Liquidity Risk Management and Financial Performance of Listed Deposit Money Banks in Nigeria

Abstract

The failure of many seemingly healthy businesses with substantial asset bases to meet their short-term commitments demonstrates the critical need for efficient liquidity management strategies. The main objective of this research therefore was to evaluate the effect of liquidity risk management on financial performance of listed deposit money banks in Nigeria. The variables of this study were liquidity risk management (liquidity coverage ratio, cash to deposit ratio, liquid assets ratio, loan to deposit ratio and capital adequacy ratio) and financial performance measured with return on equity. The research design adopted for this study was ex post facto, secondary data were used and the population of the study was 7 deposit money banks with international authorization. Census sampling technique was employed and the 7 banks constituted the sample size of the study. Panel least square regression was used to test the hypothesis and STATA 17 was the statistical tool used to analyse the study. The findings of the study revealed that liquidity coverage ratio (coef. = 0.000[0.604]) has no significant effect on return on equity; cash to deposit ratio (coeff. = -0.169[0.028]) has significant negative effect on return on equity; liquid assets ratio (coeff. = -0.033[0.957]) has no significant effect significant effect on return on equity; loan to deposit ratio (coeff. = -0.111[0.034]) has negative significant effect on return on equity; and capital adequacy ratio (coeff. = 2.489[0.009]) has significant positive effect effect on return on equity of listed deposit money banks in Nigeria. It was thus concluded that liquidity risk management alone cannot significantly influence financial performance of banks in Nigeria. Based on the findings, it was recommended among others that deposit money banks should minimize idle cash holdings and invest surplus funds in profitable ventures to improve returns. Also, banks should sustain strong capital buffers to enhance financial stability and boost shareholder returns.