Liquidity risk and bank financial performance: an application of system GMM approach

Abstract

Purpose This study aims to examine the effect of liquidity risk on deposit money banks’ (DMBs) performance in Sub-Saharan Africa. This study also tests the interaction effect of liquidity risk and nonperforming loans on the performance of DMBs’ in Sub-Saharan Africa. Design/methodology/approach This study uses a two-step system generalized method of moment to test the influence of liquidity risk on DMBs’ performance in Sub-Saharan Africa. A sample of 50 listed banks across six Sub-Saharan African countries, including Nigeria, Ghana, South Africa, Zambia, Kenya and Tanzania, were used. The bank performance proxy used are return on asset and return on equity, while net interest margin is used for robustness check. Findings The study’s findings reveal a significant and negative association between liquidity risk and bank performance. Moreover, the relationship between the nonperforming loan and bank performance is negative and significant. Furthermore, the interaction effect of liquidity risk and nonperforming loans on bank performance is found to be significantly negative for the two proxies of bank performance. The result is robust for the alternative bank performance measurements and econometric model, which adequately addresses endogeneity tendency. Originality/value To the best of the researchers’ knowledge, this is one of the earliest empirical studies that examine the effect of liquidity risk on DMBs’ performance across Sub-Saharan African countries. This study further differs from previous studies with the interaction term of liquidity risk and nonperforming loan included in the model.

Business Diversification and Banks’ Performance: The Moderating Role of Credit and Liquidity Risk (Empirical Study)

“…‫ديسمبر‬ ‫الثانى‬ ‫العدد‬ ‫عشر‬ ‫الرابع‬ ‫المجلد‬ ‫واإلدارية‬ ‫المالية‬ ‫والبحوث‬ ‫للدراسات‬ ‫العلمية‬ ‫المجلة‬ 2022 4 which found a positive impact of credit risk on banks' performance in the robustness model. In the same vein regarding liquidity risk, some studies revealed a positive impact on banks' performance (e.g., Mobarak, 2020;Azzam and Almaleeh, 2022;Hunjra et al, 2022), whereas other studies exhibited a negative effect on banks' performance (e.g., Chen et al, 2022;Yahaya et al, 2022). It is worth mentioning that inside the same study, there were different results.…”

“…In the same way, Yahaya et al (2022) mainly tested the impact of liquidity risk on banks' performance depending on (50) listed banks that operate in six Sub-Saharan African countries, including Nigeria, Ghana, South Africa, Zambia, Kenya, and Tanzania over the period from 2011 to 2019. Also, the study examined the effect of credit risk on banks' performance.…”

“…To sum up, the majority of prior studies demonstrated that credit risk has a negative impact on banks' performance (e.g., Ekinci and Poyraz, 2019); Hunjra et al, 2022;Twum et al, 2022;Zogning and Lenga, 2022). With respect to liquidity risk, the literature revealed various impacts of liquidity risk on banks' performance as some studies found a positive effect (e.g., Hassan et al, 2019;Azzam and Almaleeh, 2022), while other studies showed a negative impact (e.g., Hunjra et al, 2022;Yahaya et al, 2022;Zogning and Lenga, 2022).…”

“…The debate about the effect of credit risk and liquidity risk on banks' performance does not reach a consensus as the empirical results are different. Several studies demonstrated that credit risk has a negative impact on banks' performance (e.g., Ekinci and Poyraz, 2019); Hassan et al, 2019); Zogning and Lenga, 2021); Hunjra et al, 2022); Twum et al, 2022), whilst some studies showed that credit risk positively affects banks' performance such as the study of Yahaya et al (2022) Business Diversification and Banks' Performance: The Moderating Role of Credit and Liquidity Risk (Empirical Study)…”

“…It is worth mentioning that inside the same study, there were different results. For instance, Yahaya et al (2022) showed a negative impact of credit risk on banks' performance; but when doing robustness checks, the impact changed to become positive. Likewise, Hunjra et al (2022) concluded that liquidity risk, using Loan to deposit ratio (LTD), had a negative impact on banks' performance, whilst liquidity risk, using current ratio (CR), had a positive effect on banks' performance.…”