Impact of Liquidity on the Performance of Commercial Banks in Nigeria (2000-2015)

Filed in Articles by on November 12, 2022

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ABSTRACT

This study examined the impact of liquidity on the performance of commercial banks in Nigeria from 2000 to 2015. Profit before tax was used as proxy for the dependent variable while liquidity ratio (LQR), lending interest rate (INTR), and exchange rate (EXR) were used as proxies for explanatory variables. The study used descriptive statistics and Ordinary Least Squares (OLS) for data analysis.

The study finds that the liquidity ratio [2.43311] significantly affected profit before tax; lending interest rate on the other hand significantly [2.1924] affected profit before tax within the study period. The coefficient of determination (R2 = 0.4343) means that about 43% of the changes in the dependent variable was explained by the independent variables included in the model.

Based on the results and findings of the study, we recommend that: commercial banks should give priority to their liquidity ratio by the expansion of credit creation activities and reduction of high-risk off-balance sheet activities; commercial banks should further reduce their interest rate in order to attract more borrowers as this will increase their liquidity position as well as profitability

INTRODUCTION

Liquidity is a concept that many investors fail to take into account or understand and as a result their financial plans fail to come through in such critical times as retirement or college funding for a dependent. However, the fact is liquidity or a lack thereof it causes more financial problems than almost any other aspect of finance. People either lose money, which they needed in the short term because of improper investments or they find they have insufficient funds upon retirement because of years of investing in short term investments for a long-term goal (Central Bank of Barbados, 2008).

Businesses use a variety of financial performance evaluation measures to analyze the results of their actions. Investors perform a variety of calculations to review the actions of a particular company’s financial performance. Both company management and investors spend time focusing on the company’s liquidity to ascertain its level of financial performance. Certain financial ratios provide important information regarding a company’s liquidity, for example, bill payment.

The primary reason liquidity ratios require attention involves the company’s ability to pay its bills. Liquidity ratios compare the current assets of a business to the current liabilities (Akhtar, 2007). Banks are germane to economic development through the financial services they provide. Their intermediation role can be said to be a catalyst for economic growth. The efficient and effective performance of the banking industry over time is an index of financial stability in any nation.

The extent to which a bank extends credit to the public for productive activities accelerates the pace of a nation’s economic growth and its long-term sustainability. The Nigerian banking industry has been strained by the deteriorating quality of its credit assets as a result of the significant dip in equity market indices, global oil prices, and sudden depreciation of the naira against global currencies (BGL Banking Report, 2010).

REFERENCES

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CSN Team.

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