Abstract
The objective of this study was to examine the relationship between liquidity and profitability of deposit money banks in Nigeria using panel approach. The study made use of a sample size of ten deposit money banks in Nigeria. Data used for the study were sourced from the annual reports of the sampled firms and the statistical bulletin of the Central Bank of Nigeria ranging from 2006 to 2016. The liquidity indicators that were used were current ratio (current assets to current liabilities) (CRT), cash to total asset ratio (CTA), cash to total deposit ratio (CTD), liquid asset to total assets ratio (LATA), and loan to total deposit ratio (LTD), while return on assets (ROA) was used as proxy for profitability. A panel data regression model was specified and estimated. The empirical results showed that there was a positive and statistically significant relationship between cash to total asset (CTA) ratio and liquid asset to total assets (LATA) with profitability, and there was a negative but statistically significant relationship between cash to total deposit (CTD) ratio and profitability. It was also revealed that current ratio (CRT) and loan to total deposit (LTD) had a positive but statistically not significant relationship with profitability. It was recommended that the deposit money banks should not only focus on the profit maximization perception but also embrace methods that will certify effective and efficient liquidity management since its survival and sustainability depends on effective liquidity management and profitability. This will help to reduce the negative effects of the incidence of deficient and excessive liquidity.
Highlights
Nations across the world have adopted and are still adopting economic policies to regulate their economies in order to prevent what happened during the great depression (Oriavwote & Eshenake, 2015)
OF FINDINGS This study empirically investigated the effects of liquidity management on the profitability of deposit money banks in Nigeria from 2006 to 2016, using the panel ordinary least squares regression method
This means that cash to total assets ratio (CTA), cash to total deposit (CTD, and liquid assets to total assets (LATA) are significant indicators which tend to predict the behavior of profitability in the deposit money banks in Nigeria
Summary
Nations across the world have adopted and are still adopting economic policies to regulate their economies in order to prevent what happened during the great depression (Oriavwote & Eshenake, 2015). Financial institutions play an important role in the design and evaluation of current and future macroeconomic policies aimed at achieving economic stability (Arize, 2012). The financial institutions such as banks are seen as the pillars of the financial system, providing efficient devices for easy deployment of resources and directing them effectively and efficiently for productive uses (Wilner, 2000). Maintaining excess liquidity to meet up with customers’ withdrawal obligations may affect profitability. Liquidity should be managed to obtain optimum possible level. This optimum level should be able to meet short-term obligations as they fall due
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