Liquidity risk and bank financial performance: an application of system GMM approach
Journal of Financial Regulation and Compliance
ISSN: 1358-1988
Article publication date: 28 January 2022
Issue publication date: 27 May 2022
Abstract
Purpose
This study aims to examine the effect of liquidity risk on deposit money banks’ (DMBs) performance in Sub-Saharan Africa. This study also tests the interaction effect of liquidity risk and nonperforming loans on the performance of DMBs’ in Sub-Saharan Africa.
Design/methodology/approach
This study uses a two-step system generalized method of moment to test the influence of liquidity risk on DMBs’ performance in Sub-Saharan Africa. A sample of 50 listed banks across six Sub-Saharan African countries, including Nigeria, Ghana, South Africa, Zambia, Kenya and Tanzania, were used. The bank performance proxy used are return on asset and return on equity, while net interest margin is used for robustness check.
Findings
The study’s findings reveal a significant and negative association between liquidity risk and bank performance. Moreover, the relationship between the nonperforming loan and bank performance is negative and significant. Furthermore, the interaction effect of liquidity risk and nonperforming loans on bank performance is found to be significantly negative for the two proxies of bank performance. The result is robust for the alternative bank performance measurements and econometric model, which adequately addresses endogeneity tendency.
Originality/value
To the best of the researchers’ knowledge, this is one of the earliest empirical studies that examine the effect of liquidity risk on DMBs’ performance across Sub-Saharan African countries. This study further differs from previous studies with the interaction term of liquidity risk and nonperforming loan included in the model.
Keywords
Acknowledgements
The authors’ wish to appreciate the enormous effort put forward by the anonymous reviewers to strengthen the manuscripts to the standard of the journal.
Citation
Yahaya, A., Mahat, F., M.H., Y. and Matemilola, B.T. (2022), "Liquidity risk and bank financial performance: an application of system GMM approach", Journal of Financial Regulation and Compliance, Vol. 30 No. 3, pp. 312-334. https://doi.org/10.1108/JFRC-03-2021-0019
Publisher
:Emerald Publishing Limited
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