Liquidity and Financial Growth in Nigeria: Evidence from Listed Deposit Money.

Abstract

Liquidity in the banking sector plays a crucial role in economic development; however, in Nigeria, stringent liquidity regulatory measures such as high cash reserve and liquidity ratios may be constraining the credit creation capacity of Deposit Money Banks (DMBs), thereby limiting their financial growth. Therefore, this study examines the impact of liquidity indicators on the financial growth of listed DMBs in Nigeria from 2014 to 2023. Adopting an ex-post facto research design, the study utilizes secondary data sourced from the annual reports of 12 listed DMBs on the Nigerian Exchange Group. Earnings Per Share (EPS) serves as the dependent variable, while the liquidity ratio (LR) and the cash reserve ratio (CRR) are the independent variables, with inflation included as a control variable. Using Ordinary Least Squares (OLS) regression and relevant diagnostic tests, the findings reveal that the liquidity ratio has a positive but statistically insignificant effect on the financial growth (EPS) of listed Deposit Money Banks (DMBs) in Nigeria when inflation is controlled, whereas the Cash Reserve Ratio (CRR) has a positive and statistically significant effect on the financial growth (EPS) of listed Deposit Money Banks (DMBs) in Nigeria. The study recommends that policymakers and regulatory authorities, particularly the Central Bank of Nigeria, implement liquidity-enhancing policies and adopt a more flexible cash reserve policy to promote credit expansion and stimulate financial growth.