Inter-bank Placement

 Placement with Discount Houses

 Treasury bills

 Treasury certificate

 Investment in Stabilization

 Bill Discounted payable in Nigeria

 Negotiable Certificate of Deposits

 Bankers Acceptance and Commercial paper

 Investment in FGN Development Stock

 Industrial and (other) investment

According to Nwaezeaku (2006),liquidity in banks

measure the rate of current assets and the availability of cash

are converted to cash to meet ordinary(liquidity preference)

19
and extra(reserve requirement).it depicts the bank bargaining

prowess and strength, which will hold depositors for more

savings.

2.1.2 Bank Performance

It is an analogy used in context to depicts the capacity to

attain sustainable profitability. For a bank to be exploring

opportunities to its advantage managers must weigh complex

trade-off between growth, risk and return, favoring the

adoption of risk-return adjustment.

Bank performance measure can be classified into market

based, non-conventional and economic. The Economic Value

Added (EVA) was developed by Stern and Stewart which

contextualize the opportunity cost for stakeholders to hold

equity in a bank measuring whether a company generates an

economic rate of return higher than the cost of invested

capital in order to improve the market value of the company.

There are two colossal approach used to measure bank

performance; the accounting approach which makes use of

financial ratio and the econometric technique. The purpose of

measuring bank performance is to separate performing banks

20
form non-performing banks and to inform government policy

by assessing the effect of deregulation, market structure

efficiency. According to Ron Best the main purpose of bank

management is to maximize value. Value is the worth of a

corporation which is show cased by it profitability. It is the

performance level that shows the value and the value depicts

the profitability status of the bank either from investing their

liquid fund in securities on the exchange market of

government securities.

Profitability issue is a cogent subject that a bank has to

mandatorily face (Maximization of shareholders fund).Profit is

the margin between expenses and revenue over a period of

time, usually one year. As explained by Heibaiti, Nourani and

Dadkhar (2000), a business is first a cell, matures to an organ,

before becoming a structure. They depicted that business

changes stages so has to survive and grow. The survival

prospects of bank is in their profitability status and maintain it

activities so has to able to have greater expansion and growth

in the economy. Bank profitability can also improve managerial

performance identifying their best and worst practices

associated with high an low measured efficiency.

21
 Agbada and Osuji (2003) strategic profit planning sustain

to be the most tedious and time consuming aspects of bank

management because of many variable involved in the

decision, which are outside the control of the bank .It will ever

be more cumbersome, if the bank is operating in an highly

competitive economic environment such as that of Nigeria.

The theory of bank performance is however complex.

There are many ways of measuring performance but financial

ratio are commonly used by financial analyst. Financial ration

is a tool that is used to evaluate financial statement in order

to determine the financial performance of the bank. The

financial statement analysis is very easy to understand and it is

generally accepted in show casing the bank’s financial

performance. The commonly used financial ratio is derived

from the bank financial statement the include;

 Return of investment(Equity)(ROI) ; This is measured as

profit before tax/net worth. It offers the investors to

compare the return on investment with the bank deposit

rate and other investment with bank deposits rate and

other investment return offered by other business. It also

22
 called Return on Capital Employed (ROCE)

(Shareholder’s concern).

 Return on Asset(ROA); The return on investment does not

consider bank size is myopic to shareholders investment

or returns. But return on asset of the measures the entire

net income of the bank/total assets. Manager’s

performance on Job should be viewed good or poor on the

job base on the return of assets according to Brealy ,

Myers and Marcus.

 Net interest Margin(NIM); This is the difference between

interest income on investors and interest expenses on

depositors as a percentage of total assets. It is a

parameters the depicts banks intermediation

performance/profitability. it will be employed in this

study.

INDEPENDENT VARIABLE
LIQUIDITY
DEPENDENT VARIABLE
 LIQUIDITY
PROFITABILITY RATIO
 LOAN TO
 NET INTEREST MARGIN DEPOSIT RATIO
 ASSET QUALITY
23
 FIG 1.1 CONCEPTUAL FRAMEWORK DIAGRAM.

2.2 Theoretical Framework

2.2.1 Liquidity-Profitability Trade-Off Theory

This is one of the theory upon which this study is drawn

from. The theory depicts that there exist trade-off between

liquidity(current ratio) and profitability(performance) of a firm,

that a firm cannot achieve both measurement position

simultaneously. In order to attain soundness and sanity in the

banking system. In order to attain soundness and sanity in the

banking system, the banking system must be regulated

affectively so has to attain or achieve depositors confidence.

