Abstract
Illiquidity of firms especially banks can lead to loss of businesses thereby reducing the potentials of earnings and profitability; this is because high liquidity position of a firm helps it to meet with some obligations which lead to funding of loans and advances that could aid banks to earn income in the form of interests on loans. The study examined the effect of liquidity risk on financial performance of listed Deposit Money Banks (DMBs) in Nigeria covering a period of ten years (2009-2018).This study adopted an ex-post facto research design. The population of the study was 15 deposit money banks listed on the Nigerian Stock Exchange and employed panel regression analysis with emphasis on pooled, fixed and random effect models. Secondary data were sourced from the annual reports of the 14 selected quoted banks in Nigeria. The Hausman test was used to justify the appropriate model and inferences were made at 5 percent significant level. The findings revealed that Liquidity risk had significant effects on profitability. In particular, it was established that Liquidity risk indicators had positive and significant effects on individual profitability variables; viz: Return on equity of deposit money banks in Nigeria ( β = 49.76, p = 0.000), Return on Assets ( β = 12.87, p = 0.005) and Earnings per share ( β = 20.92, p = 0.000). The study concluded that Liquidity risk has significant effect on return on equity, return on assets and earning per share of deposit Money Banks listed in Nigeria. The study, therefore, recommended that management of banks should establish strategies to better manage their cash-flows in each product segment and maintain an optimal levels in order to earn higher returns from high volume of idle cash balances. Key words: Earnings per share, Liquidity risk management, Return on assets, Return on equity, Nigeria. Word Count: 284 words. DOI: 10.7176/RJFA/11-8-13 Publication date: April 30 th 2020
Highlights
A sound and profitable banking sector is in a better position to withstand negative shocks caused by either internal or external factors and contribute to the stability of the financial system
Given the strategic importance of Deposit Money Banks (DMBs) to the economy of every nation, policy makers and regulators have continued to churn out policies that will help improve the overall financial performance of the banking sector
The analysis showed that capital requirements increased substantially more than suggested by extensive impact studies conducted by the regulators with the participation of a large sample of banks
Summary
A sound and profitable banking sector is in a better position to withstand negative shocks caused by either internal or external factors and contribute to the stability of the financial system. DMBs perform diverse functions involving households, firms and governments in varying proportions and economic environments that make them susceptible to various categories of risks. Such risks include financial, operational, business and event risks. Liquidity risk occurs when a firm fails to meet their financial commitments when they become due (Jenkinson, 2008). This risk may be associated with depositors requesting (withdrawal of) deposits at an ill-timed occasion, stimulating disposal of assets to meet the obligations, resulting in losses or even closure of the bank (Crowe, 2009)
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