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Liquidity Ratio and Financial Performance of Commercial Banks in Nigeria
Subject area: Management and Commerce · Area of research: Economics
DOI: 10.64388/IREV9I12-1718829
Abstract
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.
Keywords
Liquidity Ratio, Financial Performance, Interest Rate Spread, Commercial Banks, ARDL, Nigeria
References
[1] Adeyemi, A. A., & Okoro, C. T. (2025). The differential impact of liquidity on bank profitability: A size-based analysis of Nigerian banks. Journal of African Finance and Economic Development, *12*(3), 45-62.
[2] Ariwa, F. O. (2023). Liquidity management and financial performance of deposit money banks in Nigeria. International Journal of Financial Research, *14*(2), 112-125.
[3] Bakare, T. S. (2025). Economic policy uncertainty, liquidity buffers, and bank stability: Evidence from Nigeria. CBN Journal of Applied Statistics, *16*(1), 78-95.
[4] Central Bank of Nigeria. (2023). Annual report and statement of accounts. Central Bank of Nigeria.
[5] Central Bank of Nigeria. (2024). Statistical bulletin. Central Bank of Nigeria.
[6] Chukwuma, J. N., & Ibrahim, M. K. (2025). Operational efficiency as a moderator in the liquidity-profitability nexus: A dynamic panel analysis of Nigerian banks. Nigerian Journal of Economic and Social Studies, *65*(2), 201-220.
[7] Daramola, J. E., & Oni, O. A. (2025). Digital banking and the evolution of liquidity management: Mitigating the profitability trade-off in Nigeria. Journal of Financial Innovation, *8*(4), 155-170.
[8] Ebinum, K. S. (2025). Post-COVID monetary regimes, interest rate spreads, and credit expansion in Nigeria. African Economic Review, *39*(1), 34-52.
[9] Jibrilla, A. M., & Balami, D. H. (2022). Interest rate pass-through mechanism and the performance of commercial banks in Nigeria. CBN Economic and Financial Review, *60*(4), 1-25.
[10] National Bureau of Statistics. (2024). Annual abstract of statistics. National Bureau of Statistics.
[11] Ogoke, V. C. (2024). Interest rate volatility and bank profitability: Evidence from quoted commercial banks in Nigeria. Journal of Banking and Finance Management, *7*(1), 88-104.
[12] Oyadeyi, O. S. (2025). Liquidity regulation in a volatile economy: The Nigerian banking experience. West African Journal of Monetary and Economic Integration, *25*(1), 113-130.
How to cite this paper
@article{1718829,
author = {Ogu, Callistus, Akamike, Okechukwu Joseph, Agwu Kalu Sunday},
title = {Liquidity Ratio and Financial Performance of Commercial Banks in Nigeria},
journal = {Iconic Research And Engineering Journals},
year = {2026},
volume = {9},
number = {12},
pages = {1028-1038},
issn = {2456-8880},
url = {https://www.irejournals.com/formatedpaper/1718829.pdf},
abstract = {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.},
keywords = {Liquidity Ratio, Financial Performance, Interest Rate Spread, Commercial Banks, ARDL, Nigeria},
month = {June},
doi = {https://doi.org/10.64388/IREV9I12-1718829}
}