Corporate Liquidity Management and Financial Distress of Deposit Money Banks in Nigeria

Abstract

The study examined the relationship between corporate liquidity management and the financial distress of deposit money banks in Nigeria. The specific objectives of the study were to ascertain the relationship between Loan-to-Deposit Ratio, Current Ratio, Cash-to-current asset ratio and Altman’s Zeta Score of Deposit Money Banks in Nigeria. Times Series Data were collected from annual reports and accounts of the selected banks for 10 years (2011 - 2020). Covariance analysis was conducted to test the hypotheses. However, multiple regression analysis was conducted for robustness. The study found that the loan-to-deposit ratio has a weak (10% approx.) and negative (-0.108720) relationship with the Altman z-score. There is a weak (26% approx.) and positive (0.265612) relationship between the current ratio and financial distress of deposit money banks in Nigeria. The cash-to-current asset ratio has a weak (30% approx.) and positive (0.298359) relationship with the financial distress of deposit money banks in Nigeria. The findings imply that banks liquidity management has not been the major cause of their financial difficulties. The study, therefore, recommends that banks should maintain a moderate loan-to-deposit ratio to avoid reducing their liquidity and the ability to repay deposits on time. They should strive to improve their current ratio. They can do this by ensuring a faster conversion cycle of loans or accounts receivables. They should increase their pool of cash and cash equivalents which will increase their financial stability. The bank should maintain liquidity to operate with and should hold an amount of cash to service net withdrawals from customer activities such as drawing from their deposit (checking and savings) accounts.

Keywords: Liquidity Management, Financial Distress, Altman’s Zeta Score , Loan-to-Deposit Ratio, Current Ratio, Cash-to-current asset ratio

DOI: 10.7176/RJFA/14-18-04

Publication date:October 31^st 2023