EFFECT OF LIQUIDITY ON BANK'S PERFORMANCE A CASE STUDY OF UBA PLC (2020 – 2025)

EFFECT OF LIQUIDITY ON BANK'S PERFORMANCE

A CASE STUDY OF UBA PLC (2020 – 2025)

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Liquidity management remains one of the most critical challenges confronting deposit money banks globally, and the Nigerian banking industry is no exception. The distress era of the 1980s and 1990s exposed the fragility of the banking system, revealing systemic weaknesses in how financial institutions managed their liquid assets and obligations. These challenges persisted into the recapitalization phase of 2005, when the Central Bank of Nigeria (CBN) mandated banks to increase their minimum capital base from N2 billion to N25 billion (Agbada & Osuji, 2013). Notwithstanding the intent of this policy to strengthen the banking system, the adequacy of the reform was tested just five years later in 2009, when the CBN was compelled to intervene in five banks that had become deeply enmeshed in illiquidity. The resultant injection of N620 billion and the subsequent establishment of the Asset Management Corporation of Nigeria (AMCON) underscored the systemic dangers of poor liquidity management and its direct consequences for bank performance.

The importance of liquidity management to banking performance has continued to gain scholarly attention in the post-crisis era. Alshatti (2015) observed that banks are exposed to various types of risks attributable to liquidity management, all of which directly affect performance and operations. He further argued that since the primary objective of bank management is to maximize shareholders' wealth, banks must evaluate their cash flows and associated risks to optimally allocate financial resources. This perspective resonates with more recent literature. Nwokoro, Ironkwe, and Nwaiwut (2023) emphasized that liquidity management ensures banks can fulfill customer obligations, which is fundamental to banking stability, a view supported by Efemena (2024), who noted that the significance of effective liquidity management for firms lies in promoting financial stability and success, thereby preventing insolvency.

Ibe (2013) emphasized that liquidity plays a vital role in the successful functioning of a business firm, cautioning that a firm should ensure it does not suffer from lack-of or excess liquidity to meet its short-term compulsions. This perspective has been reinforced by contemporary research. Mustapha (2022) found that while capital adequacy ratio, liquidity ratio, and loan-to-deposit ratio are critical proxies for liquidity management, their individual effects on financial performance measured by Tobin's Q can vary depending on the prevailing regulatory and macroeconomic environment. Similarly, Esther et al. (2023) revealed that the efficiency ratio and liquidity ratio have a significant positive effect on bank market performance, establishing that the optimal management of liquid assets is indispensable to financial sustainability.

A firm's capacity to perform its intermediation and credit creation roles in a manner that guarantees optimal profitability and minimum risk is greatly dependent on having adequate liquidity. This liquidity-profitability nexus provides stability and confidence in banks and the financial system, serving as the panacea for systemic crises (Ogbuabor & Malaolu, 2013; Okoye & Eze, 2013). Among all core banking principles, liquidity plays a crucial role as it is vital for the survival of banking businesses, especially in risk-prone environments (ECB, 2010). The capacity of liquidity to make or mar any institution has been recognized across generations of banking scholars (Nwankwo, 1989). Recent empirical work by the International Journal of Professional Business Review (2024) examined the relationship between liquidity risk and the profitability of listed Nigerian deposit money banks over a 16-year period from 2008 to 2023, finding a significant positive relationship between cash reserve ratio, loan-to-deposit ratio, and profitability.

Liquidity risk materializes when there are mismatches between the size and maturity of assets and liabilities on the balance sheet. There are generally two recognized types of liquidity risks: funding liquidity risk and market liquidity risk. Funding liquidity risk is the risk that a bank is unable to respond effectively to its current and future cash flow needs without negatively affecting its daily operations and financial condition. Market liquidity risk is defined as the risk that a bank cannot easily offset or eliminate a position without significantly affecting the market price (Ferrouhi & Lehadiri, 2014). The Basel III framework introduced the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) as regulatory tools to mitigate these twin risks. Studies such as that by Kumalo (2023) have underscored the importance of the LCR and Loan-to-Deposit Ratio (LDR) as key dimensions that underscore the trade-offs inherent in liquidity management, reinforcing the need for banks to maintain an optimal balance between liquidity buffers and profitability.

