Impact of Liquidity Risk and Leverage on the Financial Performance of Nigerian Deposit Money Banks

Abstract

This study investigates the impact of liquidity risk and leverage on the financial performance of listed Deposit Money Banks (DMBs) in Nigeria. The study utilized a census approach to gather data from all 15 listed DMBs on the Nigerian Exchange Group as of December 31, 2022. The study spanned from 2013 to 2022, employing various statistical analyses including descriptive analysis, correlation analysis, skewness and kurtosis tests for normality, multiple regression models for fixed-effects and random-effects models, and the Hausman test to ensure robust findings. The results indicated that liquidity risk exhibited a positive and significant impact on return on equity (ROE), a measure of financial performance, with a coefficient of 0.132 and a p-value of 0.000, suggesting that effective management of liquidity risk enhances profitability. Conversely, leverage was found to have a significant negative impact on ROE, with a coefficient of -1.351 and a p-value of 0.007, highlighting that higher debt levels substantially reduce profitability. In conclusion, the study suggests that while liquidity risk can be effectively managed to enhance profitability, excessive leverage poses significant threats to financial performance. The findings underscore the importance of robust risk management strategies for improving the financial performance of listed DMBs in Nigeria. These insights are crucial for policymakers, banking executives, and investors seeking to enhance the stability and performance of the banking sector.