Evaluating The Impact of Liquidity Ratio and The Performance of Deposit Money Banks in Nigeria

This study examines the impact of liquidity ratio (LR) on the performance of deposit money banks in Nigeria. Liquidity, which reflects a bank’s ability to meet its short-term obligations, remains a critical determinant of financial stability and operational efficiency in the banking sector. The study adopts a longitudinal research design using secondary data obtained from the financial statements of eight (8) selected deposit money banks in Nigeria over a nine-year period spanning 2014–2022. The analysis employs the Panel Autoregressive Distributed Lag (ARDL) model to evaluate both short-run and long-run relationships between liquidity ratio (LR) and bank performance, measured by Return on Equity (ROE). Descriptive statistics reveal that banks maintained a moderate level of liquidity and profitability during the study period, although both variables exhibited high volatility and non-normal distribution, indicating inconsistencies in liquidity management and performance. The regression results show that liquidity ratio has a positive relationship with bank performance, with a coefficient of 0.553032, implying that an increase in liquidity ratio leads to an improvement in return on equity. The p-value of 0.0041 indicates that this relationship is statistically significant, leading to the rejection of the null hypothesis that liquidity ratio has no significant impact on bank performance. However, the correlation analysis reveals a weak positive relationship (0.03420) between liquidity ratio and performance, suggesting that although liquidity contributes to profitability, its overall influence is minimal. The study concludes that liquidity ratio positively and significantly affects the performance of deposit money banks in Nigeria, but its effect is relatively weak and should not be considered in isolation. It recommends that banks maintain optimal liquidity levels, adopt efficient liquidity management strategies, ensure regulatory compliance, and balance liquidity with profitability objectives to enhance overall performance.