The relationship between liquidity and profitability remains a subject of active scholarly debate, with results often inconclusive across different banking environments. Andabai and Oyakegha (2024) examined the performance of Nigerian commercial banks over a 31-year period, from 1993 to 2023, highlighting that liquidity management significantly shapes the trajectory of bank profitability over time. Chen et al. (2024) found that banks maintaining adequate liquidity ratios tend to experience better operating performance, greater stability, and lower bankruptcy risk, a finding that strengthens the theoretical case for proactive liquidity management. In the context of COVID-19, research published in PLOS One (2024) established that liquidity risk has a positive and significant relationship with return on assets (ROA) and return on equity (ROE), suggesting that banks that managed liquidity effectively during the pandemic period outperformed their less-prepared counterparts.

From the regulatory standpoint, the CBN's Monetary Policy Committee (MPC) decisions from 2023 to 2024 have maintained the minimum liquidity ratio for deposit money banks at 30 per cent, while progressively raising the Cash Reserve Ratio (CRR) from 32.5 per cent in early 2023 to 50 per cent by September 2024 (CBN, 2024). These policy shifts have materially affected the liquidity management strategies of Nigerian banks, including United Bank for Africa (UBA) Plc., which is the focal institution of this study. The implications of these regulatory changes on bank performance are significant: a higher CRR constrains the volume of funds available for lending, potentially reducing profitability even as it enhances liquidity positions (Salihu, Kuta & Danpome, 2024).

A preponderance of research has investigated the inter-relationship between liquidity and corporate performance (Raheman & Nasr, 2007; Saleem & Raheman, 2011; Bassey & Moses, 2015; Abba, Hafsat & Umar, 2023), with most studies adopting Return on Assets (ROA) or Return on Equity (ROE) as primary performance measures. This study adopts Return on Shareholders' Fund (RSF) as an additional measure of corporate performance, as it provides a narrower but more targeted assessment of profitability from the owners' perspective, offering investors a deeper insight into the efficiency with which their capital is being deployed. This study uses UBA Plc., a pan-African banking giant, as the point of reference, providing a rich institutional case through which the theoretical and empirical dimensions of liquidity management and performance can be explored.

1.1.1 Brief History of UBA Plc.

The United Bank for Africa (UBA) Plc. has its origins in 1949, when it was established as the British and French Bank Limited (BFB). The bank took over the assets and liabilities of BFB and was formally incorporated as a limited liability company on 23 February 1961 under the Companies Ordinance (Cap 37) 1922. UBA holds the historic distinction of being the first Nigerian bank to make an Initial Public Offering (IPO), following its listing on the Nigerian Stock Exchange (NSE) in 1970. It was also the first Nigerian bank to issue Global Depository Receipts (GDRs), demonstrating its early commitment to international capital market integration.

In 2005, during the peak of the CBN's banking recapitalization exercise, UBA completed one of the most significant mergers in the history of Nigeria's capital markets through its business combination with Standard Trust Bank (STB) Plc. This strategic merger significantly enhanced its capital base and launched its pan-African expansion trajectory. UBA today operates in 20 African countries and three global financial centres: London, Paris, and New York. Its African footprint spans Ghana, Benin Republic, Cote d'Ivoire, Burkina Faso, Guinea, Chad, Cameroon, Kenya, Gabon, Tanzania, Zambia, Uganda, Liberia, Sierra Leone, Mozambique, Senegal, Congo DR, and Congo Brazzaville, among others.

In 2022, UBA opened its Dubai-DIFC branch to facilitate international corporate relationships, further signalling its ambitions as a truly global African bank. The bank's 2023 financial year marked its 75th anniversary, a milestone celebrated alongside outstanding financial performance. For the financial year ended 31 December 2023, UBA reported outstanding results underscoring its robust growth strategy. By 2024, UBA's Gross Earnings had risen to N3.19 trillion, representing a 53.56% increase over the prior year, with Profit Before Tax reaching N803.7 billion and Profit After Tax climbing to N766.6 billion (UBA Annual Report, 2024). Total assets stood at N30.3 trillion, marking a significant 46.8% year-on-year growth, affirming the bank's dominant position in the Nigerian and African banking landscape.

