This study examined how liquidity risk affects the profitability of commercial banks in Nigeria, using Return on Equity (ROE) as the measure of profitability. The study focused on three key liquidity indicators: Loan-to-Deposit Ratio (LDR), Cash Reserve Ratio (CRR), and Liquidity Coverage Ratio (LCR). Data were collected from financial statements of selected banks covering 2014 to 2023, and analysis was done using Panel Ordinary Least Squares (OLS) regression. The results showed that LDR had a significant positive effect on ROE (coefficient = 0.040697, p-value = 0.0003), meaning that banks that lend out more of their deposits tend to be more profitable. However, CRR and LCR had negative but insignificant effects on ROE, with coefficients of -0.053538 (p-value = 0.7526) and -0.018040 (p-value = 0.3136), suggesting that holding more reserves or liquid assets slightly reduces profitability but does not have a strong impact. The model explained 93% of the changes in ROE (R² = 0.936993, Adjusted R² = 0.926313), and the F-statistic (87.73978, p-value = 0.000000) confirmed that the overall model was statistically significant. The study recommends that banks optimize their LDR to increase profitability while maintaining enough liquidity to avoid financial risk. It also suggests that banks adopt better asset allocation strategies to reduce any negative effects of CRR and LCR.
Keywords: Cash Reserve Ratio, Commercial Banks, Loan to Deposit Ratio, Nigeria, Return on Equity, and liquidity coverage ratio
