ABSTRACT
The study empirically emphasized the impact of liquidity management on commercial banks profitability in Nigeria using time series data from 1996 to 2015. The dataset sourced from Central Bank of Nigeria Statistical Bulletin was analyzed using multiple regression analysis. The results of the analysis revealed that bank cash assets and treasury bills rate has a negative and significant impact on commercial banks profitability (proxied by return on assets). Also, treasury bills rate was found to have a negative and significant impact on commercial banks profitability. On the other hand, cash reserve to asset ratio was positive and insignificant, while liquidity ratio was positive and insignificant. Based on the findings an efficient management of bank liquidity would not only inure to the benefit of banks but also to individuals and business entities and thus the whole economy at large.
TABLE OF CONTENTS
Title i
Declaration ii
Certification iii
Dedication iv
Acknowledgments v
Table
of contents vi
List
of Tables vii
Abstract
CHAPTER ONE
INTRODUCTION 1
1.1 Background to the Study 1
1.2 Statement of the Problem 4
1.3 Objectives of the Study 5
1.4 Research Questions 6
1.5 Research Hypotheses 6
1.6 Significance of the Study 7
1.7 Scope of the Study 8
CHAPTER
TWO
REVIEW
OF RELATED LITERATURE 10
2.1 Conceptual
Framework 10
2.1.1 Concept of Liquidity 14
2.1.2 The Concept of Profitability in Banks 15
2.1.3 Measurement of Liquidity in Commercial Banking 17
2.1.4 Relevance of Liquidity and Profitability to
Nigerian Banks 21
2.2 Theoretical
Review 22
2.2.1 Anticipated
Income Theory 22
2.2.2 Shiftability
Theory 22
2.2.3
Liquidity Preference Theory 23
2.2.3 Commercial
Loan Theory 24
2.3 Empirical
of Related Empirical Literature 25
CHAPTER
THREE
RESEARCH
METHODOLOGY 32
3.1 Research
Design 32
3.2 Area of the Study 32
3.3 Data
Collection 33
3.4 Method of Data Analysis 33
3.4.1 Model Specification 34
3.5 Description of the Variables 35
3.7 Decision rule 37
CHAPTER FOUR
PRESENTATION OF DATA, ANALYSIS AND
DISCUSSIONS
4.1 Presentation of Data 38
4.2 Results, Interpretations and Hypotheses
Testing 38
4.2.1 Descriptive Analysis 39
4.2.2 Regression Analysis 40
4.2.3 Discussion
of Results and Test of Hypotheses 41
CHAPTER FIVE
SUMMARY
OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings 43
5.2 Conclusion 43
5.3 Recommendations 44
REFERENCES 46
APPENDIX Descriptive Statistics &
Regression Analysis 51
LIST OF TABLES
Table Page
2.1 Measurement of Liquidity in
Commercial Banking 18
4.1
Time series Data used for
Study (1996 – 2015) 38
4.2: Descriptive
Statistics 39
4.3: Regression Results (Dependent variable, ROA) 40
CHAPTER ONE
INTRODUCTION
1.1 Background
to the Study
Liquidity is a financial
term that simply means the amount of capital that is available for investment.
Today, most of this capital available for investment is credit, not cash. Thus,
the need for easy and prompt convertibility of this credit into cash in order
to meet urgent needs emerging from business environment. In a related
dimension, bank liquidity simply means the ability of the banks to maintain
sufficient funds to pay for its maturing obligations (Owolabi, Obiakor, and
Okwu, 2011). More so, it is the ability of banks to immediately meet cash,
cheques, other withdrawals obligations and legitimate new loan demand while
abiding by existing reserve requirements. Nwaezeaku (2008) defined liquidity as
the degree of convertibility to cash or the ease with which any asset can be
converted to cash sold at a fair market price.
Therefore,
Liquidity management involves the strategic supply or withdrawal from the
market or circulation, the amount of liquidity consistent with a desired level
of short-term reserve money without distorting the profit making ability and
operations of banks (Soludo, 2000). It relies on the daily assessment of the
liquidity conditions in the banking system, so as to determine its liquidity
needs and thus the volume of liquidity to allot or withdraw from the market.