The outcome of the not quick to forget financial global crisis,

portrays a position that liquidity is as cogent to the bank

stability(capital requirement). Bagyenda et al(2001) in his

study found-out that banks with larger capital buffer and high

liquidity are less exposed to solvency distress during financial

crisis. Which made it mandatory for regulatory bodies, to

compel stable and higher reserve requirement for banks. The

24
theory is adopted because it captures the financial

performance (profitability) of banks and the liquidity current

ratio (LCR) variable.

2.2.2 Commercial Loan Theory

The theory depicts that the liquidity ratio of commercial

bank is attained by implicit liquidation of loan, which being

granted to finance working capital have a short term period.

The borrower refund the borrowed after successfully

completing stock cycles of goods. According to this theory the

banks do lend out money for medium or long term basis, it

strictly debar granting loans to purchase real estates of for

investing in stocks and bonds, due to expected payback period

of there investment,when this theory is proposed for retail or

wholesale traders who need to finance their specifies trading

transactions for short period(Emmanuel 1997).it is also called

real bill theory.

2.2.3 Asset Theory

This supports the need for holiday short-term assets to

survive the effect of unforeseen happening in the banking

operation and various need for liquidity. This theory posit

25
consequences of holding liquid assets is to seek high interest

investors and reduce defaults risk. The commercial bank are

not solely financed by asset, but also financed by collateral

asset a distress investors. This refers to loans that provide the

lender with a priority claim on specific assets and a general

claim on the debtors other assets. The concepts of assets has

some short comings. it focuses on assets side of the balance

sheet which makes the theory grossly deficient in the active

money markets. The bank and the rate of

changes in purchased funding are dependent on the market. It

also fails to consider that high returns are associated with high

risks. According to Dietrich and Wanzenried, achieving high

returns while holding a large portion of liquid assets at a low

risk can be difficult as liquid assets are costly

and have the tendency of reducing profits. In addition, the

assets have to be attractive and easily marketable. Failure to

do so has been proven to lead to bankruptcy or the need for an

emergency loan. Cash asset is presumed to have no unique

role in the process of acquisition and disposal of financial

assets but the easiness of exchange for cash balance. The

easiness is defined as ratio of stock of cash balances to

26
meeting financial obligations on maturity. The closer assets to

maturity, the greater in general are the possibilities of

realizing them before maturity without risk of significant

capital loss. The more liquid a bank is in this sense the greater

is its capability to meet its obligations as they fall

due. Higher ratio implies better performance, while lower ratio

is an indicator of threat to the bank and would tend to inhibit

bank performance.

Financial assets such as treasury bills have low risk: the

risk of loss of value due to changes in interest rate policies is

always very low since they are held in short term bases.

Financial assets can be categorized into: running assets,

reserve assets along with other liquid assets which are mostly

short-term claim e.g. treasury bills and investment assets

including long-term claims e.g. bonds; money (cash), stock and

bonds; and assets ‘held for trading’, ’held to maturity

investment’, ‘loans and receivables’ and ‘available for sale’ for

treatment purposes . Keneys explained the three motives of

holding financial assets to include the transactional,

precautionary and speculative motives .The economics and

finance literature in support of Keneys’ assertion analyze four

27
possible reasons for firms to hold liquid assets: the transaction

motive; the precaution nary motive; the agency motive and the

tax motive.

2.3 Empirical Review

Idowu,Essien and Adegboyega (2017) examined the issue

of liquidity management on banks performance in Nigeria. The

results revealed that there is a statistical relationship between

bank’s liquidity, return on assets and return on equity. This

study examined four deposit money banks in Nigeria.

Daniel (2017) examines the impacts of liquidity

managements on the performance of deposits money banks.

The study uses descriptive, correlation and inferential

statistics. The results shows that there is a significant

relationship between liquidity management and the

performance.

Raykov (2017) examined the liquidity-profitability trade-

off in Bulgaria in terms of changed financial management

function during crisis. The results depicts a weak but clearly

negative relationship between controllable liquidity and

operational profitability in long-term.

28
 Olanrewaju and Adeyemi (2015) examined the existence

and direction of causality btw liquidity and profitability of

deposit money banks in Nigeria. The study adopted pair wise

granger causality test was carried out to determine the

presence and direction of causality between banks liquidity

and profitability. The results revealed that there is no causal

relationship between liquidity and profitability of GTB, Zenith

Bank, Sterling Bank, Diamond Bank, IBTC, Unity bank, UBA,

Fidelity Bank ,Wema Bank, Union Bank and Eco banks and

there is no trace of unidirectional causality relationship

running from liquidity to profitability for banks, FBN, Access

Bank and FCMB.