UBA is a publicly quoted company listed on the Nigerian Exchange Group (NGX) and has a well-diversified shareholder base. It employs over 25,000 staff across its global operations as of 2024. The bank's vision is to be the undisputed leading and dominant financial services institution in Africa, and its mission is to provide excellent financial services in the most customer-friendly manner while enhancing economic prosperity across its markets. UBA is committed to sustainable banking practices, promoting Environmental, Social, and Governance (ESG) initiatives, including financial inclusion, youth empowerment, and community development through its UBA Foundation (UBA Abridged Report, 2024).

1.2 Statement of the Problem

The Nigerian banking industry operates within a complex and volatile economic environment characterized by exchange rate instability, inflationary pressures, regulatory policy shifts, and an increasingly competitive landscape. In this context, liquidity management has emerged as a critical determinant of bank performance, yet its implications remain insufficiently understood at the firm level, particularly for systemically important institutions such as UBA Plc.

A recurring challenge for deposit money banks in Nigeria is the optimization of liquidity within the constraints imposed by the CBN's regulatory requirements. The CBN's progressive increase of the Cash Reserve Ratio (CRR) from 32.5% in early 2023 to 50% by September 2024 represents a significant policy constraint on bank earning assets, with potential adverse consequences for profitability (CBN, 2024). Simultaneously, banks must maintain a minimum liquidity ratio of 30% to safeguard depositor confidence and systemic stability. The tension between these regulatory imperatives and the pursuit of performance creates a dilemma that demands systematic empirical investigation.

Adekunle, Oke and Fasusi (2024) studied the relationship between monetary policy rates and the financial performance of the five largest Nigerian banks, the so-called FUGAZ banks (First Bank, UBA, GTBank, Access Bank, and Zenith Bank), from 2013 to 2022. Their findings showed that while the cash reserve ratio had a positive effect on net income, most other liquidity variables had insignificant effects, pointing to the complex, context-dependent nature of the liquidity-performance relationship. Similarly, Salihu, Kuta, and Danpome (2024) found that both the Cash Reserve Ratio and Liquidity Ratio had negative but statistically insignificant effects on bank performance in Nigeria over the 1992 to 2023 period, complicating the policy narrative.

Furthermore, the public has not fully recovered confidence in the banking system since the distress episodes of the 1980s, 1990s, and the 2009 intervention, and any sign of illiquidity risks triggering bank runs and systemic instability. Despite various reforms, the performance of some Nigerian banks remains suboptimal, partly due to misaligned liquidity management strategies (Olagunji, Adeyanju & Olabode, 2011). Deposit money banks continue to face the fundamental problem of identifying the optimal level at which to maintain liquid assets in order to maximize performance without compromising solvency (Ajibike & Aremu, 2015).

The existing empirical literature on the liquidity-performance relationship in Nigeria presents contradictory conclusions. Ajibike and Aremu (2015) reported a positive relationship between liquidity and profitability, while Olanrewaju and Adeyemi (2015) found no significant relationship. In contrast, Eljelly (2004) and Dahiyat (2016) established a negative relationship between the two constructs. More recent studies have been equally divergent: Esther et al. (2023) found that liquidity ratio has a significant positive effect on performance, while the International Journal of Professional Business Review (2024) found that liquidity ratio has a negative but insignificant relationship with profitability. The absence of consensus in the literature reveals a research gap that this study seeks to address by examining the specific case of UBA Plc. over the 2020–2025 period using firm-level panel data.

1.3 Objectives of the Study

Main Objective

The main objective of this study is to examine the effect of liquidity on the financial performance of United Bank for Africa (UBA) Plc.

