Financial Deepening and the Liquidity of Commercial Banks in Nigeria

This study examined the effect of financial deepening on the liquidity of commercial banks in Nigeria from 2001 - 2018 using a sample of seven commercial banks. Panel data analysis technique was used in analyzing the secondary data, which were sourced from the Central bank of Nigeria statistical bulletin and the annual reports of the selected banks. Cash to deposit ratio and cash to asset ratio of commercial banks were the proxies of liquidity, while, the ratio of broad money supply to GDP, the ratio of deposit liabilities to GDP and the ratio of credit to the private sector to GDP represents financial deepening. The findings of this study revealed that financial deepening indicators; the ratio of broad money supply to GDP and the ratio of deposit liabilities to GDP had positive but statistically insignificant effect on commercial banks' liquidity in Nigeria, while, the ratio of credit to the private sector to GDP has negative but significant effect on commercial banks' liquidity. The study recommends that, monetary and macroeconomic policies should be geared towards strategically increasing money supply, and credit to the private sector should be channeled to the real sector of the economy to increase economic activities, generate revenue, increase savings and enhance commercial banks liquidity. Furthermore, high quality liquid assets buffer, sufficient to hedge unexpected liquidity outflows should be maintained and there should be regular review of prudential guidelines for efficiency. Measures should be put in place to avoid idle cash by leveraging on savings deposits, fixed account and current account balances to ensure that investment opportunities are utilized and commercial banks liquidity enhanced.