ABSTRACT
This study examined liquidity management and commercial banks’
profitability in Nigeria. The major aims of the study were to find empirical
evidence of the degree to which effective liquidity management affects
profitability in commercial banks and how commercial banks can enhance their
liquidity and profitability positions. Considering the nature of the survey,
quantitative methods of research were applied. In attempt to achieve the
objectives of the study, several findings were made through the analysis of
both the structured and unstructured questionnaire on the management of banks
and the financial reports of the sampled banks. The data obtained from the
Primary and Secondary sources were analyzed through collection, sorting and
grouping of the data in tables of percentages and frequency distribution. We
formulated a hypothesis, which were statistically tested through Pearson
correlation data analysis. Findings from the testing of this hypothesis
indicate that there is significant relationship between liquidity and
profitability. That means profitability in commercial banks is significantly
influenced by liquidity and vice versa. The study concluded that for the
success of operations and survival, commercial banks should not compromise
efficient and effective liquidity management and that both illiquidity and
excess liquidity are "financial diseases" that can easily erode the
profit base of a bank as they affect bank's attempt to attain high
profitability-level.
TABLE OF CONTENTS
CHAPTER ONE
1.0 BACKGROUND OF STUDY
1.1 INTRODUCTION
1.2 STATEMENT OF THE PROBLEM
1.3 OBJECTIVES OF THE STUDY
1.4 RESEARCH HYPOTHESIS
1.5 RESEARCH QUESTIONS
1.6 SIGNIFICANCE OF THE STUDY
1.7 LIMITATION OF THE STUDY
1.8 SCOPE OF THE STUDY
1.9 DEFINITION OF TERMS
CHAPTER TWO
2.0 LITERATURE REVIEW AND
THEORETICAL INSIGHT
2.1 INTRODUCTION
2.2 RELEVANCE OF LIQUIDITY
AND PROFITABILITY TO NIGERIAN BANKS
2.3 THE CONCEPT OF LIQUIDITY
2.3.1 Liquidity
Components
2.4 ELEMENTS OF LIQUIDITY
2.5 THE MANAGEMENT OF
LIQUIDITY IN COMMERCIAL BANKS
2.6 LIQUIDITY MEASUREMENT IN
COMMERCIAL BANKS
2.7 GUIDELINES FOR THE
DEVELOPMENT OF LIQUIDITY MANAGEMENT POLICIES
CHAPTER
THREE
3.0 RESEARCH METHODOLOGY AND DESIGN
3.1 RESEARCH DESIGN
3.2 POPULATION OF THE STUDY
3.3 SAMPLE OR SAMPLING TECHNIQUES
3.4 RESEARCH INSTRUMENTS
3.5 DATA COLLECTION PROCEDURE
3.6 DATA ANALYSIS TECHNIQUES
3.6.1 STATISTICAL PROCEDURE
3.7 DATA COLLECTION PROCEDURE
CHAPTER FOUR
4.0 PRESENTATION AND
ANALYSIS OF DATA
4.1 INTRODUCTION
4.2 PRESENTATION OF DATA
CHAPTER FIVE
5.0 SUMMARY, CONCLUSION AND
RECOMMENDATION
5.1 INTRODUCTION
5.2 SUMMARY OF FINDINGS
5.3 CONCLUSION
5.4 RECOMMENDATION
BIBLIOGRAPHY
QUESTIONAIRE
CHAPTER ONE
1.0 BACKGROUND OF STUDY
1.1 INTRODUCTION
In every system, there are major
components that feature paramount for the survival of the system. This is also
applicable to the financial system. The banking institution had contributed
significantly to the effectiveness of the entire financial system as they offer
an efficient institutional mechanism through which resources can be mobilized
and directed from less essential uses to more productive investments
(Wilner,2000).
In the performance of this
financial inter-mediation role, the financial institutions have proved to be an
effective channel between savers and borrowers. Among the financial
institutions that make themselves available for this all-important role are
merchant banks, savings banks, the Central bank, development banks and
commercial banks. Commercial banks have overtime become very important
institutions in the financial system as they function as retail banking units
facilitating the transfer of financial assets that are well desired from some
part of the public (Fund Lenders) into other financial assets which are more
widely preferred by greater part of the public (fund seekers). In view of this
role and of the fact that the activities of the commercial banks affect the
greater part of the society, commercial banks are selected as the main focus of
this study.