Specific Objectives

The specific objectives of this study are:

1. To identify and analyze the key determinants of liquidity risk in UBA Plc. over the period 2020–2025.

2. To analyze the impact of liquidity risk on the profitability of UBA Plc.

3. To examine the liquidity position of UBA Plc. and evaluate its compliance with regulatory benchmarks.

4. To determine whether the liquidity ratio has a significant impact on the commercial banking operating performance of UBA Plc.

5. To assess the moderating influence of macroeconomic factors such as monetary policy rate and inflation on the liquidity-performance relationship in UBA Plc.

1.4 Research Questions

The following research questions guide the execution of this study:

1. What are the key determinants of liquidity risk in UBA Plc. during the study period of 2020–2025?

2. What is the impact of liquidity risk on the profitability of UBA Plc.?

3. What is the liquidity position of UBA Plc. relative to CBN regulatory benchmarks?

4. Does liquidity ratio have a significant impact on the commercial banking performance of UBA Plc.?

5. To what extent do macroeconomic factors moderate the relationship between liquidity and bank performance?

1.5 Hypotheses

Hypothesis I

H₀: The dependence on non-deposit funding sources does not significantly affect the liquidity risk of UBA Plc.

H₁: The dependence on non-deposit funding sources significantly affects the liquidity risk of UBA Plc.

Hypothesis II

H₀: Liquidity risk does not significantly affect the profitability of UBA Plc.

H₁: Liquidity risk significantly affects the profitability of UBA Plc.

Hypothesis III

H₀: There is no significant relationship between the cash reserve ratio and the financial performance of UBA Plc.

H₁: There is a significant relationship between the cash reserve ratio and the financial performance of UBA Plc.

1.6 Significance of the Study

This study makes several contributions to the existing body of knowledge on liquidity management and bank performance in Nigeria. It is expected to be of immense value to investors, regulators, bank managers, academics, policymakers, and other stakeholders in the Nigerian financial system.

For investors and shareholders, the study provides insights into how liquidity management strategies affect the returns generated on their invested funds, helping them make more informed investment decisions regarding their holdings in UBA Plc. and other deposit money banks.

For regulators, particularly the Central Bank of Nigeria, the study offers empirical evidence on the effects of regulatory liquidity requirements (such as CRR, LDR, and minimum liquidity ratios) on bank profitability, which can inform future policy calibration. Given recent regulatory tightening, including the CBN's decision to raise the CRR to 50% in 2024, this research is particularly timely in assessing the performance implications of such actions.

For bank managers, the findings provide actionable guidance on determining optimal liquidity levels that balance depositor confidence with profitability imperatives. Given the competitive nature of Nigeria's banking industry, where the five largest banks including UBA compete fiercely for market share, the ability to manage liquidity optimally becomes a strategic differentiator.

For academia, the study contributes to resolving the ongoing debate on the direction and magnitude of the liquidity-performance relationship in the Nigerian context. By employing firm-level panel data from UBA Plc. over the 2020–2025 period and adopting Return on Shareholders' Fund (RSF) as a performance proxy, the study offers a differentiated methodological contribution compared to prior studies that predominantly employed ROA or ROE. It also bridges a research gap identified in recent literature (Nwude & Okeke, 2018; Abdelaziz et al., 2022; Oladele & Akinwumi, 2024), which called for studies that consider the complementary role of firm-level disclosures and macroeconomic variables in moderating the liquidity-performance nexus.

Furthermore, the inconclusive nature of prior research findings (Ajibike & Aremu, 2015; Olanrewaju & Adeyemi, 2015; Eljelly, 2004; Dahiyat, 2016; Esther et al., 2023) underscores the need for updated empirical work, and this study responds to that need by employing the most recent available data from UBA Plc.'s annual reports for 2020 through 2025.

1.7 Scope of the Study

This study focuses on the effect of liquidity on the financial performance of United Bank for Africa (UBA) Plc., one of Nigeria's leading pan-African deposit money banks. The study covers a period of six years, from 2020 to 2025, a period chosen for its relevance to contemporary banking realities, encompassing the disruption caused by the COVID-19 pandemic, post-pandemic economic recovery, a major naira devaluation cycle, and the CBN's aggressive monetary policy tightening between 2023 and 2025.

