shaibu, i., & okafor, c. (2020). a statistical assessment

ArchivesofBusinessResearch–Vol.8,No.3PublicationDate:Mar.25,2020DOI:10.14738/abr.83.7815.

Shaibu, I., & Okafor, C. (2020). A Statistical Assessment of Liquidity Management and Profitability in a Cross Section of Deposit Money Banks in Nigeria using Panel Analysis. Archives of Business Research, 8(3), 173-190.

AStatisticalAssessmentofLiquidityManagementandProfitabilityinaCrossSectionofDepositMoneyBanksin

NigeriausingPanelAnalysis

IbrahimShaibu,Ph.D.DepartmentofBusinessAdministration,

UniversityofBenin,BeninCity.

ProfessorChinwubaOkafor,Ph.D.DepartmentofAccounting,

UniversityofBenin,BeninCity.

ABSTRACTThe objective of this study was to examine the relationship between liquidity andprofitabilityofdepositmoneybanksinNigeriausingpanelapproach.ThestudymadeuseofasamplesizeoftendepositmoneybanksinNigeria.DatausedforthestudyweresourcedfromtheannualreportsofthesampledfirmsandthestatisticalbulletinoftheCentralBankofNigeriarangingfrom2006to2016.Theliquidityindicatorsthatwereusedwerecurrentratio(currentassetstocurrentliabilities)(CRT),cashtototalassetratio(CTA),cashtototaldepositratio(CTD),liquidassettototalassetsratio(LATA),andloantototaldepositratio(LTD),whilereturnonassets(ROA)wasusedasproxyfor profitability. A panel data regression model was specified and estimated. Theempirical results showed that there was a positive and statistically significantrelationship between cash to total asset (CTA) ratio and liquid asset to total assets(LATA) with profitability, and there was a negative but statistically significantrelationship between cash to total deposit (CTD) ratio and profitability. It was alsorevealed that current ratio (CRT) and loan to total deposit (LTD) had a positive butstatisticallynotsignificantrelationshipwithprofitability.Itwasrecommendedthatthedepositmoneybanksshouldnotonlyfocusontheprofitmaximizationperceptionbutalso embrace methods that will certify effective and efficient liquidity managementsince its survival and sustainability depends on effective liquidity management andprofitability.Thiswillhelp toreduce thenegativeeffectsof the incidenceofdeficientandexcessiveliquidity.Keywords:Liquidity,profitability,returnonassets,panelapproach,cashtototalassets,cashtototaldeposits,Liquidassetstototaldeposits,Currentassets,Loantototaldeposits.

INTRODUCTION

Nations across theworld have adopted and are still adopting economic policies to regulatetheireconomiesinordertopreventwhathappenedduringthegreatdepression(Oriavwote&Eshenake,2015).Financialinstitutionsplayanimportantroleinthedesignandevaluationofcurrent and future macroeconomic policies aimed at achieving economic stability (Arize,2012).The financialinstitutionssuchasbanksareseenas thepillarsof the financialsystem,providingefficientdevicesforeasydeploymentofresourcesanddirectingthemeffectivelyandefficientlyforproductiveuses(Wilner,2000).Inviewoftheabove,reasonliquidityissueshavebeen a concern of all the nations across theworld, because no sector in any economy cansurvivewithoutadequatefunds(Ismail,2016).Theattemptsbybankmanagement to increaseprofitabilityor returnsmaynegativelyaffectliquidity which might not be favourable to the bank as it could result in loss of goodwill,patronageaswell as reduction inbanks credit standardandat theextreme, it could lead to


URL:http://dx.doi.org/10.14738/abr.83.7815. 174

force liquidationof thebanks’assets.However,maintainingexcess liquidity tomeetupwithcustomers’withdrawalobligationsmayalsoaffectprofitability.Therefore liquidityshouldbemanaged to obtain optimum possible level. However, this optimum level should be able tomeetshort-termobligationsastheyfalldue.The hitches of inefficiency in themanagement of banks liquidity inNigeria became obviousduringthedistressandliquidationerasinthelate1980saswellasearly1990s.Theadverseeffects of the banking system liquidity problem in these periods remained up to the re-capitalizationera in2005 inwhichbanksweremandatedto increasetheircapitalbase fromN2billion toN25billion. Itwasbelieved thisdirectiveby theCentralBankofNigeria (CBN)would rectify and stabilize the banks liquidity challenges that were predominant in theeconomy(Fadare,2011).Therecentuproarintheglobaleconomicsystemhasshowedsomeshortcomingsinliquiditymanagement of the financial sector in Nigeria. During the last banking crisis in 2009manydepositmoneybanksranoutofliquiditywhilesomeraisedfundsatahighdiscountinordertomeetupwithcustomers’demandforexigentcash.Manyfinancialorganizationshadtorevisittheir corporate governance policies to absorb market and liquidity risk exposures. Foreignexchange rate, commodity prices, interest rate, equity prices, and credit spread displayedadverse effect on banks performance in general and their profitability in particular as net-worth and returns on investment of their businesses fell tremendously. Some banks hardlycouldmeettheirfinancialobligationsasandwhendueorwhentheydid,theydischargedthematexorbitantcost.Theseaffectedthebanks’abilityinstimulatingproductiveeconomy.TheCentralBankofNigeria(CBN)overthepastyears,particularlysince1958,hasformulatedpolicythruststorestoretheNigerianfinancialsystemforsustainableeconomicgrowth.Thesepolicies which came in the form of merger and acquisition, consolidation, re-capitalization,amongotherswereallaimedatrevampingthefinancialsystemwithlittleornoeffortontheefficiencyof themanagementof liquidity.Forexample, the incidentof1990swhichbroughtabout the unprecedented level of distress revealed by high rate of insolvency, liquidityproblem, largevolumeofnon-performing loans, and failure inmeetingdepositorsand inter-bank responsibilities, all necessitated the innovations in the banking industry in 1986. The2008global financialcrisisalsohad itsbitontheconfidenceandthe financialconditions. InwhatwasseenasastimulatedrepositioningofbanksagainstlackofliquiditytheCentralBankofNigeriacameonarescuemissionin2009tosavefiveilliquidbanksbybyinjectingthesumofN620billion into the sector in2009asa rescuemission to save the fivebanks thatwereoperatingonanegativeshareholders’funds.Governmentdirectivetowithdrawthedepositsofgovernmentsandotherpublicagencies in1989fromdepositmoneybankscoupledwiththedirectiveontreasurysingleaccount(TSA)bytheFederalgovernmentin2015areallexamplesofreformsthatcouldrepositiontheliquidityinthebankingindustryinNigeria.TheseinnovationsandotherbankingreformsinNigeriahavenotproducedsufficientresultsinstabilizingthebankingsector.Thisisevidencedintheundulatingexchangerates,highinterestrates, and other liquidity challenges in the banking sector. Onemajor reason that has beenadduced for the failure of most policy measures in Nigeria is the relatively weak scientificeffortsatexplainingthedynamicsofthepolicyobjective.Asaresult,policymakinghasreliedupondecisionsthatarenotanchoredonscientificmodels that trackmajoreconomic indices(Adenikinju,Busari,&Olofin,2009).

