NON-PERFORMING LOANS AND DEPOSIT MONEY BANKS’ LIQUIDITY IN NIGERIA
Abstract
The persistence of liquidity risk in Nigerian deposit money banks (DMBs) remains a key concern for financial stability, particularly in the face of growing non-performing loans (NPLs) and changing loan-loss provisions (LLPs). This study investigates the effect of NPLs on the liquidity of Nigerian DMBs, proxied by the loan-to-deposit ratio (LDR), using quarterly data from 2019Q1 to 2024Q4 sourced from the Central Bank of Nigeria (CBN) Statistical Bulletin.
The study employs the Autoregressive Distributed Lag (ARDL) approach to examine both short-run and long-run dynamics, complemented by Granger causality and diagnostic tests.
The ARDL bounds test confirms the existence of a stable long-run relationship (F-statistic = 3.330, exceeding the 5% critical bound of 2.45). Long-run estimates reveal that NPLs have a significant positive effect on liquidity risk (β = 0.5533, p = 0.000), indicating that rising NPLs increase liquidity pressure. LLPs show an insignificant negative relationship with liquidity risk (β = -0.0027, p = 0.5622), while loan size (LOA) significantly increases liquidity risk (β = 0.2796, p = 0.000). Granger causality results indicate a unidirectional causality from LOA to liquidity risk (p = 0.0156), with no significant causality observed for NPLs and LLPs. Diagnostic tests confirm the robustness of the model.
The study concludes that effective management of NPLs is crucial for liquidity stability in Nigerian banks. Policymakers and bank managers should strengthen risk monitoring and provisioning frameworks to enhance resilience. This study contributes recent empirical evidence on credit risk and liquidity dynamics in an emerging economy.
Keywords: Liquidity risk, non-performing loans, loan-loss provisions, ARDL, Nigerian deposit money banks
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