1.1 BACKGROUND OF STUDY
Liquidity is the word that the banker uses to describe his ability to satisfy demand for cash in exchange for deposits. It can also be defined as the capacity of the bank to meet promptly demands that it pays its obligation.
A bank is considered to be liquid when it has sufficient cash and other liquid assets, together with the ability to raise funds quickly from other sources to enable it to meet its payment obligation and financial commitments in a timely manner. In addition there should be a sufficient liquidity buffer to meet almost any financial emergency.
How much liquidity to hold and in what forms to hold it are a constant concern of bank management. Banks are required to comply with legal reserve, requirements. In addition, banks need liquidity to meet seasonal and unexpected loan demands and deposit fluctuations. The majority of the transactions can be anticipated in advance and met from expected cash in flows from deposits, loan repayment or earnings.
Cash reserves also are needed to take advantage of unexpected profit opportunities, or for what might he termed aggressive purposes. When a business firm that the bank has been working to secure as a customer finally presents a loan application, or a particularly desirable investment develops, the bank must have funds available to seize these opportunities. During periods of expanding economic activity, banks are frequently presented with attractive loan situations which can only be met if banks maintain adequate liquidity. To determine the liquidity a bank needs at a particular time is to find the ratio of loans to deposits. The higher the ratio is, the less willing banks will be in lending out and vice versa.
In Enugu State, commercial banks activities are regulated strictly by the banking act of 1969 as amended under the control of the central bank of Nigeria. As a result of these regulation by the central bank, the commercial banks are required to hold specific assets equal to a certain percentage of their deposits and certain liabilities in liquid form. This is known as the legal
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