Financial inter-mediation role of
the commercial banks hence becomes the bed-rock of the two major functions of
commercial banks namely deposit mobilization and credit extension. An adequate
financial intermediation requires the purposeful attention of the bank
management to profitability and liquidity, which are two conflicting goals of
the commercial banks. These goals are parallel in the sense that an attempt for
a bank to achieve higher profitability will certainly erode its liquidity and
solvency positions and vice versa.
Practically, profitability and
liquidity are effective indicators of the corporate health and performance of
not only the commercial banks (Eljelly,2004), but all profit-oriented ventures.
These performance indicators are very important to the shareholders and
depositors who are major publics of a bank. As the shareholders are interested
in the profitability level, the depositors are concerned with liquidity
position which determines a bank's ability to respond to the withdrawal needs
which are normally on demand or on a short notice as the case may be.
Liquidity management is an
important aspect of monetary policy implementation, while the other integral
component of monetary policy, i.e. economic management, involves promoting
sustainable economic growth over the long term by keeping monetary and credit
expansion in step with an economy’s noninflationary output potential, liquidity
or reserve management as a shorter time horizon. In order to maintain relative
macro-economic stability, reliance is placed on liquidity management to even
out the swings in liquidity growth in the banking system.
An important step towards market
oriented policy procedures takes place when the Central bank assumes
responsibility for evening out swings in demand relative to demand on its own
initiative, rather than waiting passively for individual banks to come to it.
Once it begins to supply or absorb liquidity through market intervention, the
discount window plays an important, but subordinate safety valve role by
providing the short-run reserve needs of the banking system for purposes of
meeting short term liquidity obligations.
In the financial intermediation
process, a bank collects money on deposit from one group (the surplus unit) and
grants it out to another group (the deficit unit). These roles involve bringing
together people who have money and those who need money.
Apart from the technical aspects
of the CBN’s responsibility discussed above, it is important in this section to
highlight certain critical factors that are required to facilitate liquidity
management in the context of autonomy. These include a stable macroeconomic
environment, a sound and competitive financial system, adequate regulatory and
supervisory framework, and capacity build up.
Stable Macroeconomic Environment
to enhance liquidity management and ensure macroeconomic stability, there is
the compelling need to insulate monetary policy from the pressure of financing
the government fiscal deficit. Also, the monetary authorities should have
freedom in the management of interest rate in order to sufficiently influence
transactions in the intervention securities and enhance the effectiveness of
instruments for liquidity management. Uncontrolled financing of the deficit by
the CBN, either through ways and means advances or the absorption of
unsubscribed government debt issues, increase bank liquidity thereby
constraining the effectiveness of instruments for liquidity management
(Amarachukwu Ona, 2003)
Under the new dispensation,
sustaining monetary stability will be achieved through greater coordination
between the CBN and the Federal Ministry of Finance, in order to limit
government borrowing from the bank to the level stipulated by law.
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 later is not in position to
meet their financial obligations. Considering the public loss of confidence as
a result of bank distress which has bedeviled 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 should ensure
that it operates on profit and at the same time meets the financial demands of
its depositors by maintaining adequate liquidity.
The problem then becomes 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. This
problem becomes 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, erosion of asset base.
This research seeks to
investigate other problems such as excess liquidity and the problem of establishing
the proportion of the deposits that will be demanded by the depositors at any
particular time.
There is also the problem of
satisfying the two publics of the commercial banks simultaneously. While the
accurate selection of the factors that influence the level of bank liquidity
also poses some problems. All these problems are what the study intends to
consider, find solutions and make recommendations where necessary.
1.3 OBJECTIVES OF THE STUDY
The competitive environment of
the financial institutions is so tense that any commercial bank that aims to
survive must be fully aware of the consequences of its liquidity and
profitability obligations as both variables can make or destroy its future.
This study is largely centered on liquidity management which enables the bank
to determine its liquidity requirement and ensures its ability to meet up the
depositors demand or its financial obligations, thereby maximizing its value.
Due to the fact that the value of
the new deposit does not synchronize or correspond with the customers'
withdrawal needs at any particular time, there are uncertainties in the asset
management of the commercial banks. These uncertainties become complex as
depositors make their withdrawals on demand or at short notice.