Bassey (2015) examines the liquidity-profitability trade off

of deposit money banks in Nigeria. The study estimated using

Ordinary least square technique. The empirical results

revealed that there is a statistically significant relationship

between bank liquidity measurement and return on equity.

Sujani, Probir, Mohammad, Abdul and Abdullahi (2013)

examines and evaluate the profitability and liquidity of a group

five conventional bank in Bangladesh. The study evaluate the

profitability and liquidity of two types of banking system in

29
Bangladesh. The study found out that Islamic bank are less

preferable that conventional banks 2000 and 2001 in all the

profitability indicators and there is no significant difference in

liquidity between any two sets of banks.

Victor, Samuel and Eric (2013) examines the relationship

between the liquidity and the profitability of banks listed on

Ghana Stock exchange. The study revealed that there is a very

weak positive relationship btw the liquidity and the

profitability of the banks.

Ajanthan (2013) examines the nature and extent of the

nexus between liquidity and profitability in profit oriented

quoted trading companies.

Lartey,Antwi and Boadi (2013) examines the relationship

between the liquidity and the profitability of banks listed on

the Ghana Stock Exchange. The study was descriptive in

nature. The

results found out that for the period of 2005-2010 both the

liquidity and the profitability of the listed banks were declining

and there was a very weak positive relationship between the

liquidity and the profitability.

30
 Niresh (2012) examines the cause and effect relationship

between liquidity and profitability. The study adopted

correlation analysis and descriptive statistics. The results of

findings suggest there is a significant relationship between

liquidity and profitability among the listed manufacturing firm

Sri Lanka.

Owolabi, Obiakor and Okwu (2011) examines the

relationship between liquidity and profitability in selected

quoted companies, most importantly the nature and extent of

the relationship between quoted companies. Investigative and

quantitative analysis methods were used for the study. The

results showed that while a trade-off existed between liquidity

and profitability in the banking company the two variable were

positively correlated and also reinforced each other in other

companies.

Olagunju, Adebajo, Adeyanju, Olabode et al (2011)

examines liquidity management and commercial banks

profitability in Nigeria. The findings were made through

survey and quantitative methods. The findings of the study

concluded that for the success of operation and

survivals,commercial banks should not compromise efficient

31
and effective liquidity management and that both illiquidity

and excess liquidity are financial distress that can easily erode

the profit base of a bank as they affect bank’s attempt to attain

high profitability-level.

Teshale (2011) examines the determinants of Ethiopian

commercial bank profitability by using both primary and

secondary data. Both correlation analysis and linear panel data

regression model was used to analyze the relationship of

profitability. The results of the study show that size,

capitalization, loan and activity diversification are profitability.

While credit risk and expense preference behavior have a

negative impact.

Petropoulous and Kyriazopoulous (2010) examines

profitability, efficiency and the liquidity of the co-operative

banks in Greece. The results revealed that profitability and

efficiency for the co-operative banks turn out to be very

satisfactory.

2.4 Gap analysis

Prior studied on Liquidity management and bank performance

have majorly been carried mostly in Europe and Asian

countries and few on developing countries. More so not so

32
much studies have been carried out or documented on this

area in Nigeria. it is in the light of this ,this study is set to fill

the empirical gap by providing empirical evidence on liquidity

management and Bank performance of commercial bank in

Nigeria using a sample size of (10) commercial bank listed on

the Nigerian Stock Exchange from 2009-2016.

On the methodology, extant studies measure bank

performance using ROE (return on Equity) and Return on

Asset (ROA) which only cover the bank performance internally

has a firm. However this study tend to add to the body of

knowledge by using NIM(Net interest Margin) which aid to

depicts both the internal performance and mostly their

functional intermediation prospects. Merton (1995).

SECTION THREE.

METHODOLOGY

3.0 Introduction

This section provides details on how this study will be

carried out. it will cover a number of sections including

33
research design, population sample and collection of data,

model specification and model estimation.

