The study examined the impact of liquidity management on the financial performance of commercial banks in Nigeria. The study adopts the use of primary data from 5 commercial banks still operating within (2005-2015), which are First Bank, Ecobank, Union Bank, Wema Bank, Fidelity Bank.

The study employed the survey design and the purposive sampling technique to select 450 staff across management, senior and junior level. A well-constructed questionnaire, which was adjudged valid and reliable, was used for collection of data from the respondents.

The data obtained through the administration of the questionnaires was analyzed using the Pearson correlation analysis.

The results showed that there is positive and significant relationship between liquidity ration and financial performance (r=0.772; p<0.05); a positive and significant relationship exists between cash reserve ratio and financial performance (r=.896; p<0.05); a positive and significant relationship exists between loan to deposit ration and financial performance (r=0.772; p<0.05).

The study concludes that there is a significant relationship between liquidity ratio, cash reserve ration and loan to deposit and financial performance in commercial bank of Nigeria.

The study suggested that commercial banks should ensure that expenditure are properly managed in a manner that it will raise the company’s liquidity performance capacity; commercial banks should direct its expenditure towards the productive departments as it would reduce the cost of doubt and risk; there is need for efficient management of liquidity ratio, cash reserve ratio and loan to deposit in such a way to stimulate the company to grow.




Nigeria, often referred to as the ‘Giant of Africa’ became an independent country in 1960. The government of the federation had a constant alternation between the military rulers and the democratically – elected rulers, until it stabilized in 1999 with Chief Olusegun Obasanjo becoming the President. Nigeria was a colonized country by the British before she gained her independence and it was during her pre – independence period that she was given the name Nigeria. The name, which was coined from the River Niger, was given by Flora Shaw.

Before the introduction of currency of exchange, the country was operating a system of trade called the barter system. This system involved the exchange of goods for goods or services for services. This system is an ancient system that was used by our fore fathers in their exchange with the British masters coming from the South and the Arabs coming from the North. Due to the diverse trade, it brought about diverse currencies, which can be grouped into two; local/indigenous currency (e.g, iron, animals, salt, feathers, beads, etc), and imported/non indigenous currency (e.g, cowries, manilas, copper, iron bar, gin and tobacco. (Mint, 2016)

These means of exchange had to be replaced because some of them were limited to a particular area; some were very cumbersome and lacked the distinctive quality of what the modern day exchange means. These limitations brought about the introduction of a uniform and acceptable means of exchange, which were the coin and paper money.

The Nigerian economy has various factors/elements that are vital for the survival of the economy. Financial institutions are seen as one of the elements needed for this survival. They have contributed greatly to the growth of the economy and have helped in providing effective ways by which the resources of the economy have been mobilized and deployed for national development. Commercial Banks are part of the financial institutions.

These banks began to exist in the year 1892 with the first one being African Banking Corporation Ledger Depositor and Co. and was later taken over in 1984 by the bank of the British West African, which later became First Bank of Nigeria PLC and Standard Bank. (Skylar, 2015) After the Second World War, economic activities in the country rose and this brought about the incorporation of more banks. Between 1905 and 1975, about eighteen banks had been established but by 1975, most of them had gone into liquidation or had closed down. It was due to the various shut down that the Central Bank developed a policy that mandated all banks to increase their capital base from N2 million to N25 billion naira (Agbada and Osuji, 2013)

Banks make their own revenue by lending money at a rate higher than the cost of the money that they lend to customers, by remitting the loans that have been imposed on loans and debt securities. They are seen as the backbone of the economy as they facilitate saving and borrowing. Their major function is that of deposit mobilization and credit extension. Due to its varying functions, it is exposed to different problems, one of such is liquidity management. (Johnson, 2017)

Liquidity is said to be the bank’s ability to meet its cash, cheque, and other obligations as well as its loan demand. The liquidity needs of a bank are usually defined by the sum of its reserve requirements imposed on banks by a monetary authority (Central Bank Nigeria, 2012). Liquidity management not only affects the performance of a bank but also its reputation (Jenkinson, 2008). A bank will lose the confidence of its customers if funds are not provided to them when they are needed. The bank’s goodwill may become at stake in this situation.

Liquidity management has become a serious challenge for the modern banks (Comptroller of the Currency, 2001). A bank having good asset quality, strong earnings and sufficient capital may fail if it is not maintaining adequate liquidity (Crowe, 2009).

During the last crisis which occurred in the ‘80s, many banks ran out of liquidity, some had raise funds at a discount in order to meet with the high of demand for urgent cash. Liquidity markets were frozen. Many financial institutions had to review their corporate governance policies in order to accommodate liquidity risk exposures. (Edem, 2017)

Bhattacharyya and Sahoo (2011), argued that liquidity management by Central banks refers to the framework, set of policies and instruments, and the rules that the monetary authority follow in managing systemic liquidity, consistent with the goals of monetary policy.

According to Central Bank’s Monetary, Credit, Foreign Trade and Exchange Policy circular for the fiscal year 2016/2017, it stated that commercial banks as well as merchant banks are expected to maintain a liquidity ratio of 30, 20, and 10 per cent which is subject to review from time to time. The maintenance of this ratio will aid effective liquidity management which is an important factor that has helped maintain bank profits and helped keep the banking institution and the financial system from insolvency. The strategic management for banks has helped at keeping banks solvent and liquid in order for them to earn good profits and remain financially stable (Agbada and Osuji, 2013). In order to keep the confidence the public has in the financial system and to increase the survival of the financial system of the country, banks have been required to maintain adequate and sufficient amount of cash and near cash assets in order to meet the withdrawal obligations of the public.