ArchivesofBusinessResearch(ABR) Vol.8,Issue3,Mar-2020

Copyright©SocietyforScienceandEducation,UnitedKingdom 175

Against this background, the aim of this study was to empirically develop a model thatexplained the relationship between some selected liquidity and profitability indicators inNigerian deposit money banks between 2006 and 2016. Thus, this study did not onlyinvestigatetheeffectofliquiditylevelsonprofitabilityofcommercialbanksinNigeria,italsoextended previous works to cover more temporal and cross sectional dimension on theliquidityandprofitabilityofbanksinNigeria.Theideawastodevelopandestimateascientificmodel thatwouldensure thatdecisionmakingwith respect to liquidityandprofitabilityareanchoredonbanks’majoreconomicindices.

REVIEWOFLITERATUREDepositmoney banks are like every other business organizationwith the purpose of profitmaking. The banks’ profits are mainly from interest on their assets earnings, such as theirinvestment and loans. For this reason, the banks need to ensure healthy liquidity positionwhile maximizing profit at the same time. A firm can be regarded as liquid if it can easilyconvertitsassetstocashwithoutmuchdelaysandinconveniences.There are several sources fromwhich bank gets their liquidity. These include balancesheldwith Central Bank, vault cash, balances with offices outside Nigeria, inter-bank placement,money at call in Nigeria, discount houses placement, investment in stabilizations securities,treasuringbillsandcertificates,commercialpapers,andbankersacceptances.Bank’sliquidityinsimpletermsisthebank’sabilitytosufficientlymaintainfundstomeetitsfinancial obligations such as cheques, cash, legitimate new loans and other withdrawalobligationswhilemaintainingthestatutoryreserverequirements.Thebestcapitalstructureisobtainedbyhaving inmindthe financialrequirementsofboththeshort-termand longtermperiods.AccordingtoBiety(2003)liquidityistheeaseandspeedwithwhichanassetissoldand still realizes fair price. Liquidity therefore is seen as the entries and leakages of cashthroughthefirmassalespayment,productprocurement,andtheprocessesofcollectiontakingplace over time, by which asset can be converted into cash without a substantial loss ofprincipalliquidasset.Itisarelationshipbetweenthetimeframeitrequirestomakesalesandthe discount from fairmarket price of an investment asset. Therefore, an enterprise shouldmakesurethatitdoesnotsufferfrominadequateliquidityandatthesametime,doesnothavesurplusliquidity.Theinabilitytomeetfinancialobligationsasaresultofinsufficientliquiditycanresultinlossofcreditors’confidenceandpoorcreditworthiness.Ontheotherhand,ahighpercentageofliquiditycanalsoresultincashbeingidle(CBN,2015).The concept of liquidity management involves the efficient and effective planning andorganizingoftheassetsofbanksthatwillmaximizeitsprofitabilityandliquidityatthelowestcostpossible.Managementof liquidity is the calculated supplyorwithdrawal theamountofliquidity consistent with preferred level of short-term reserve money without altering theabilitytomakeprofitandoperationsofthebankfromthemarketcirculation(Aghada&Osuji,2013).Generally,liquidityadequacyplaysveryimportantroleinthesuccessfulrunningofallbusinessorganizations.Liquidity couldbeCentralBank liquidity, funding liquidity,ormarket liquidity.CentralBankliquidityisseenastheflowofliquiditytothefinancialsectorfromtheCentralBank.Accordingto the International Monetary Fund (IMF), funding liquidity is the ability to timely meetpaymentsastheyfalldue.Marketliquidityisthecapabilityofanassettobetradedwithintheshortestpossible time,with littleorno significanteffecton thepriceand at lowestpossiblecost(Fernandez,1999).



