Causal Relationship between Liquidity and Profitability of Nigerian Deposit Money Banks

Abstract

The aim of this paper is to examine the existence and direction of causality between liquidity and profitability of deposit money banks in Nigeria. Fifteen quoted banks out of the existing nineteen banks were selected for the study. They are; Guarantee Trust bank, Zenith bank, Skye bank, Wema bank, Sterling bank, First City Monument bank, United Bank for Africa, Eco bank, First bank, Access bank, Diamond bank, Unity bank, Fidelity bank, Union bank and IBTC bank. Pairwise Granga Causality test was carried out to determine the presence and direction of causality between banks’ liquidity and profitability. From the finding of this study, at 5% and 10% level of significance, it was revealed that the F-statistics corresponding to the null hypotheses of no causal relationship (both unidirectional and bidirectional) between LODEP (a proxy for liquidity) and ROE (profitability measure) for banks like Guaranty trust bank, Zenith bank, Sterling bank, Diamond bank, IBTC, Unity bank, UBA, Fidelity bank, Wema bank, Union bank, and Eco bank, are too low and as such there is no enough evidence for the rejection of the corresponding null hypotheses. Thus, the result revealed that there is no causal relationship (be it unidirectional or bidirectional) between liquidity and probability of Guaranty trust bank, Zenith bank, Sterling bank, Diamond bank, IBTC, Unity bank, UBA, Fidelity bank, Wema bank, Union bank, and Eco bank. The result also shows that there is a trace of unidirectional causality relationship running from liquidity to profitability for banks like Skye bank, First bank, Access bank and FCMB. Based on the findings and conclusions, the study recommend that the apex bank (Central Bank of Nigeria) should ensure close supervision and monitoring of deposit money banks’ strength and level of liquidity in an attempt to stabilize and strengthen the financial sector of the economy.