A Review of Capital Structure and Commercial Bank Liquidity Management in Nigeria

This study reviews the impact of capital structure on commercial bank liquidity management in Nigeria. Focusing on eight Nigerian Deposit Money Banks over the period 2006–2021, the paper investigates how financing decisions—captured through the debt-to-equity and leverage ratios—influence profitability, measured by Return on Equity (ROE). Drawing on key theoretical frameworks, including Trade-Off, Agency, and Pecking Order theories, the research critically examines how internal and external financing choices affect bank performance. Empirical analysis using regression via the Generalized Method of Moments (GMM) reveals a significant negative relationship between capital structure indicators and profitability. Specifically, higher reliance on debt financing is associated with lower ROE, suggesting that increased debt levels may constrain a bank’s profit-making ability. Additionally, the study highlights the importance of robust liquidity management practices, emphasizing that careful cross-checking of liquidity ratios can inform both routine operations and emergency liquidity provisions. The findings underscore the need for banks to identify an optimal mix of debt and equity that maximizes profitability while mitigating agency costs. This review provides valuable insights for policymakers and banking practitioners aiming to enhance financial stability and performance in emerging markets.