Management of liquidity has been an important agenda for every bank for the past few years in Nigeria. Bassey, Tobi, and Ekwere (2016), stated that for the successful survival of banks, policies should be put in place to guard the effective and efficient management of liquidity which enables them to satisfy their financial obligations to customers, build public confidence to maximize the profit for shareholders.

Failure in liquidity management has a negative effect on bank operation and has a long term effect on the economy as a whole. Liquidity management is seen as the major element in measuring the going concern for banks and this is the reason they have come up with the idea to develop policies to improve the liquidity position, yet the problem is unsolved. Edem (2017) states that, the attempts by bank managers to increase return tend to have negative impact on liquidity which might be dangerous to the banks as this can lead to loss of bank’s patronage, goodwill, deterioration of bank’s credit standings and might lead to forced liquidation of bank’s assets on one hand, and maintaining excess liquidity to satisfy customers’ demands might affect the returns on the other hand.

Sensarma and Jayadev (2009), stated their findings that banks’ management capabilities as regards liquidity has been improving as well as banks’ returns on stocks. They stated that the banks’ stocks have been sensitive to the management capability of banks, which means that there is a positive relationship between the banks’ liquid assets and its return on equity.

These statements from both parties contrast each other which gives way for the purpose of this research to empirically investigate the impact of liquidity management on the performance of banks and ascertain which party’s statement is more realistic using Nigeria as a case study.

1.1               Objectives of the Study

The broad objective of the study is to examine the impact of liquidity management on the financial performance of commercial banks in Nigeria. The specific objectives of the study are:

  1. To assess the impact of liquidity ratio on the financial performance of commercial banks in Nigeria.
  2. To investigate the impact of cash reserve ratio on the financial performance of commercial banks in Nigeria.
  3. To explore the impact of loan-to-deposit ratio on the financial performance of commercial banks in Nigeria.

1.2               Research Questions

The study attempts to provide answers to the following research questions:

  1. To what extent has liquidity ratio affected the financial performance of commercial banks in Nigeria?
  2. To what extent has cash reserve ratio affected the financial performance of commercial banks in Nigeria?
  3. To what extent has loan to deposit ratio affected the financial performance of commercial banks in Nigeria?

1.3               Research Hypotheses

Based on the research objectives, the following hypotheses are developed to guide the study. The hypotheses are stated in their null forms.

  1. H01: Liquidity ratio has no significant impact on the financial performance of commercial banks in Nigeria.
  2. H02: Cash reserve ratio has no significant impact on the financial performance of commercial banks in Nigeria.
  3. H03: Loan to deposit ratio has no significant impact on the financial performance of commercial banks in Nigeria.


The significance of this study is directed at getting relevant and sufficient information that would help in solving the liquidity problem being faced in the country. The researcher believes that the information derived will be of great benefit to the following group of people:

The government, this study will help the government in setting appropriate liquidity ratio and cash ratio that will not be harmful to the operation and survival of the commercial banks.

Students/Academic area, this study will prove to be significant in this area as it will serve for future references when carrying out further research.

Central Bank of Nigeria, this study will help this authority to evaluate how effective liquidity management and credit policy guidelines will affect profitability.

Investors, this study will help this group of people to decide if they would put their resources into a particular economy and if they would get a good return for their resources.

Ministry of Finance, this study will help this regulating authority in ensuring that the policies being set by the Central Bank are being followed accordingly.


This study will be making use of five commercial banks, which are, First Bank, Ecobank, Union Bank, Wema Bank, Fidelity Bank. The information needed to carry out this study will be derived from their financial statements for the period of 2005 – 2015 (10 years).

These banks have been chosen for this study due to some characteristics peculiar to them. The banks, First Bank, Union Bank, Ecobank, Wema Bank, and Fidelity Bank have been chosen for the singular reason that they have been in existence for a long period of time and they were not part of the banks that were merged during the 2011 consolidation by the Central Bank of Nigeria (CBN).


LIQUIDITY: this is a term used to describe a firm’s ability to convert its assets to cash to pay up its liabilities/obligations.


DEPOSIT MONEY BANKS: this is a financial institution that is licensed by the regulatory authority to mobilize deposits from the public and channel the funds through loans and performs other financial services activities.

CASH: this is referred to as the most liquid asset that a company can hold.

NEAR CASH ASSETS: these are assets that can be quickly converted to cash. Such assets are rental income, treasury bills, etc.

MONETARY POLICIES: this is a macro economic policy that is carried out by the Central Bank in order to manage the supply of money which in turn affects the interest rate.

RETURN ON CAPITAL EMPLOYED: this is a financial ratio that measures a company’s profitability and the efficiency with which its capital is employed.

DEBT EQUITY: this is a ratio that is used to determine how much debt a company is using to finance its assets relative to the amount of value represented in shareholders’ equity.

DEBT RATIO: this is the ratio of the total long term and short term debt to total assets.

 INTEREST COVER: this is used to determine how easily a company their interest expenses on outstanding debt.

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