Thoughtheissueofliquidityisvitaltootherbusinesses,itisofmostsignificanttothebankingsector.Thusbanksensuretheavailabilityofcashandotherfinancialassetstomeetcustomersdemand of liquidity (Aghada & Osuji, 2013). As ameans to effectivelymanage the liquiditypositionsofbanksinNigeria,theCentralBankmandatorilyrequiresthebankstocomplywiththeCashReserveRequirementpolicy(CRR). Performance is the end result of activity. Organizations can generally use objective andsubjective measures to assess their performance. Objective measures mostly encompasscomparingcorporateperformancewithfinancialmeasures,whilesubjectivemeasuresrefertopersonalperceptionsaboutbusinessperformance(Shaibu,2010).Whichmeasurestoselecttoassessperformancedependsontheorganizationalunit tobeappraisedandtheobjectivestobe achieved. The objectives of profitability,market share, and cost reduction, among othersshouldcertainlybeusedtomeasurecorporateperformance.Somemeasures,suchasreturnoninvestment(ROI)orreturnonassets(ROA),areappropriateforevaluatingacompany'sabilitytoachieveaprofitabilityobjective.Traditionally,businessperformancehasbeen assessedby financialmeasures like, returnonassetsemployed(orreturnoninvestment),returnonsales,growthinrevenues,salesrevenue,returnonequity,earningspershare,netprofitmargin,stockreturnsandeconomicembeddedvalue,marketshare(Shaibu,2010).Themostcommonlyusedtraditionalmeasureofcorporateperformance (in terms of profit) is return on investment (ROI). It is simply the result ofdividing net income before taxes by the total amount invested in the company (typicallymeasuredbytotalassets).The use and reliance on financial measures of business performance, such as return oninvestment,hasbeensupportedbyvariousauthors.Forinstance,Brancato(1995)hasstatedthatusingreturnoninvestment(ROI)hasseveraladvantages.Thereturnoninvestment(ROI)is a single, comprehensive number that includes all revenues, costs, and expenses; it can beusedtoevaluatetheperformanceofgeneralmanagerofadivisionorSBU;itcanbecomparedacrosscompaniestoseewhichfirmsareperformingbetter;itissubjectedtointernalcontrolswhichmake themreliable; theyarealso reportedexternallyandhenceare subject topublicscrutiny;anditprovidesanincentivetousecurrentassetsefficientlyandtoacquirenewassetsonlywhentheywouldincreaseprofitssignificantly.Many theories abound on the relationship between profitability and liquidity of banks. Theunderlying question which these theories intend to answer is the effect of liquidity on theprofitability of banks. It was noted by Osborne, Fuertes, andMilne (2012) that having highliquidityratioisusuallyattheexpenseofthebankwhichimpliesthatprofitabilityisreducedwithhigherliquidity.Goingbythetheoryofthetrade-offhowever,higherliquidityreducestheriskofbanksandsavethepremiumthatwouldhavebeenusedincaseofbankruptcysituation.Ontheaverage,accordingtocorporatefinancialconventionaltheory,bankswillprefertoholdonoptimalliquiditywhichcantradeoffreturns.However,becauseofthemonetaryauthorities’requirement on deposit reserve, it forces the banks to holdmore liquidity than theywouldhave ordinarily held. In addition, as it is expected that banks optimal level of liquiditymayfluctuate,dependingonthebusinesscyclewhichislikelytoincreasewhentheexpectedcostofdistress is high, therefore a higher cyclical relationship is expected between liquidity andprofitability,whichisexpectedtobemorepositiveduringdistressperiodastheprofitabilityofbanksincreasedastheyincreasetheirliquidityinthedistressperiod.Therefore,theremaybea positive or negative relationship between liquidity and profitability in short run, thiswilldependonliquiditylevelofthebank,whetheritisbeloworaboveoptimalatthatperiod.



ItwasassertedbyFlanneryandRegan(2008)thattheremightbenoshortrunrelationshipinthefirstplaceifbankssuccessfullyattainoptimallevelofliquiditysinceithasbeenimpliedbytheconditionsof the firstorderstandardsthat therewillbenoeffectonprofitabilitybyanychangethatoccurs inliquidity.Howevertheregulatoryrequirementon liquidity in the long-run may still be binding. It therefore implies that having higher liquidity can only reduceprofitability if the banks go above their optimal level of liquidity either due to unexpectedshock or requirements of regulatory authorities. In line with the above, it was opined byOsborne,Fuertes,andMilne(2012)thattheoptimallevelofliquidityofbanks’risesduringthebankingsectordistressperiodsbecauseinsuchperiodsitisexpectedthatthebankruptcycostshouldrise. It is thereforeself-evidencethat theaveragerelationshipthatwillexistbetweenliquidity andprofitabilitywill be cyclical across banks. This results because banks go belowtheiroptimallevelofliquidityinanenvironmentthatisdistressed,whereas,itispossibleforthebankstomeetornottomeettheirhighestlevelofcapitalwhentheenvironmentisnormal.Ineithercase,therelationshipthatwillexistbetweenliquidityandprofitabilitywouldbezeroapproximately, in such case, the banks may reduce their liquidity to achieve a higherprofitabilitylevel.Itiseasierforabankwithahigherlevelofliquiditytosurviveandbemoreprofitableinthefuturethanabankwitha less levelof liquidity.AccordingtoAllenandMarguez(2011), thismaybringaboutahighvoluntaryliquiditybufferintheopenmarketbecauseamoreeffectivewaytoguaranteethebankssolvencyisthehighliquiditylevelofthebank.Thiswillthereforeenablethebanktolendthesurplustotheinvestingpublicwhichwillalso,inturn,bringaboutahigherlevelofprofitability.Bordeleau and Graham (2010) investigated the impact of holding liquid assets on theprofitabilityoftheCanadianandtheUnitedStates(US)banksusingpaneldatawithordinaryleast square regressionmethod.They found thatbanks thathold liquidassets improve theirprofitability.However,allthingsbeingequal,thereisalevelthatfurtherliquidassetsholdingminimizetheprofitabilityofthebanks.Goddard, Molyneux, and Wilson (2004) investigated the United States banks profitabilityduring the 1990s, using the dynamic and pooled panel models. The determinants for theprofitability model include diversification, size, dynamic effects and ownership type. Theresearchersfoundaweakrelationshipbetweentheregressorsandprofitability.Eljelly(2004)studiedtherelationshipbetweenliquidityandprofitabilityinSaudiArabia.Thisrelationshipwasmeasured using cash gap and current ratio on a cross section of differentindustries.Byusing the regressionandcorrelationanalysis, itwas found that thereexist aninverserelationshipbetweenliquidityandprofitabilityratioinSaudiArabia.Naceur (2003) investigatedwhat determines the profitability of the Tunisia banking sector,usingasamplesizeoftenbanksforthetimeframeof20yearsthatisfrom1980–2000.Usingtheregressionanalysis,hefoundthatbanksthathavehugecapitalaswellasoverheadshavethe tendency to have large net interest margin as well as profitability. The study furtheremphasized those determinants like bank size has a negative relationshipwith profitability,whileloanshavepositiverelationshipwithbanksprofitability.Somestudieshavebeenconductedon the relationshipbetween liquidityandprofitability inNigerian banks (Adeyinka, 2013; Aghada & Osuji, 2013; Bassey, 2016; Ibe, 2013). Adeyinka(2013) examined the efficacy of capital adequacy of deposit money banks profitability inNigeriafrom2006to2010.Astatisticallysignificantrelationshipwasfoundtoexistbetween