The liquidity needs of the banking system are usually defined by the sum of
reserve requirements imposed on banks by a monetary authority (CBN, 2010).
Financing
business, especially at the wake of the global financial crisis, has become a
major source of concern for business owners and managers as bank loans are
becoming too expensive to maintain as a result of tightening of both the local
and international financial market and the reluctance of the public to invest
in the share of companies sequel to the crash of the capital market (Bashir,
2006). These situations compel business owners and managers to device various
strategies of managing internally generated revenue to enhance their chances of
making profit and meeting existing shareholders’ expectations. Liquidity is a
precondition to ensure that firms are able to meet its short-term obligations.
The liquidity position in a company is measured based on the 'current ratio'
and the 'quick ratio'. The current ratio establishes the relationship between
current assets and current liabilities. Normally, a high current ratio is
considered to be an indicator of the firm's ability to promptly meet its short
term liabilities (Berk, 2009). The quick ratio establishes a relationship
between quick or liquid assets and current liabilities. An asset is liquid if
it can be converted into cash immediately or reasonably soon without a loss of
value. Low liquidity leads to the inability of a company to pay its creditors
on time or honour its maturing obligations to suppliers of credit, services and
goods. This could result in losses on account of non-availability of supplies
and lead to possible insolvency. Also, the inability to meet the short term
liabilities could affect the company's operations and in many cases it may
affect its reputation as well (Chakraborty, 2008).
Smith (2006) posits that liquidity
management is a concept that is receiving serious attention all over the world
especially with the current financial situations and the state of the world
economy. Some of the striking corporate goals include the need to maximize
profit, maintain high level of liquidity in order to guarantee safety, attain
the highest level of owner’s networth coupled with the attainment of other corporate
goals and objectives. The importance of liquidity management as it affects
corporate profitability of commercial banks in today’s business environment cannot
be over emphasised. The crucial part in managing working capital is required to
maintenance of its liquidity in day-to-day operation to ensure its smooth
running and meets its obligation (Eljelly, 2004). Liquidity plays a significant
role in the successful l functioning of financial institutions.
As a way of ensuring corporate survival
and growth, commercials banks have ensure that it does not suffer from lack-of
or excess liquidity to meet its short-term compulsions. A study of liquidity
management is of major importance to both the internal and the external
analysts because of its close relationship with day-to-day operations and
profitability of a commercial banks (Gapenski, 2010). Dilemma in liquidity
management is to achieve desired trade-off between liquidity and profitability
(Raheman, 2007). Liquidity requirement of any financial institutions depends on
the peculiar nature of the firm and there is no specific rule on determining
the optimal level of liquidity that a firm can maintain in order to ensure
positive impact on its profitability.
1.2 Statement of the Problem
Through the financial inter-mediation
role, the commercial banks reactivate the idle funds borrowed from the lenders
by investing such funds in different classes of portfolios. Such business
activity of the bank is not without problems since the deposits from these fund
savers which have been invested by the banks for profit maximization, can be
recalled or demanded when the latter is not in position to meet their financial
obligations. Considering the public loss of confidence as a result of bank
distress which has bedevilled the financial sector in the last decade; and the
intensity of competition in the banking sector due to the emergence of large
number of new banks, every commercial bank has been under pressure to ensure
that it operates on profit and at the same time meets the financial demands of
its depositors by maintaining adequate liquidity. As a result, the problem is how
to select or identify the optimum point or the level at which a commercial bank
can maintain its assets in order to optimize these two objectives since each of
the liquidity has a different effect on the level of profitability. In recent
times, this problem has become more pronounced as good numbers of commercial
banks are engrossed with profit maximization and as such they tend to neglect
the importance of liquidity management. However, the profit maximization
becomes a myth as the resulted liquidity can lead to both technical and legal
insolvency with the consequence of low patronage, deposit flight and erosion of
asset base.
