The Linear Effect of Bank Liquidity on Profitability in Selected African Economies

Ago-Iwoye Journal of Behavioural Sciences Volume 5, No. 2

17 Pages Posted: 16 Nov 2020

See all articles by Oyebola Fatima Etudaiye-Muhtar

Oyebola Fatima Etudaiye-Muhtar

University of Ilorin

Dayo Bamigbade

affiliation not provided to SSRN

Fagbemi Temitope Olamide

affiliation not provided to SSRN

ABDULAZEEZ ABDURRAHEEM

affiliation not provided to SSRN

Date Written: March 15, 2018

Abstract

Given the importance attached to sound liquidity management in the banking industry, this paper investigates the effect of bank liquidity on profitability. The study employs the bankruptcy cost and risk-return hypotheses to examine the linear effect of bank liquidity on bank profit. Annual bank-specific data from commercial banks in Kenya, Nigeria and South Africa, for the period 2000-2014, are used in the study. The two-step system generalised method of moments technique of analysis, an instrumental variable technique that addresses issues such as endogeneity, reverse causality and auto-correlation, is used for the investigation. The results revealed a statistically significant and positive relationship between liquidity and bank profit indicating the applicability of the bankruptcy cost hypothesis. This implies that banks in the study benefit from reduced financial distress and funding costs thereby increasing profits. The study thus recommends that commercial banks in the selected countries hold higher levels of liquidity to mitigate the risk of failure and increase profit.

Keywords: Bankruptcy cost, endogeneity, liquidity risk, profitability

JEL Classification: G21, G32, G33

Suggested Citation

Etudaiye-Muhtar, Oyebola Fatima and Bamigbade, Dayo and Olamide, Fagbemi Temitope and ABDURRAHEEM, ABDULAZEEZ, The Linear Effect of Bank Liquidity on Profitability in Selected African Economies (March 15, 2018). Ago-Iwoye Journal of Behavioural Sciences Volume 5, No. 2, Available at SSRN: https://ssrn.com/abstract=3467454

Oyebola Fatima Etudaiye-Muhtar (Contact Author)

University of Ilorin ( email )

Ilorin, Kwara State 0834
Nigeria

Dayo Bamigbade

affiliation not provided to SSRN

Fagbemi Temitope Olamide

affiliation not provided to SSRN

ABDULAZEEZ ABDURRAHEEM

affiliation not provided to SSRN

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