3.1 Research Design

This research work will utilize a descriptive research design

which is ex-post factor nature, relying on secondary data

obtained after the occurrence of the event which the

researcher has no control over. Both inferential and

descriptive will be relied on to examine the liquidity

management and bank performance in commercial bank in

Nigeria. Descriptive statistics will help to describe and

understand the attribute of the variable that will be used in the

study while inferential statistics assist in establishing a causal

relationship between the variables of the study namely;

Liquidity management proxy and Bank performance proxy. The

researcher will make use of the panel data of 10 fifteen banks

covering from 2001-2016 (10) which will be gathered from

annual published reports of the banks.

3.2 Population, Sample and Collection of Data.

The population of this study consists of the 23 operational

commercial banks in Nigeria. However for the purpose of this

study the researcher will use a sample size of 10 banks which

34
could be regarded as fairly representative of the banking

sector. The bank selection will be base on the fact that they

have a wide branch network and timely published financial

reports that are readily available in their website and also

posted on the internet. Which include; Zenith bank, Guarantee

Trust Bank, , Access Bank, Diamond bank, First Bank of

Nigeria, FCMB, Stanbic IBTC, Sterling Bank, Union Bank,

UBA, Eco Bank.

3.3 Model Specification

This section presents the model for testing the research

hypothesis formulated given the nature of the study, a

mathematical model will be constructed to achieve the

objective of investigating liquidity management and bank

performance in commercial banks in Nigeria. The models were

adapted from the study Saleem at al (2011) and Agaba and

Osuji (2013),but a gap addition of (NIM) Net interest Margin

into the existing model.

The model will be in the following this form;

 Nature and extent of the relationship between liquidity

and profitability

35
  Effect of loan deposit ratio and asset quality on net

interest margin of commercial banks

 Effect of liquidity ratio on the net interest margin of

commercial banks

The linear equation is given below:

PROt =f ( LIQt ) …………………………………………………………….1

LIQ=f ( CUR t , LDR t AQQt )…………………………..………………………..2

Model for Objectives

The model 3 and 4 presented below captures the effect the

effect of liquidity management on bank performance of

commercial bank in Nigeria.

NIM t=f ( CUR , LDR , AQQ , )……………………………..3

NIM t= ( α 0+ β1 CURt + β2 LDR t + β 3 AQQt +µ )……………….4

Where;

PRO = Profitability at time t

LIQ= Liquidity at time t

NIM = Net Interest Margin at time t

CUR = Current Ratio at time t

36
LDR = Loan to deposit at time t

AQQ = Asset quality ratio at time t

α = Intercept

α1– α3 = Coefficient of the Independent Variables.

Description of Variables

Variable Description

Net This is the difference between interest income

income and interest expenses of the banks. it is the

margin(NI parameter that depicts their intermediation level

M)

Liquidity This is the difference between the current assets

ratio(curre and current liabilities of the banks

nt ratio)

Loan to This is measured as total loans relative to the

deposit total liabilities. A higher ratio means less liquidity

position which may affect bank lending while a

lower ratio signifies good liquidity position which

enables banks to lend and invest.

Asset It is a measure that helps to depicts the

quality responsiveness of the availability of capital or

37
 fund acquired and used for their day-to-day

running of the business

CHAPTER FOUR

RESULTS AND DISCUSSION

4.0 Introduction

This chapter depicts the descriptive statistics of variables used

in this study to explain the individual behavior of each variable

and how they are distributed. It also presents the pooled, fixed

and random effect models which will assist in making

inference under the test of hypotheses and arriving at a

conclusion.

4.1 Descriptive Statistics of Variables

38
Table 1: Descriptive Statistics

NIM AQQ LDR LR

0.07107 0.69934 2.36327
1.17282
Mean 0 0 4 5
0.05764 0.55100 0.75288
1.16806
Median 5 7 2 1
Maximu 0.55736 10.9813 121.273
1.42806
m 8 8 3 7
Minimu 0.03369 0.30966 0.40336
0.14381
m 8 0 2 3
Std. 0.07364 1.17238 13.4863
0.13437
Dev. 1 4 4 8
-
Skewnes 5.75557 8.58851 8.73035 5.44277
s 0 6 0 7
35.9878 75.8369 77.4703 44.5371
Kurtosis 8 6 6 4

Jarque- 4069.02 18667.5 19502.3 6146.09

Bera 2 8 7 7
Probabil 0.00000 0.00000 0.00000 0.00000
ity 0 0 0 0

5.68560 55.9472 189.062 93.8260

Sum 2 3 0 2
Sum Sq. 0.42841 108.584 14368.6 1.42652
Dev. 7 3 3 9

Observa
tions 80 80 80 80
Note; NIM (Net interest margin),AQQ(Asset

Quality),LDR(Loan to deposit ratio),LR(Liquidity ratio).