Furthermore, the current squeeze in
Nigeria on cash and credit is threatening the survival of many commercial
banks. The fact that commercial banks cannot exist without working capital is
thus, undeniable. Although, liquidity is an important ingredient in the smooth
working of business entities, it has not attracted much attention of scholars. There
is a missing gap in the Nigerian literature as there are few studies that have
extracted data from the annual statements of deposit money banks to empirically
investigate the profitability- liquidity nexus. Thus, this study will not only ascertain
the impact of liquidity management on profitability of commercial banks, it
will also contribute to the missing gap in the extant literature.
1.3 Objectives of the Study
The broad objective of the study was to
ascertain the impact of liquidity management on the profitability of commercial
banks in Nigeria. Specifically, the study sought to:
i.
Examine the effect of bank cash assets on
the profitability of commercial banks in Nigeria;
ii.
Evaluate the effect of cash reserve to
asset ratio on the profitability of commercial banks in Nigeria;
iii.
Determine the impact of treasury bills on
profitability of commercial banks in Nigeria.
iv.
Investigate the impact of liquidity ratio on
the profitability of commercial banks in Nigeria.
1.4 Research Questions
The following research questions were
answered in this study:
i.
To what extent has cash assets impacted on
the profitability of commercial banks in Nigeria?
ii.
In what way does cash reserve to asset
ratio impacted on the profitability of commercial banks in Nigeria?
iii.
How has treasury bills influenced the on the
profitability of commercial banks in Nigeria?
iv.
How has liquidity ratio impacted on the
profitability of commercial banks in Nigeria?
1.5 Research Hypotheses
The hypotheses for the study are stated
below in null form as follows:
HO1: Bank cash assets has no significant impact on
the profitability of commercial
banks in Nigeria;
HO2: Treasury bills do not
have any significant impact on profitability of commercial banks in Nigeria;
HO3: Cash reserves to asset
ratio has no significant impact on the profitability of commercial banks in Nigeria;
HO4: Liquidity ratio has no
significant impact on the profitability of commercial
banks in Nigeria.
1.6 Significance of the Study
This study will help
strengthen the Nigerian banking sector by providing detailed information on the
liquidity management policies in regard to the profitability of Commercial
Banks in Nigeria. Commercial Banks operating in Nigeria can use the information
to improve on their mode of delivery to strengthen their stand against other
financial institutions especially the MFIs.
Moreso, finance controllers and managers
have a major role to manage their working capital and cost structure in order
to drive the banks performances for the survival of the organization. This
research will provide a guideline on whether banks can perform well if the
working capital is efficient and cost structures are managed well. The study will
also help scholars to improve on literature on liquidity management policies in
Nigeria and to provide further guidance in filling in the gaps on further
studies.
The findings of the study can guide
finance managers in banks to make investment decisions that will satisfy the
stakeholders’ interest with regard to liquidity and profitability needs of the
investors. Identification of liquidity levels that maximize profits enables
managers revise and adopt relevant strategies.
Additionally, the regulators will have
evidence as to what levels of liquidity are present in profitable banks. This
will help them formulate rules and regulations that help minimize failure risk
in the sector. Further the research adds to the body of knowledge in finance as
well as further evidence on how banks are managed.
1.7 Scope of the Study
The study which centred on liquidity
management among financial institutions will generated data from selected
commercials and CBN statistical bulletin from 1996 to 2015. The timeframe was
selected because of the fluctuation of exchange rate that occurred in the last
decade which affected liquid management strategies of commercial banks. Thus,
the study is geared to ascertain the extent of liquidity management on the profitability
of commercial bank.
1.8 Limitations of the study
The
researcher encountered many difficulties in the course of carrying out this
research work. Some of the difficulties in getting and gathering information
are as follows:
The
research found it difficult to access vital information from official of data
and statistical reports due to their unresponsive attitude to provide current
and relevant data in the course of sourcing for useful data. Most of the data
provided were either outdated, inconclusive or irregularities.
The
researcher went through difficulties in search for confidential data for
analysis. Many commercial bank owners were reluctant to give out or provide
information needed for the research, since they believe that tax payment is
something very confidential.
Click “DOWNLOAD NOW” below to get the complete Projects
FOR QUICK HELP CHAT WITH US NOW!
+(234) 0814 780 1594
Login To Comment