An Empirical Investigation of the Liquidity-Profitability Relationship in Nigerian Commercial Banks

Abstract

The study critically assessed the relationship between liquidity and profitability of Nigerian commercial banks. Purposive sampling method was used to select First Bank Nigeria Plc as the case study being the oldest and the biggest among the 24 commercial banks currently operating in Nigeria. Secondary data collated from First Bank’s annual reports of ten years (2002-2011) were used for the study. The regression analysis of ordinary least square was employed to analyse the data. Student’s t-test was also used to test the relevant hypothesis.Findings show that there is a very high correlation between liquidity of banks and their profitability. The result further shows that liquidity is a determining variable when it comes to banks profitability. To this end, it was therefore recommended that the monetary authority should create a conducive environment that can boost banks’ liquidity which will eventually transform to loanable funds and profit. Also, the Nigerian commercial banks are advised to put in place efficient liquid management to forestall insolvency and bankruptcy.

Keywords: Profitability, Liquidity, Insolvency