liquidityadequacyandbanksprofitability inNigeria.The implicationof theresult is that theprofitabilityofdepositmoneybanksinNigeriaismajorlydeterminedbyliquidityadequacy.Itwasshowedthatliquidityandprofitabilityarebankriskmanagementefficiencyindicators.Aghada and Osuji (2013) conducted a study on the effect of liquidity management on theperformanceof theNigerianbanks.The studyemployed returnoncapital employed (ROCE)andprofitabilityasproxies forbankperformance.Using regressionandcorrelationanalysis,they found that the relationship that exists between banking performance and efficientmanagementofliquiditywasstatisticallysignificant.Ibe(2013)examinedtheeffectofliquiditymanagementontheprofitabilityofbanksinNigeria.The studymadeuseof a sample sizeof three (3)banks inNigeria to represent the bankingindustry.The studymadeuseofbankbalances, cashandshort term fund treasurybills andcertificate as proxies for liquidity, while profitability was proxied by profit after tax (PAT).Usingtheordinaryleastsquaresregression,thestudyshowedthatliquiditymanagementhasacriticalprobleminthebankingindustryinNigeria.BasseyandMoses (2015) investigated the tradeoffbetween liquidityandprofitability in theNigerianbanks from2010to2012.Usingtheordinary leastsquares(OLS)technique for theempiricalanalysis, they foundasignificantrelationshipbetween liquidityandprofitabilityofbanksinNigeriawhenprofitabilitywasproxiedbyreturnonassets.Bassey (2016) studied the impact of effective and efficient liquidity management on theperformance ofNigeria depositmoney banks from2000 to 2010. The relationship betweenbank performance variables and profitability was examined using some performanceindicatorssuchasbankinvestment,bankdeposits,cashratioandcashreserverequirementasperformanceindicators.Theyfoundasignificantrelationshipbetweenperformancevariablesand profitabilitywhich supports some other findings that the survival and sustainability ofbanksishingedontheeffectiveandefficientmanagementofitsliquidity.However,therearesomeidentifiedgapswithrespecttothesamplesize,lengthoftime,andthemethodologyapplied.Theseidentifiedgapserveasabasisforfurtherempiricalinvestigation,which could assist in understanding the relationship between liquidity indicators andprofitability in Nigerian deposit money banks. This study attempted to fill these gaps byextractingdatafromtheannualstatementsofdepositmoneybankstoempiricallyinvestigatetheliquidity-profitabilitynexus.

THEORETICALFRAMEWORKANDMODELSPECIFICATIONPanel data is the outcome of a successive recording of the same individuals in a selectedsample foraspecificperiodof time.Even if in theobservedsamplethecriterion forrandomselection may be very restrictive, eventual correlations may be made among indicatorsdescribing individuals over time. The use of panel data in applied research is increasinglygaining relevance both indevelopedanddeveloping countriespartlybecauseof theneed toharmonize regional policies and more generally due to the inherent benefits for empiricalanalyses.Hsiao (2006)provides justification for the considerationofpaneldata inempiricalandpolicybasedstudies.ThesearerepresentedinBaltagi(2008)andsummarized.

a. Paneldataprovidesufficientobservationsand,consequently,moresamplevariability,less collinearity, more degrees of freedom, and more accurate inference of modelparameters.



b. Panel data models better capture the complexity of human behaviour than a singlecross-sectionortimeseriesdata.

c. Panel data models are better able to capture the heterogeneity inherent in eachindividual unit. The structure of panel data suggests that the cross-sectional unitswhether individuals, firms, states or countries are heterogeneous. In empiricalmodelling,ignoringtheseheterogeneouseffectswheninfacttheyexistleadstobiasedandinefficientresults.

d. Thebehaviourofeconomicagentsisintrinsicallydynamic.Thesedynamicscanneitherbe captured by cross-sectional framework nor time series models. Cross-sectionalmodels canonlyascertain thebehaviouralpatternat aparticularpoint and thereforecannot be used to capture behavioural dynamics. Similarly, time series data thatprovidesinformationoveraperiodoftimeonlylimitsitselftooneunitand,therefore,we are unable to compare changes in the behaviour of different economic agents.However, since panel data sets provide time series on each cross-sectional unit in agroup,itbecomesrelativelyeasytoevaluatethechangesinthebehaviouralpattern.

Inspecializedliterature,paneldataalsoappearunderthenameofpooleddataorlongitudinaldata(Gujarati,2004).Apaneldatasetisasetofcross-sectiondataobtainedbymeansofstatisticalobservationperformedperiodicallyinadefinedtimeintervalTofvariablescharacteristicforagroupofNindividuals(Baltagi,2008).Paneldatasetinvolvesa variability of observations for the same individuals over time leading to recording ofN·Tobservations(Hsiao,2003).Fromtheperspectiveofthisrepresentation,statisticalobservationshows a variation of individual features contributing to the increase of variability ofobservationsandaccuracyofestimation(Sevestre,2002).By the sizeof the sample,paneldatamaybe:balanced(individualsareobservedoverequalperiodsoftime)orunbalanced(individualsareobservedoverdifferentperiodsoftime).Bytheselectionmethodof individuals,paneldatasetmaybeclassified into:continuous(individualsselectedinthesampleremainunchangedduringrecordingobservations)orrotative(aseriesofindividualsareobservedduringanumberofspecifiedperiods,thenthesemaybeeliminatedfrom the sample being replaced by other individuals for whom new observations will berecorded)In what regards the structure of analyzed data, panel data analysis will consider for Nindividuals,Kvariables forTdifferentmoments.For statisticalobservation,wemay identifythreeperspectivesforpaneldataanalysis:individualn,timetandvariableY.Basedonthesenotations, is the observed variable Y for individual n at moment t (Sevestre, 2002). Ifindividuals remain constant, chronological series are obtained and if the period is constant,there will be a sequential series of individuals included in the sample. Depending on thepurpose of analysis, panel data set may have more than two dimensions (temporal andindividual) by including other factors thatwill be used to structure the analyzed sample (NindividualsoverTperiodforCgroups).Someauthorsarguethatinordertomakerecordingsof the panel type, the time variation is not a key criterion if the variation of recordedobservationsmaybeexplainedbyatleastonedimension(NindividualsobservedbyCcriteria)(Hsiao,2003).As shown above, panel data set is characterized by double dimensional representation,temporalandtransverse,conferring thema significantadvantage compared toother typesofdata(Sevestre,2002).

