Liquidity Ratio and Financial Performance of Commercial Banks in Nigeria

This study examines the impact of the liquidity ratio on the financial performance of commercial banks in Nigeria from 1986 to 2024, a period marked by significant financial reforms and economic shifts. Against the backdrop of persistent volatility in bank profitability, the research investigates the dynamics between liquidity management, measured by the liquidity ratio (LQR), and bank performance, proxied by Bank Profit Margin (BPM). The study also incorporates interest rate spread (IRS) and inflation rate (INFR) as control variables to provide a comprehensive analysis. Employing an ex-post facto research design, the study utilized secondary data sourced from the Central Bank of Nigeria. The Autoregressive Distributed Lag (ARDL) bounds testing approach was adopted to analyze both short-run dynamics and long-run equilibrium relationships. The findings reveal a significant positive long-run relationship between the liquidity ratio and bank profitability, challenging the conventional view of a strict trade-off. Furthermore, interest rate spread was identified as the most potent driver of profitability, while inflation exhibited a modest positive effect. The study concludes that effective liquidity management, rather than being a mere cost, is a strategic imperative for enhancing bank profitability and stability in Nigeria. Based on these findings, the study recommends that commercial banks optimize their liquidity buffers, and that policymakers at the Central Bank of Nigeria implement measures to streamline intermediation costs to ensure interest rate spreads are conducive to both bank profitability and economic growth.