Effects of liquidity risk practices on the financial position of depository financial institutions in Nigeria

Abstract

This study examined the effects of liquidity risk practices on the financial position of Nigerian depository financial institutions. Growing concerns regarding liquidity pressures, banking stability and financial sustainability in emerging economies inspired this study. The secondary data was derived from audited annual reports of thirteen (13) listed depository financial institutions for the period 2004-2023. Considering that the study combines cross-sectional and time-series observations, a panel research design was adopted. In order to assess liquidity risk, loan-to-deposit ratios (LDRs) were used, whereas financial strength was determined by return on assets (ROAs) and return on equity (ROEs). As control variables, bank size and inflation were included. Following diagnostic tests, the data were analysed using panel regression techniques. The findings of this study indicate that liquidity risk practice positively influences the financial status of DFIs, though the strength of the relationship varies depending on the measure used. The study concluded that institutional performance and stability are enhanced when a liquidity position is maintained at an optimal level. The study recommends stronger liquidity monitoring frameworks and improved risk governance mechanisms.