( 1,..., and 1,..., )ntY n N t T= =

ntY



Temporal dimension enables us to observe individual’s evolution over time depending onstudied variables. This dimension determines statistical recording of data of each observedstatistical unit as time series. For this dimension, the breakdownof total variability in eachrecordedobservationshouldmainlyconsiderthenumberperiodsused inthestudy.Forthiscase,totalvariancemaybebrokendownasfollows(Sevestre,2002):Totalvariance=Intertemporalvariance+Intratemporalvariance,or

Transversal dimension (individual) allows to observe the variance of features from oneindividual to another irrespective of period of time t for which observations have beenrecordedandtotalvariancemaybedecomposed,asfollows(Sevestre,2002):Totalvariance=Inter-individualvariance+Intra-individualvariance,or

By active combining of the twodimensions, total variance of recorded observationsmay bedecomposed,asfollows(Sevestre,2002):Totalvariance=Inter-individualvariance+Inter-temporalvariance+Intra-individual-temporalvariance,or

Main difference between the last breakdown and the first two lies in simultaneousconsideration of intra-temporal and intra-individual differences. The breakdownmethod oftotalvarianceasinthelastmodelisthemainadvantageofstudyingindividuals’behaviorfromtheperspectiveoftheindividualandthetemporaldimensions(Jabaetal.,2013).ModelsofpaneldataanalysisToanalyzepaneldata,westartfromaseriesofdatarecordedforNindividualsobservedforaTperiodoftime.Forthesedata,thefollowinggeneralmodelmaybewrittenandusedfortheanalysisofaresultativevariable(Y)bydeterminantfactors(Xk):

n=1,...,Nand t=1,...,T, where represents values of dependent variable, , valuesK fordependantvariable, ,aconstantand ,theerrorcomponent(Sevestre,2005).

Coefficients and ,k=1,...,Kvaries in timeandbetween individuals.As thebehaviorofindividualsmay change in time that regards dependent variables of the studied sample,wemayobserveinthestudiedsampletheabsenceofrecordeddatahomogeneity.Asthenumberofcoefficients(NT(K+1))ishigherthanthetotalnumberofobservations(NT),it isdifficult toestimatethemodelusingtraditionalmethods. In thiscase,contrastsbetweencoefficientsshouldbeusedbydefiningtwocanonicmodels:fixedeffectsmodels(individualortemporal)andcomposederrormodels(randomeffects).

nty kntx

0ntb ntw

0ntb kntb



FixedeffectsmodelsIncaseoffixedeffectsmodels,itisassumedthattheinfluenceofconsideredfactorvariables(

)onthedependentvariable( )isidenticalforallindividualsduringtheentireanalyzed

period( ).Inthiscase,theconstant maybebrokendownasfollows: (5)

where, is the constant of the regressionmodel, , a constant indicates unobservabledifferencesbetweenindividualsand temporaldifferencesthatmayappearinindividuals.

Basedonthisbreakdown,theregressionmodelmaybewrittenasfollows(Sevestre,2002):

To estimate parameters of the fixed effects model we may consider the individual andtemporal specificityby introducingspecific effectsalso called fixedeffects in individualsandtemporalperiodsthatrepresentcoefficientstobeestimated.Incaseofamodelforaspecificperiod,twocompaniesthathavethesameobservablefeaturesshouldhavethesamevaluesfortheresultativevariables:

Wemayobserveinthismodelthatifthereisadifferenceincompaniesstableintime,itmaybeemphasizedbymeansofthecoefficient .Byanalogy,thecoefficient measurestheeffectoftemporalvariationofcompanyfeatures.RandomeffectmodelsIn this case, the random character of specific effects differentiates composed effect modelsfrom fixed effects models. Generally, composed effect models may be written as (Sevestre,2002):

In caseof randomeffectmodel, individual effects expressunobservablepersonal featuresandtheyareuncorrelatedwithdependentobservablevariables.

kntx nty

knt kb b= 0ntb

0 0nt n tb b a d= + +

0ntb 0b na

td

na td

nu



Tochooseoneofthetwotypesofmodels(withfixedorrandomeffects),FtestandHausmantestsareused(Jabaetal.,2016).The panel model for this study flows from the theoretical framework on liquidity andprofitabilityrelationship.Thefunctionalformofthemodelisgivenas:

(11)

where:

=Returnonassetsofthebanksiinperiodt=Cashtototalassetsofbanksiinperiodt=Cashtototaldepositforbanksiinperiodt=CurrentRatioofbanksiinperiodt

=LiquidAssettoTotalAssetsofbanksiinperiodt=LoantoTotalDepositofbanksiinperiodt

Equation(11)isfunctionalrepresentationwhichcannotbeestimatedinitscurrentstate.Thus,tomaketheequationcompliantforregressionanalysisandestimation,theequationislinearlyexpressedas:

Theaprioriexpressionsaboveimplythatcurrentratio,cashtototalassets,andliquidassettototal assets and loans to total deposit ratio are all theoretically expected to have a positiveeffect on return on assets; while cash to total deposits is theoretically expected to have anegativeeffectonreturnonassets.DefinitionofTermsReturnonAssets(ROA).Thedependentvariablechosenforthisstudyisthereturnonassets(ROA) Ratio. This ratio measures how effectively and efficiently a firm is able to produceincomewithinagivenperiodwith it total assets. Inotherwords,ROAratio is aprofitabilityratio that measures how well a firm is able to manage its total assets to produce the bestresultspossibleintermsofmaximizingprofit.Theformulaisgivenas:

Thisratiocanalsobecalledreturnoninvestment(ROI),astheterminvestmentmayalsorefertototalassets.The independent variables (the liquidity management) were measured by the followingindicators:

),,( itititititit LTDLATACTRCTDCTAfROA =

itROA

itCTA

itCTD

itCTR

itLATA

itLTD

Assets Total AverageIncomeNet Ratio Assetson Return =



CurrentRatio (CTR).This isa liquidity indicatorratiowhichmeasuresthebanks’ability tomeet up with its short-term obligations as they fall due. It measures the banks short termsolvency. To measure this ability, current ratio takes into consideration all the liquid andcurrent assets of the bank in relation to the banks current total liabilities. Current ratio iscalculatedbydividingcurrentassetsbycurrentliabilities.Itisgivenasfollows:

