Impact of Liquidity Management on the Profitability of Commercial Banks in Nigeria

ABSTRACT

This research work investigates the impact of liquidity management on the profitability of Commercial Banks in Nigeria. It is necessitated by the pivot role liquidity management plays in enhancing profitability. Five independent variables (net working capital, cash and short term funds, short term loan and advances, bank balances and treasury bills and certificates) of four banks were regressed against profit after tax of those selected banks (Zenith Bank, First Bank Plc, United Bank for Africa and Union Bank) using ordinary least square method. Other tests carried out on the data include: stationarity test, cointegration test and serial correlation test. The study found that while there is no significant relationship between bank liquidity, short-term loans and advances, treasury bills and certificate, bank balances; and bank profitability; there is significant relationship between Net Working Capital and cash and short term fund and profitability of Banks. Based on the above findings, the work concludes that liquidity management is indeed a crucial problem in the Nigeria banking industry. Some of the variables selected have not performed very well in terms of their contribution towards the performance of the selected banks as represented by profit after tax. Finally, the work recommends that: for banks to resolve the liquidity/profitability trade-off, there is need for each bank to determine its optimal liquidity position, there is need for banks to establish an optimal profitability model. We mean that efforts must be made to hold the right sizes of cash and short term funds, bank balances and treasury bills and certificates.

Key words: Liquidity Management, Profitability, Commercial Banks and Net Capital Working Capital,