LIQUIDITY AND LOAN PORTFOLIO PERFORMANCE: EVIDENCE FROM THE NIGERIAN BANKING SECTOR
One of the major indicators of financial performance is profitability .Every stakeholder in the banking sector is interested in liquidity and performance (profitability)of the bank, the Shareholders are interested in profitability of the bank because it determines their returns on investment. Depositors are concerned with the liquidity position of their banks because it determines the ability of the bank to response to their withdrawal needs, which are normally on demand or on a short notice as the case may be. The tax authorities are interested in the profitability of the bank in order to determine the appropriate tax obligation to the government.
In a bid to see how the interest of the various stakeholders could be protected, the effects of liquidity on the loan portfolio performance of Nigerian Banks was examined. This study found out whether liquidity proxies(loans to deposit ratio and liquidity ratio) have significant impact on the loan portfolio performance (Profitability) of Nigerian banks with Lending spread as proxy for loan performance.
To achieve the objectives of this research, a quantitative research method (secondary data) was adopted. Using purposive data collection approach, the study carried out a time series, cross sectional analysis on the 12 banks listed on the Nigerian Stock Exchange over a period of 8 years from 2008 to 2015. The selection of the banks was determined by data availability for the period and the data were retrieved from the Annual financial reports of the 12 banks as obtained in the Nigerian Stock Exchange (NSE) and the respective banks’ websites. Panel data regression analysis from Stata statistical software was employed to analyse the data.
The study concluded that there is significant negative impact of both liquidity ratio and loan to deposit ratio on lending spread. That means, profitability is significantly but negatively influenced by liquidity.
Keywords: Liquidity, Loan portfolio, Lending Spread, Profitability, Loans-to- deposit ratio