An Empirical Analysis of Capital Structure, Liquidity and Banking Sector Performance in Nigeria (2011-2021)

Akinbola Olawale¹ and Ezeala Obinna^2,

¹Department of Finance, University of Lagos, Lagos, Nigeria

²Department of Economics, University of Lagos, Nigeria

Cite this paper:
Akinbola Olawale and Ezeala Obinna. An Empirical Analysis of Capital Structure, Liquidity and Banking Sector Performance in Nigeria (2011-2021). Journal of Finance and Economics. 2023; 11(3):149-159. doi: 10.12691/jfe-11-3-3

Abstract

The study examines the relationship between capital structure, liquidity, and banking sector performance in Nigeria from 2011 to 2021. Utilizing the Panel Least Square (PLS) method and drawing upon the theoretical frameworks of trade-off theory, pecking order theory, and agency theory, the study provides valuable insights into the determinants of banking sector performance. The findings reveal that long-term debt has a statistically significant positive impact on returns on assets, indicating that an increase in the long-term debt ratio is associated with higher bank performance. However, the relationship between short-term debt and returns on assets is positive but statistically insignificant, suggesting that short-term debt may not significantly influence bank performance. The analysis shows that the debt equity ratio does not have a significant impact on returns on assets, suggesting that the level of debt relative to equity may not be a major determinant of bank performance. On the other hand, the equity to asset ratio has a statistically significant positive effect on returns on assets, emphasizing the importance of higher equity levels in contributing to improved bank performance. Furthermore, the study finds that a more concentrated ownership structure has a statistically significant negative impact on returns on assets, indicating that a higher level of bank ownership hinders bank performance. Conversely, the net loan to total asset ratio demonstrates a statistically significant positive relationship with returns on assets, suggesting that increased lending activity contributes to improved bank performance. In terms of other factors, the analysis reveals that larger firm size has a statistically significant positive impact on returns on assets, indicating that larger banks tend to exhibit better performance. However, the age of the bank is not found to be a statistically significant determinant of performance. These findings provide important insights for banking industry practitioners, policymakers, and regulators in Nigeria. The results suggest that long-term debt, equity levels, ownership structure, liquidity, and firm size are significant factors influencing bank performance. Hence, it was therefore recommended that policymakers should encourage banks to access long-term debt financing options by promoting long-term debt instruments, emphasizing the importance of sufficient capital requirements and encouraging banks to strengthen their equity base while promoting a diverse ownership structure in the banking sector to enhance performance.

Keywords:
Capital Structure Liquidity Banking Sector Performance

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