The Impact of Liquidity Risk on Profitability of Listed Deposit Money Banks in Nigeria

Abstract

Objective: The study examined the relationship between liquidity risk and the profitability of Nigeria's listed deposit money banks in Nigeria over a 16 years period from 2008 to 2023. Method: Panel data on cash reserve ratio, liquidity ratio, loan to deposit ratio, and return on equity were collected from the annual reports and financial statements of the five systemic banks listed on Nigerian Exchange Group from 2008-2023. Ordinary least square regression analysis, panel unit root test, Hausman test were used in analysing the data. Results: The study found a significant positive relationship between the cash reserve ratio, loan to deposit ratio and profitability of Nigerian deposit money banks. But liquidity ratio has a negative but insignificant relationship with profitability of deposit money banks in Nigeria. Conclusion: Based on the findings, the research recommends that the Central Bank of Nigeria (CBN) must act quickly to lower cash reserve ratios in order to help Nigeria's deposits banks operate more effectively. Banks should engage competent and qualified personnel in order to ensure that right decision are adopted with regard to the optimal level of liquidity and the loan-to-deposit ratio should be fully utilized by banks to support sales initiatives.