Thecurrentassetshereincludecashandallotherassetsthatcanbeconvertedtocashwithintheperiodofoneyear.Theseincludedebtorsandinventories,aswellasmarketablesecurities.Prepaidexpensesarealsoincludedinthecurrentassetsastheseareconsideredasexpensesthatwillnotbepaid foragain in the future, as ithasbeen takencareof in thepast.Currentliabilities on the other hand included billspayable, creditors, short-termbank loan, accruedexpenses,long-termdebtthatismaturinginthecurrentyearandincome-taxliability.Aratiothat is greater than one implies that the bank hasmore current assets than current claimsagainstthem.Thisratioisrelatedtoliquiditybecauseitisameasureofthebanksliquidity.Cash toTotalAssetsRatio (CTA).Thisratioiscalledthecashratio.Theratiocomparestheamountofliquidassetstotheamountoftotalliabilitiesofthebank.Liquidassetssuchascashand other marketable securities are considered as liquid assets because they can be easilyconvertedtocashtosettleshort-termobligations.Thisratio isrelatedto liquiditybecause itshowsthe liquiditypositionof thebankand itsability tosettleshort-termobligations.Sincemarketablesecuritiesareseenasequivalenttocash,theycanbeincludedinthecomputationofcashratio:

Thehigherthecashratio,thebettertheliquiditypositionofthefirmanditsabilitytomeetitsdaytodayfinancialobligation.However,aratioof2:1ormoreisconsideredsatisfactoryasanoutrageouscashratiowillimplyexcesscashinhandwhichmaynotbeprofitabletothebank.Itisadvisablethatidlecashshouldbeputintoprofitableinvestmentandabalancedcashratioshouldbeheldbythebankssoastoremainprofitableandalsostayliquid.CashtoTotalDeposit(CTD)Ratio.Thisratioalsocalledcashdepositratiocanbedefinedasthe total cash in hand and cash balances with RBI divided by total deposits. It shows theamount a bank lends out to borrowers out of its total deposit; that is; the deposits it hasmobilizedfromthebankingpublic.Thecashdepositratiogivesaproperunderstandingofhowmuchofthebank’sdepositsisbeingusedforthepurposeoflending,whichisthemainactivityofbanking.Cash to total deposit ratio is calculated by dividing total cash and cash balances with totaldeposit.

Ahigherratioshowsthatahigherpercentageofthetotalbankdepositisbeinggivenoutbythebankasloansandgrantstotheinvestingpublicfordevelopmentalpurposes,whichisthemain

Current assetsCurrent ratio

Current Liabilities=

sLiabilitieCurrent securities Marketable Cash ratioCash +

=

Deposits TotalbalancesCash Cash ratioDeposit Cash +

=



banking activity. This ratio is related to profitability because the higher percentage of totaldeposits is given out as loans, will in turn bring aboutmore profit for the bank instead ofkeepingidlecashthatyieldsnothing,butontheotherhand,indicatealowliquiditypowertothebank.LiquidAssetstototalAssetsRatio(LATA).Thisratiomeasuresthefirm’sliquidassetstoitstotal assets. In liquidity crisis, low liquid assets to total assets ratio can be hazardous to afinancialinstitutionshealthandsurvival.Thisratioiscalculatedbydividingtotalliquidassetsbytotalassets.Itgivesaninsightintotheliquidityavailableatthedisposalofthebanktosettleboth the expected and the unexpected cash exigencies. The liquidity level indicates thecapabilityofthebanktowithstandshocktotheirbalancesheet.Theformulaisgivenas:

Thehigherthisratio,thestrongerthebankisabletosettleitscurrentliabilities.Loan to Total Deposit Ratio (LTD). This is the measure of total loan in relation to totaldepositsinthesameperiod.Whenloantototaldepositratioishigh,itindicateslowliquidityposition by the bankswhich can affect the bank’s ability to grant loans. On the other hand,whentheloantototaldepositratioislow,thisindicatesavibrantliquiditystatusofthebank,which in turnenables thebank to create loansandalso invest inotherprofitable securities.However,thisratiohasbeenflawedasitfailstorecognizethematurityandliquidityofbanksassetsandonthegroundthatitconsidersthedegreeofmaturityandliquidityofbanksassetstobeequal.

EMPIRICALANALYSISANDRESULTSThissectioncontainstheanalysesofdataobtainedfor thisstudyaswellas thediscussionofresults.This section ismadeupof thedescriptive statistics,unit root test,model estimationandinterpretationaswellasdiscussionoffindings.DescriptiveStatisticsTable 1 below presents annual mean value, standard deviation, Jarque-bera statistic andprobabilityvaluesofthefactorsaffectingliquiditymanagementandtheprofitabilityofdepositmoneybanksinNigeria.

Table1:DescriptiveStatisticsofVariables

ReturnonAssets(ROA)

Cash to TotalAssets(CTA)

CashtoTotalDeposit(CTD)

CurrentRatio(CRT)

LiquidAssettoTotalAssets(LATA)

LoantoTotalDeposit(LTD)

Mean 0.827758 0.146250 0.273440 1.213332 1.673145 0.702230Median 1.405079 0.127629 0.180321 1.027373 1.397810 0.549697Maximum 9.536409 0.591020 6.975889 9.209206 31.26639 13.80014Minimum -29.64348 0.016487 0.024432 -0.164657 0.895124 0.144112Std.Dev. 4.354214 0.109713 0.665981 1.604722 2.860281 1.273842Jarque-Bera 3181.582 133.0877 40417.49 521.8084 50619.97 48120.49Probability 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000Observations 110 110 110 110 110 110

Source:Authors’Computation(2018)

The result above shows that the average liquidity ratio for the selected banks in Nigeria is0.828%forthesampledperiod.Thesectoralsohasmaximumandminimumliquidityratioof

