Liquidity versus Profitability in DMB'S in Nigeria

Akademische Arbeit aus dem Fachbereich BWL - Investition und Finanzierung, University of Benin, Sprache: Deutsch, Abstract: The main aim of this study is to find empirical evidence of the impact of effective liquidity management and its implication on the financial performance of deposit money banks in Nigeria for the period duration of the year 2005-2021. Five banks were selected in our sample and descriptive as well as correlation analysis statistics were used to conduct the study. Data sourced from the annual reports of the banks were analyzed.

Liquidity and profitability are among the two most important concepts in the corporate world. Whilst liquidity has been identified as one of the most crucial goals of working capital management, it is also a central pillar of cash management. When viewed with regard to a financial institution, liquidity is seen as a bank¿s capacity to fund any increase in assets and simultaneously meet both expected and unexpected cash and collateral obligations at a reasonable cost and without incurring unacceptable losses. In the context of banking, liquidity, or the ability to fund increases in assets and meet obligations as they come due, is critical to the ongoing viability of the banking institution. The issue of effective liquidity management is a key factor in determining the survival, growth, sustainability, and performance of a bank in the banking industry. Since there is a close association between liquidity and solvency of banks, sound liquidity management reduces the probability of banks becoming insolvent, thus reducing the possibilities of bankruptcies and bank runs. The problem becomes acerbated when the deposit money banks try optimizes their profits at the expense of liquidity. This clearly causes some technical and financial hardships in the banks working capital management and performance.

Ultimately, prudent liquidity management must be championed as part of the overall risk management strategy of the banking institutions to ensure a healthy and stable banking sector. Effective liquidity risk management helps ensure a bank¿s ability to meet its obligations as they fall due and reduces the probability of an adverse situation developing. Given that, any mistakes in liquidity planning and implementation can affect banking operations and might exhibit long term ripple effects on the economy.