1.1 BACKGROUND OF THE STUDY
Liquidity is necessary for banks to compensate for expected and unexpected balance sheet fluctuation and to provide funds for growth. It also represents a bank‟s ability to efficiently accommodate the redemption of deposits and other liabilities and to cover funding increases in the loan and investment portfolio (Grueving and Bratanovic 2003).
A bank has adequate liquidity potential when it can obtain needed funds (by increasing liabilities, securitizing or selling assets) promptly and at a reasonable cost.
Sayers (1960:59), asserts that the perfectly liquid asset is of course cash itself. The more the cash a banker holds the more obviously can he exchange for deposits. But cash is an „‟idle asset‟‟, it earns no income at all. To make a profit, the banker must hold some assets which are imperfectly liquid. What should be the nature (other than income earning) of the imperfectly liquid assets of a bank? The answer which bankers have given to this question has generally left an ambiguity about the word „‟liquidity‟‟, an ambiguity that has its root in the banking conditions of earlier years. According to Olagunju, Adeyanju and Olabode, (2011), liquidity is the ability of the company to meet its short term obligations. It is the ability of the company to convert its assets into cash. According to Nwankwo (2004), in banking, liquidity management simply means being able to meet every financial commitment when due, whether it is withdrawing from a current account, maturing euro or interbank deposit or a maturing issue of commercial paper. Bank liquidity refers to as the ability of a bank or banks to raise certain amount of funds at a certain cost within a certain period of time to discharge obligations as they fall due. It follows, therefore, that quantity, that is, amount, time and cost, are at the heart of liquidity management. The greater the amount of funds a bank can raise in a certain time at a specified cost, the more liquid it is. Similarly, the sooner a bank can raise
a given amount of fund at a certain cost, the greater is its liquidity; and the less it costs a bank to raise a given amount of funds in a certain period of time, the more liquid it is. This has two implications to be effective, liquidity management must contribute tom the achievement of the overall corporate funds management objective of attaining and maintaining a balance of profitability, solvency and liquidity.
To satisfy depositor‟s claims, a bank must be able to convert its assets into cash quickly. But this is not all, if the depositor‟s claims are to be fully satisfied, the banker‟s assets must be converted into cash without loss. When bankers have said that they aim at liquidity, they have generally included both these attributes
According to Ariyo (2005), in a non-barter economy (like that of Nigeria), money serves as the measure and store of value. It also oils the wheels of the economy by serving as the means of exchange. In this regard, one unit of physical output or service rendered need to be backed up with a similar unit of currency to ensure parity in value between the real output and the unit of currency.
Regulatory agencies like Central Bank of Nigeria (CBN) and Nigerian Deposit Insurance Corporation (NDIC) were normally established to ensure appropriate liquidity. Bindseil (2000:1), asserts that „‟liquidity management” of a Central bank is defined as the frame work, set of instruments and especially the rules the Central bank follows in steering the amount of bank reserves in order to follow their price ( i.e., short term interest rates) consistently with its ultimate goals (e.g., price stability).
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. (Olagunju, Adeyanju and Olabode, 2011)
1.2 STATEMENT OF THE PROBLEM
Just as a bank is a going concern, so is the problem of management of liquidity of Nigerian banks. In particular, the liquidity management is a continuing dilemma. A significant proportion of the problem facing banks are attributable to their inability to manage the liquidity/profitability conflicts. In fact, there is a short trade off between liquidity and profitability by banks which is currently giving some concern to the regulatory authorities like the CBN and the NDIC.
Given that poor banking habits has been the bane of the Nigerian society, how could the liquidity and hence profitability position of Nigerian banks maintain acceptable level or standard in developing banking culture.
Though it has been established that excess liquidity entails the risk of low earnings or less earning, on the other hand, liquidity problems bring about a loss of faith and confidence in the Nigerian banks. So banks must strike a balance between the two (in excess liquidity and shortage of liquidity).
1.3 OBJECTIVE OF THE STUDY
All over the world, banks are subjected to varying degrees of regulations because of their sensitive nature as custodians of funds and their ability to create money. However, in the Nigeria context, these controls are mainly direct and administrative resulting invariably in less efficiency in the management and allocation of resources. Through the use of the instruments of the monetary policy, the Central Bank of Nigeria, directly changes the levels of banks cash reserves and indirectly induces changes in the terms and availability of credit and ultimately money supply and general economic activities. Managing liquidity therefore entails striking a balance between the customer‟s need for liquidity and the demand to optimizing interest earning by tying down deposits in other less liquid assets such as loans and advances.
The summary of the objective of the study can be stated as follows;
i. To examine how excess liquidity affects the profitability of Nigerian banks.
ii. To examine how shortage of liquidity affects the profitability of Nigerian banks.
iii. To show whether loans and advances do affect the profitability of Nigerian banks.
1.4 RESEARCH QUESTIONS
i. To what extent does excess liquidity affect the profitability of Nigerian banks?
ii. To what extent does shortage in liquidity have significant effect on profitability of the Nigerian banks?
iii. How do loans and advances affect the profitability of Nigerian banks?
1.5 HYPOTHESES OF THE STUDY
On the basis of the above views, the researcher hereby proposes the following hypothesis:
Ho1. Excess liquidity does not have a significant impact on the profitability of Nigeria banks
Ho2. Shortage in liquidity does not have a significant impact on the profitability of Nigerian banks
Ho3. Loans and advances do not have significant impact on the profitability of Nigerian banks.
1.6 SCOPE OF THE STUDY
This work is designed to preview the liquidity management of Nigerian banks. It will also show the inter-relationship that exists between Nigerian banks. This study centres on the Enugu main branch of First Bank of Nigeria PLC and Zenith Bank PLC, Okpara Avenue, Enugu.
1.7 SIGNIFICANCE OF THE STUDY
In this regard and taking into consideration the changing trend in our banking system, this study is undertaken in other to contribute to the existing literature by updating it as much as possible. This study is hoped to unveil problems likely to rise out of some dimension which Nigerian banking business is fast assuming in this country. This writer intends to identify imminent consequences
including future prospects and challenges of management of liquid assets and liability of Nigerian banks.
In addition, suggestions will be made to help in checking the anticipated undesirable consequences and consolidate the positive effects of the policy measures. This study provides good reading materials for practicing bankers, Professionals in finance, accounting, economics and other related fields.
1.8 LIMITATIONS TO THE STUDY
The researcher has constraints in visiting other Nigerian banks considering the time and financial involvements as a student researcher. Some other problems that hindered my work include the inability of the researcher in obtaining adequate and reliable information from the staff of Enugu main branch of First Bank of Nigeria and Zenith Bank PLC, Okpara Avenue, Enugu. Banks would like to keep their secret of success of such important information from their competitors.
Finally, availability of the required data will expose the operational results of the banks which they might not be willing to release for fear of getting into the hands of their competitors as earlier mentioned.
1.9 DEFINITION OF TERMS
Banks deposit: the amount outstanding to the credit of the bankers but must be repaid on demand. Deposits are not held in trust but are borrowed by customers.
Liquidity: the quality of an asset that makes it easily convertible into cash with little or no risk of loss. That is, a state of being able to raise funds easily by selling assets.
Assets: aspect of a balance sheet that shows the investment decisions of the bank.
Liabilities: aspect of a balance sheet that shows the financing decisions of a firm.
Balance sheet: a statement that shows a summary of a bank‟s financial position or performances. That is, a bank‟s investment and financing decisions.
Bank: an organisation offering financial services, especially loans and the safe-keeping of customer‟s money.
Portfolio: a collection of (in this discussion) bank‟s investment assets.
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