Effect of Liquidity Risk on the Financial Performance of Quoted Deposit Money Banks in Nigeria

Abstract

This study examines the effect of liquidity risk on the financial performance of quoted deposit money banks in Nigeria. The ratio of loans and advances to total assets and the ratio of loans and advances to total deposits were used to measure liquidity risk, while Return on Assets (ROA) was used to measure financial performance. Data were collected from the annual financial reports of each of the deposit money banks. The study utilized panel regression to analyse the data from a sample of eleven (11) quoted deposit money banks on the Nigerian Exchange Group from 2014- 2021. The results of the panel regression revealed that the loans and advances to total assets and loans and advances to deposit have a significant effect on the performance of the quoted deposit money banks in Nigeria. The study recommends that quoted deposit money banks management should diversify their loan portfolio to reduce concentration risk. By diversifying the loan portfolio, banks can spread the risk and reduce the impact of defaults on their performance. The current loans to deposit of 65% ordered by the Central Bank of Nigeria should be sustained. However, bank management should manage their deposit growth to ensure that they have sufficient funds to support their loan and advance activities. This can be achieved by setting appropriate deposit rates.