The table above depicts the descriptive statistics of the

variable used in the study. In table 4.1 above Net interest

Margin (NIM) as a mean value of 0.07,with a standard

deviation of 0.07 and median value of 0.05.

39
On the explanatory variables (AQQ) Asset quality as a mean

value of 0.69,with standard deviation 1.17 and median value of

0.55.The maximum value of (AQQ) Asset Quality 10.9 and

minimum value of 0.03.Loan to Deposit ratio has a mean value

of 2.36%,median value of 0.75.The maximum of 121.2 and

minimum value of 0.40.Liquidity ratio as a mean of 1.17 and

median value of 1.16,standard value of 0.13.The maximum of

1.42 and minimum of 0.42.

4.2 Correlation

Table 2; Correlation Matrix

NIM AQQ LDR LR

-
1.00000 0.62604 0.00084 0.55785
NIM 0 8 9 3
- -
0.62604 1.00000 0.01224 0.85098
AQQ 8 0 4 1
- -
0.00084 0.01224 1.00000 0.04378
LDR 9 4 0 7
- - -
0.55785 0.85098 0.04378 1.00000
LR 3 1 7 0

Table 4.2 above show the correlation among the variables used

in the study. Notably NIM (Net interest Margin) as a positive

relationship with Asset Quality (AQQ) of 0.62 and Loan to

40
Deposit ratio (LDR) of 0.00 and a negative relationship with

Liquidity ratio (LR) of -0.55.

4.4 Regression Results and Test of Hypothesis

Model
NIM t=f ( CUR , LDR , AQQ , )……………………………..3

NIM t= ( α 0+ β1 CURt + β2 LDR t + β 3 AQQt +µ )……………….4

Table 3 Pooled Regression Results

Variable Coefficie Std. t-Statistic Prob

nt Error

C
0.104918 0.116613 0.899711 0.3711
AQQ
0.034501 0.010725 3.216768 0.0019
LDR
1.980105 0.000490 0.040347 0.9679
LR
-0.049472 0.093658 -0.528227 0.5989
R-Squared Mean dependent var
0.394233 0.071070
Adj R- S.D dependent var

squared
0.370321 0.073641
S.E. O of Akaike info

regression criterion
0.058436 -2.793069
Sum squared Schwarz Criterion

resid
0.259521 -2.673967
Log likehood 115.7227 Hannan-Quinn -2.745318

41
 criter

F-statistic Durbin-Watson stat

16.48694 2.272002
Prob (F-

statistic)
0.000000

Table 3 above revealed the pooled regression. In the pooled

regression model. AQQ(Asset quality) as a positive significant

effect on profit (Net interest Margin).LDR (Loan to Deposit) as

a positive insignificant effect on (NIM) Net interest margin and

LR (Liquidity Ratio) as a negative significant effect on

profit(Net interest margin).

Table 4 Fixed Regression Model

Variable Coefficien StdErr t-Statistic Prob

t or
C 0.1387
-0.030894 71 -0.222623 0.8245
AQQ 0.0126
0.046988 28 3.720997 0.0004
LDR 0.0005
-0.000407 17 -0.787589 0.4337
LR 0.1115
0.059740 54 0.535521 0.5941
Cross-section fixed(dummy variables)
Period fixed (dummy variables)
Mean

R-squared 0.467717 dependent var 0.071070

Adjusted R- 0.372383 S.D dependent 0.073641

42
squared var
Akaike info

S.E. of regression 0.058340 criteri -2.697388

Sum squared Schwarz criteri
resid 0.228039 -2.310309
Hannan-

Log likelihood 120.8955 Quincriter -2.542197

Durbin-Watson

F-statistic 4.906071 stat 2.613021

Prob(F-statistic) 0.000010

Table 4 above revealed In the fixed regression model, AQQ

(Asset Quality) as a positive significant effect on profit(Net

interest Margin) at 0.00 which is (P<0.05).LDR(Loan to

Deposit) as a negative insignificant effect on profit (Net

interest margin) while LR (Liquidity ratio) as a positive

insignificant effect on profit(Net interest margin).