The study is geographically limited to UBA Plc.'s Nigerian operations, though the bank's overall group performance as reported in its consolidated annual reports and financial statements is considered where relevant. Liquidity will be operationalized using Cash Reserve Ratio (CRR), Loan-to-Deposit Ratio (LDR), and Liquidity Ratio (LR). Financial performance will be proxied by Return on Shareholders' Fund (RSF) and supported by Return on Assets (ROA) where supplementary analysis is conducted.

The study does not cover other Nigerian deposit money banks. Findings may not be universally generalizable to smaller banks operating under different balance sheet structures or in different regulatory environments.

1.8 Limitations of the Study

While this study is designed to generate credible and policy-relevant findings, a number of limitations must be acknowledged. First, the study relies exclusively on secondary data extracted from UBA Plc.'s audited annual reports and the CBN Statistical Bulletin, and as such, is subject to the accuracy and completeness of these disclosures. Any misstatement or omission in the bank's financial statements could affect the reliability of the findings.

Second, the study period of 2020–2025, while offering rich data that captures significant regulatory and macroeconomic shifts, is relatively short for drawing strong inferences about long-run relationships between liquidity and performance. Panel data analyses benefit from larger samples and longer time horizons.

Third, the study's focus on a single institution, albeit a systemically important one, limits its ability to control for industry-wide effects such as competitive dynamics, sectoral shifts in credit demand, and macroeconomic shocks that affect all banks simultaneously.

1.9 Operational Definition of Terms

Liquidity: The ability of a bank to fund increases in assets and meet obligations as they fall due, without incurring unacceptable losses or disrupting normal business operations (CBN, 2024).

Liquidity Management: The strategic and operational process by which a bank manages its liquidity position so that neither its liquidity nor profitability will suffer unduly. It encompasses the planning and provisioning for deposit withdrawals, short-term cash cycles, and the compliance requirements of regulatory bodies.

Liquidity Ratio (LR): The ratio that evaluates a bank's capability to settle its near-term financial responsibilities using its liquid assets. The CBN requires a minimum liquidity ratio of 30% for deposit money banks (Dhanuskodi et al., 2022; Hamid, 2023).

Cash Reserve Ratio (CRR): The proportion of a bank's total deposits that must be held as reserves with the Central Bank of Nigeria. As of September 2024, the CBN increased the CRR for deposit money banks to 50% (CBN, 2024).

Loan-to-Deposit Ratio (LDR): The financial metric that compares a bank's total loans to its total deposits, reflecting the bank's ability to fund its lending portfolio from its deposit base. The CBN lowered the target LDR to 50% in April 2024.

Return on Shareholders' Fund (RSF): A profitability measure that assesses the net return generated on the equity capital provided by shareholders, computed as net profit after tax divided by total shareholders' funds. It is considered a narrower but more precise indicator of profitability from the shareholders' perspective.

Funding Liquidity Risk: The risk that a bank will be unable to meet its cash flow obligations in a timely manner at a reasonable cost without adversely affecting its operations or financial standing.

Market Liquidity Risk: The risk that a bank cannot easily offset or eliminate a position in the financial markets without significantly moving the market price, thereby incurring losses (Ferrouhi & Lehadiri, 2014).

Bank Deposits: Funds placed with a bank by customers and other institutions. These are classified into demand deposits, savings deposits, and time deposits, and constitute the primary funding base from which banks make loans and investments.

Demand Deposits: Also known as checking accounts, these are deposits payable on demand by the depositor without prior notice, making them the most liquid form of bank liability.

Savings Deposits: A type of deposit usually evidenced by a passbook or electronic account statement, under which the depositor may be required to notify the bank before withdrawal, although in practice such notice is often waived.

Deposit Money Bank (DMB): A financial institution licensed by the Central Bank of Nigeria to accept deposits from the public and provide credit, payment, and other financial services. UBA Plc. is one of Nigeria's systemically important deposit money banks.

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