DO LIQUIDITY MANAGEMENT DYNAMICS TRANSLATE TO EFFICIENCY OF THE NIGERIAN BANK? A DATA ENVELOPMENT ANALYSIS APPROACH
Abstract
Short-term financial health is essential for any business to stay stable, face economic challenges, and pursue growth opportunities. This study examines the impact of liquidity management strategies, including the Loan to Deposit Ratio (LDR), Cash Reserve Ratio (CRR), liquid assets to ratio (LATR), and overall liquidity, on the financial performance of banks in Nigeria, as measured by Constant Return to Scale Efficiency. Secondary data from the Central Bank of Nigeria's bulletin were analyzed. The research uses Ordinary Least Squares (OLS) multiple regression analysis to estimate the model. Results indicate that CRSE is negatively related to LASFR but positively related to LR, LTDR, and CRR, highlighting implications for improving asset quality and policy development to decrease non-performing loans, as recommended for the Nigerian banking sector. The finding that an increase in CRR positively impacts banks' performance aligns with Liquidity Preference Theory. This suggests that, in our context, banks' liquidity management strategies respond to changes in CRR by adjusting their liquid assets, likely anticipating shifts in interbank lending rates. This proactive approach to liquidity management helps improve financial performance.