Assets Totalassets Liquid ratio assets Liquid =



9.54%and-29.64%respectivelyforthesampledperiod.Intermsofthelevelofvariabilityasrevealedbystandarddeviation(4.35)oftheliquidityratio,theselecteddepositmoneybanks’haveahigherstandarddeviationasrelatedtothemeanratioovertheperiod.Thedescriptivestatisticsfortheexplanatoryvariablesalsoshowsthattheselectedbanks’liquidassetstototalassetsseemstobethemostvolatilevariableintheset,sinceitpossessesthehigheststandarddeviationvalueamongtheexplanatoryvariables.Thisisfollowedbycurrentratioandloantototaldeposit ratiowith standarddeviationvalueof1.605and1.274 respectively, thereafter,cashtototaldepositratioandcashtototalassetsratiowithstandarddeviationvaluesof0.666and0.11respectively.AllthevariablesintheseriesarenormallydistributedatP<0.1whichsupporttheuseofpaneldatamodelingapproach.UnitRootTestUnitroottestgenerallyinvolvesthestationaritytestforvariablesusedinregressionanalysis.Thestartingpointofanempiricalanalysisistoexaminethestationaritypropertiesofthetimeseries. This is important because a non-stationary series can lead to bias and misleadinginferences.ThisstudyusedLevin,LinandChuunitroottesttoascertainthestationarityofthevariables. Levin, Lin and Chu (2002) unit root test is used because they established thefoundationforpanelunitroottest(Nam&Robert,n.d).

Table2:UnitRootTestVariables Statistic Prob. Integration Remark

ReturnonAsset(ROA) -2.04865 0.0202 I[0] StationaryCurrentRatio(currentassetstocurrentliabilities)(CRT)

-6.24249 0.0000 I[0] Stationary

CashtoTotalAssets(CTA) -13.3148 0.0000 I[0] StationaryCashtoTotalDeposit(CTD) -14.4559 0.0000 I[0] StationaryLiquidassettototalassets(LATA) -1.34440 0.0894 I[0] StationaryLoantototaldeposit(LTD) -29.8307 0.0000 I[0] Stationary

Source:Authors’Computation(2018)Theresultsrevealedthatallthevariablesarestationaryatlevelsat5%levelofsignificance.Itcanbeconclusivelystatedthatthevariablesdonotpossessunitrootsareintegratedoforder0(I[0])asshownintable2above.ModelEstimationandInterpretation Thissectioncontainsthree formsofestimations:Pooledordinary leastsquares(PooledOLS,fixed effect model (FEM), and random effect model (REM) carried out in this study. AlsoHausmancross-sectionaltestwasconductedtoknowthemostappropriatemodeltouse.



Table3:ResultsofEstimatedModelsDependentVariable:ROA

Variable PooledOLS FixedEffectModel RandomEffectModel C -8.66 -8.27 -8.54 (-2.48) (-2.29) (-2.45) [0.01] [0.02] [0.02]

CRT 0.28 0.14 0.23 (1.06) (0.47) (0.88) [0.29] [0.64] [0.38]

CTA 44.91 42.48 44.15 (2.73) (2.48) (2.70) [0.01] [0.01] [0.008]

CTD -26.70 -27.78 -27.08 (-2.48) (-2.50) (2.53) [0.01] [0.01] [0.01]

LATA 4.44 5.65 4.82 (1.92) (-2.50) (2.09) [0.06] [0.02] [0.04]

LTD 3.50 1.22 2.79 (1.51) (0.48) (1.18) [0.14] [0.65] [0.24]

R-squared 0.58 0.52 0.57AdjustedR-squared 0.53 0.50 0.53F-statistic 11.84 11.77 11.59Prob(F-statistic) 0.00 0.00 0.00Durbin-Watsonstat 2.24 2.38 2.34Observations 110 110 110

HausmanCross-SectionalTestTestSummary Chi-sqStat Chi-Sq.d.f Prob.

Cross-SectionRandom 5.68 5 0.34

Note: t-statistics and probability values are in bracket () and parenthesis [ ] respectively.Theestimatedmodelisshownbelow:Table 3 presents the results ofpooledordinary least squaresmodel, fixed effectmodel, andrandomeffectmodel.Atotalofsix(6)variableswereusedintheestimation.ReturnonassetROA)wasusedasthedependentvariablewhilecurrentratio(CRT),cashtototalassets(CTA),cashtototaldeposit(CTD),liquidassettototalassets(LATA),andloantototaldeposits(LTD)wereusedas the independentvariables.From thepooledOLS, theresults show that cash tototal assets (CTA), cash to total deposits (CTD), and liquid assets to total assets (LATA) aresignificant at 1%, 1% and 10% respectively. Whereas cash to total assets (CTA) and liquidasset to totalassets(LATA)haveapositiverelationshipwithreturnonassets(ROA),cashtototaldeposits(CTD)hasanegativerelationshipwithreturnonassets(ROA).TheR-Squaredis0.58 showing that the explanatory variables explain 58% of the changes in the dependentvariable.Thefixedeffectmodel(FEM)resultsshowthatcashtototalassets(CTA),cashtototaldeposits(CTD),andliquidassetstototalassets(LATA)aresignificantat1%,1%and10%respectively.Whereas cash to total assets (CTA) and liquid assets to total assets (LATA) have a positiverelationship with return on assets (ROA), cash to total deposits (CTD) has a negativerelationshipwithreturnonassets(ROA).TheR-Squaredis0.52showingthattheexplanatoryvariablesexplain52%ofthechangesinthedependentvariable.



The random effect model (REM) results show that cash to total assets (CTA), cash to totaldeposits (CTD), and liquid assets to total assets (LATA) are significant at 1%, 1% and 5%respectively.Whereascashtototalassets(CTA)andliquidassetstototalassets(LATA)haveapositiverelationshipwithreturnonassets(ROA),cashtototaldeposits(CTD)hasanegativerelationshipwithreturnonassets(ROA).TheR-Squaredis0.57showingthattheexplanatoryvariablesexplain57%ofthechangesinthedependentvariable.TheF-statisticswhichmeasuretheoverallstatisticalsignificanceofthemodelsshowthatthemodels are statistically significant at 1% level (F-value = 11.84, p-value = 0.000 forpooledOLS; F-value =11.77, p-value = 0.000 for fixed effectmodel; and F-value = 11.59, p-value =0.000forrandomeffectmodel).TheDurbin-WatsonStatisticsof2.24,2.38,and2.34forpooledOLS,fixedeffectandrandomeffectmodelsshowtheabsenceofautocorrelationinthemodels.In selecting the best model to use for analysis, the Hausman cross-sectional test wasconducted. The result in Table 3 shows that the p-value for the test is greater than 5%,indicatingthattherandomeffectsmodelwasmoreappropriateandpreferred.Therefore,therandomeffectspecificationresultsareinterpretedandusedforthisstudy.