Table 5 Random Effect Model

Variable Coefficien Std.Err t-Statistic Prob

t or
C 0.11344
0.104918 7 0.924818 0.3580
AQQ 0.01043
0.034501 4 3.306534 0.0014
LDR 0.09111
-0.049472 5 -0.542967 0.5887
LR 0.00047
1.981205 7 0.041473 0.9670

43
Cross-section random 0.000000 0.0000
Idiosyncratic random 0.056849 1.0000
R-squared Mean

0.394233 dependent var 0.071070

Adjusted R- S.D dependent
squared 0.370321 var 0.073641
S.E of regression Sum squared

0.058436 resid 0.259521

F-statistic Durbin-Watson

16.48694 stat 2.272002

Prob(F-statistic)
0.000000
R-squared Mean

0.394233 dependent 0.071070

Sum squared resid 0.259521 Durbin-Watson 2.272002

Table 5 above revealed the random effect model, AQQ (Asset

Quality) as a positive significant effect on profit (Net Interest

Margin), LDR (Loan to deposit) as a negative insignificant

effect on profit (Net interest margin).Liquidity ratio (LR) as a

profit significant effect (NIM) Net interest Margin.

Table 6 Hausman Test

Test summary Chi-sq Chi-Sq d.f Prob

Statistic

44
Cross-section random
11.109020 3 0.0112
Variable Fixed Random Var(Diff) Prob

AQQ 0.014784 0.034501 0.000090 0.0373

LDR -0.000053 0.000020 0.000000 0.6203
LR -0.235698 -0.049472 0.005965 0.0159

The Hausman’s test discriminate between fixed effect model

(Alternative Hypothesis) and Random effect model(Null

Hypothesis) as presented is table 6. The Hausman’s chi-square

statistics of 0.01 is significant at 0.05% which depicts that

there is correlation between the error term and one or more

independent variables. Therefore, the fixed effect model is

considered to be capable of illustrating more consistent

estimates as opposing Random effect model. Our discussion

and interpretation is based on the fixed effect model as

presented in table 6.

4.5 Test of Hypothesis

Hypothesis one

H0= Liquidity has no casual effect on commercial bank

profitability

Net interest Margin (NIM) has a positive relationship with

(AQQ) Asset Quality of 0.62 and Loan-to-deposit (LDR) and

negative relationship with (LR) Liquidity ratio of 0.55.

45
Hypothesis two;

H0= Loan deposit ratio and asset quality has no casual effect

on net interest margin of commercial banks.

Loan to deposit ratio has a negative insignificant relationship

effect on (NIM) Net interest margin which is bank financial

intermediation profitability determinant while (AQQ) asset

quality has positive significant relationship with net interest

margin (NIM).

Hypothesis three;

H0= Liquidity ratio has no casual effect on net interest margin

of commercial bank performance

Liquidity ratio has a negative insignificant effect on (NIM) Net

interest margin which is bank financial intermediation

profitability measure.

46
 SUMMARY, CONCLUSION AND RECOMMENDATION.

5.1 Summary

The study examined the effect of liquidity management on

bank performance of commercial bank in Nigeria, the specific

objectives are to investigate the effect of liquidity management

47
(Asset quality, Loan-to-deposit ratio and Liquidity ratio) on

bank performance (Net interest margin) which is financial

intermediation determinants of commercial banks

Manager will use the findings of the study to know and take

proper strategic decision on the relationship between different

measure of bank liquidity and bank performance level. The

government and monetary policy agents will see from the

findings the particular influence of liquidity on the economic

responsibility on intermediation of the bank in their financial

system responsibilities.

The study population include 23 commercial banks in

operation in Nigeria and (10) commercial bank was selected as

the sample size between 2009-2016.The study employed ex-

post facto research design using panel data.

Relevant concept were reviewed such as Liquidity

Management, and Bank performance

Relevant theories such as Liquidity-Profitability Trade off

theory, Commercial Loan Theory,

Asset Theory.

5.2 Conclusion
48
The study depicts that Net interest margin as a positive

relationship with Asset Quality and Loan-to-Deposit ratio and

negative relationship with Liquidity ratio

Liquidity ratio has a positive and insignificant effect on Net

interest margin while Asset quality has a positive significant

effect on Net interest margin. Loan-to-deposit ratio has a

negative insignificant effect on Net interest margin.

5.3 Recommendation

Since, the study only depicts a positive significant effect of

Asset quality on Net interest margin, this implying that asset

quality has a positive relationship meaning bank’s must

maintain it’s Net interest appropriately because it determines

their asset accuracy and durability which is a major concern to

shareholder’s and depositor’s in-terms of thir liquid and

savings.

49
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