Consequently, this study will
disclose how liquidity management will handle these uncertainties and determine
their effects on profitability. The study is aimed at discovering the specific
factors that are useful in enhancing the profitability and liquidity position
of the commercial banks.
It will attempt to identify the
basic causes of liquidity problems in Nigerian commercial banks and to
recommend appropriate measures to solve such problems.
1.4 RESEARCH HYPOTHESIS
The Research Hypothesis is hereby
stated to give more emphasis to the purpose of the Study.
H0: There is no significant
relationship between liquidity and profitability of a commercial Bank. (Null
Hypothesis)
H1: There is significant
relationship between liquidity and profitability of a commercial Bank (Alternate
Hypothesis).
1.5 RESEARCH QUESTIONS
The study is intended to answer
the following questions amongst others relevant to the study topic.
1. What are the significant
relationship between a bank’s levels of deposit and liquidity?
2. Does the amount of loans and
advances granted to customers significantly determine the profitability level?
3. Is there any significant
relationship between liquidity situation in a bank and related profitability?
4. Do commercial banks in Nigeria
keep the minimum liquidity ratio required by CBN at all times?
5. Does liquidity necessarily
affect the investment portfolio performance?
6. Do you think bank liquidity
affect/lead to bank crisis?
7. Does bank’s liquidity affect
inflation rate in the economy through commercial bank lending process?
8. Do
you think bank liquidity would affect money supply?
1.6 SIGNIFICANCE OF THE STUDY
The study justification arises due to
incessant crises in the banking sector in Nigeria within a recent time now.
Apart from this liquidity has always been a
source of concern with some Nigeria banks. The importance of liquidity has even
acquired a new dimension in the advanced countries of the world in recent
years.
However, with the emergence of active
liability management strategies liquidity has been more than a function,
particularly in some instance of the of the banks capacity to acquire
additional funds in the market place.
It is hoped that it will assist people
carrying out study on this
1.7 LIMITATION OF THE STUDY
Time constraints were one of the limitations
encountered in the case of the study.
This is because; this study was carried out
during an academic session, the researcher did not have enough time to properly
concentrating on this particular study.
Secondly, finance was yet another problem
that put a check on the extent of investigation.
Finally there was the problem of inadequate
information and unavailable material or information for the study.
1.8 SCOPE OF THE STUDY
Due to time and resources constraints the
study at hand has been limited to First Bank of Nigeria Plc.
1.9 DEFINITION OF TERMS
The following definition terms are given to
facilitate better understanding.
Liquidity
Management
This
is the act of storing enough funds and razing funds quickly from the market to
satisfy depositors, Loan customers and other parties with a view to maintain
public confidence.
Bank
A bank
is a financial house established for the purpose of accepting deposits and
lending out funds in addition to other services.
Central
bank of Nigeria
This is the national apex and financial
institution that regulates the banking system value supply and cost of finds in
the economy.
Financial
System
The aggregation of financial market arrangement
institutions agent that inter-act with each other and other economic unit
together with the set of rules and regulation that guide their interactions.
Nigerian
Deposit Insurance Corporation (Ndic)
This
is the body which ensures that customer funds are insured in the commercial
banks at liquidation they make sure the customer are paid bank their deposits.
Profitability
Ratio
This a
class of financial metrics that are used to asses a business ability to
generate earning and compared to it expenses and other referent costs incurred
during a specific period of time, for most of these ratios, having a higher
value relative to a competitors ratio or the same ratio from a previous period
is indicative that company is doing well.
Liquidity
Assts Theory
This theory argues that banks should hold
large sum of liquid assets to avert sudden payment request that might be
received.
Call
Money
They are banks excess reserves on daily or
short-term basis with the correspondent banks.
Short-Term
Government Securities
These
are gifted securities with short-term maturity which are being bought and sold
in active market.
Marginal
Loans
This is a loan made by a brokerage house to a
client that allows the customer to buy stocks on credit
Liquidity
Ratio
This is a class of financial metrics that is
used to determine a company ability to pay off its short term debts obligation.
Generally the higher the value of the ratio, the larger the margin of safety
that the company posses to over short-term debts.
Liquidity
Portfolio
Liquidity is the ability for the bank to have
sufficient capital in it account or cash deposited by individuals and portfolio
is any collection of financial assets such as stock bonds and cash it may be
held by individual investor and or managed by financial professional’s hedge
financial institution, or a portfolio is a brief case for caring loses papers.
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