DISCUSSIONOFFINDINGSThisstudyempiricallyinvestigatedtheeffectsofliquiditymanagementontheprofitabilityofdepositmoney banks in Nigeria from 2006 to 2016, using the panel ordinary least squaresregression method. Data used for the study were sourced from the annual reports of thesampledfirmsandthestatisticalbulletinoftheCentralBankofNigeria.Theregressionresultsshowedthatcashtototalassetsratio(CTA),cashtototaldeposit(CTD),andliquidassetstototalassets(LATA)arestatisticallysignificantinexplainingthebehaviorofprofitabilityinthedepositmoneybanksinNigeriawhilecurrentratio(CRT)andliquidassetsto total assets (LATA)arenot.Thismeans that cash to total assetsratio (CTA), cash to totaldeposit(CTD,andliquidassetstototalassets(LATA)aresignificantindicatorswhichtendtopredictthebehaviorofprofitabilityinthedepositmoneybanksinNigeria.Sincetheregressorsareinpercentages,1%increaseincashtototalassetsratio(CTA)leadstoasignificantincreaseinprofitabilityinthedepositmoneybanksinNigeriaby44.91%ontheaverage. In the same vein, 1% increase in liquid assets to total assets (LATA) leads to asignificant increase in profitability in the depositmoney banks in Nigeria by 4.44% on theaverage.Thatliquidityratiohaspositiveeffectonbanksprofitabilityisinagreementwiththefindings by Bourke (1989) that liquidity ratio has a positive and significant effect on banksprofitability.Conversely, 1% increase in cash to total deposit (CTD) leads to a significant decrease inprofitabilityinthedepositmoneybanksinNigeriaby26.7%ontheaverage.Thisfindingisinline with the theory of (Aghada & Osuji, 2013) and it is also supported by the a prioriexpectationofthisstudy.ThefindingsofanegativerelationshipbetweencashtototaldepositandprofitabilityofdepositmoneybanksinNigeriabyBasseyandMoses(2015)alsosupportthefindingsofthisstudy.



This study also found a positive and non-significant relationship between current ratio(current assets to current liabilities) and deposit money banks profitability in Nigeria. thisfinding is not consistent with the finding ofMaqsood et al (2016) that current ratio has apositiveandsignificantrelationshipwithbanks’profitabilitycontradictsthisfinding.Finally, it was found that loan to total deposit (LTD) ratio has a positive but insignificantrelationshipwiththeprofitabilityofdepositmoneybanksinNigeria.ThisfindingsupportsthefindingsofBasseyandMoses(2015)thatfoundthatloantodepositratiohadaninsignificanteffectonthereturnonassets(ROA)ofthedepositmoneybanksinNigeria.

CONCLUSIONANDPOLICYRECOMMENDATIONSThis study empirically investigated the liquidity indicators or measures that influence theprofitabilityofdepositmoneybanksinNigeriafrom2006to2016.Thestudycombinedbothcross-sectional and timeseriesdata (paneldata)on theselectedvariables (returnonassets,currentratio,cashtototalassets,cashtototaldeposits,liquidassetstototalassets,andloantototal assets.The selected randomeffectmodelbasedon theHausman test indicate that thatcash to total assets ratio (CTA), cash to totaldeposit (CTD), and liquidassets to total assets(LATA) are statistically significant in explaining the behavior of profitability in the depositmoneybanksinNigeriawhilecurrentratio(CRT)andliquidassetstototalassets(LATA)arenot.Alltheparametersareconsistentwiththeoreticalexpectations.Therelationshipbetweencashtototalassetsratio(CTA),cashtototaldeposit(CTD),liquidassetstototalassets(LATA)andprofitability in thedepositmoneybanks inNigeriawerepositive,negative, andpositiverespectively.Banksviabilitycouldbelinkeddirectlytothemanagementoftheirliquidity.Thebanksshouldtherefore set among their priorities the ability to meet up with their day to day financialobligations.Therefore,depositmobilizationshouldbeamongthevitalfunctionsofthebanks.Thiswillgivethebanksenablementtomobilizeunproductiveand idledeposits to thedeficitsector in the economy. The continuous interest paid by borrowers on their loan will alsoensure the provision of productive resources at all time. The banks liquidity should bemanagedinsuchalevelthattheycanmaximizerevenuebymanagingliquiditywhiletheriskofinsolvencyisheldatareasonablelevel.Followingtheanalysesandfindingsofthisstudy,thefollowingarerecommended:

1. Thedepositmoneybanksshouldconsidercashtototalassetsratio(CTA)variableiftheobjectiveistoincreaseprofitabilitydrasticallyandconsiderliquidassetstototalassets(LATA) variable if the objective is to increase profitability gradually; and the depositmoneybanksshouldconsiderthecashtototaldeposits(CTD)factoriftheobjectiveistoreduceprofitability.

2. Thedepositmoneybanksshouldnotonlyfocusontheprofitmaximizationperceptionbutalsoembracemethodsthatwillprovideeffectiveandefficientliquiditymanagementsince their survival and sustainability depend on liquidity management andprofitability.Thiswillhelptoreduces incidenceofdeficientandexcessive liquidityastheireffectsareadverse.

3. ThedepositmoneybanksinNigeriashouldasmuchaspossibletrytoworkoutagoodportfolio mix which can be achieved by analyzing and studying the situation andchoosingabalancedanddiversifiedportfoliomixthatwillensurethesurvival,stability,aswellasthegrowthanddevelopmentofthebankingindustryinNigeria.

4. The monetary authorities through the central bank of Nigeria should as much aspossible try tomaintain an adjustable lending rate thatwill enable the banks to take



advantage of the various means of meeting unexpected withdrawal obligations tocustomers,therebyreducingtheinstancesofholdingidlecashwhichisofnobenefittothebanks.

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