Liquidity represent the ability to most efficiently accommodate decrease in deposit and fund increase in the loan portfolio, that is to meet the customers loan request fund commitment and line of credit.
A bank has liquidity when it has the ability to manage sufficient cash in a timely manner of at reasonable cost. The cost of obtaining liquidity is a function of market condition and the degree of risk reflected in the balance sheet. Those who are involved in the management of the source and the use of fund fund deposit in the commercial bank are raised to some degree.
There will be a thorough research to prove how the bank has been managing their liquidity and profitably. In this cause, both secondary and primary data were gathered and was analyzed. The primary source was the administration of questionnaire and oral interview while the secondary source was in form of literature reviews of some books, journals and newspaper.
A critical and statistical analysis was carried out on the data available to access the commercial bank assets and liability management in Nigeria, their efficiency and loopholes in the developing economy. Form the finding of the analysis, the research come up with a conclusion and a recommendation.
This research work is aimed at identifying the effect of liquidity and profitability problems on the Nigerian banking sector with regards to their profit and previous efforts made by the Government and the Apex Authority in finding the solution the problem.
In carrying out his study, secondary Data was used extensively. This project work is divided into five chapters:
In chapter one, we have: Introduction, Background of the study, statement of problem, purpose / objectives of the study, significance of the study, scope and limitation and definition of terms.
In chapter two, we have literature review which is made up of liquidity versus profitability in Nigerian Bank, Equilibrium balance between profitability and liquidity ratio-which is further subdivided into; Signifance of liquidity ratio, computation of liquidity ratio, cash ratio, liquidity risks, liquidity preference, liquidity measurement, rational for liquidity ratio measurement. Furthermore, there is factors affecting liquidity of Nigerian banks, Federal Government steps towards solving the liquidity problems in Nigerian banks and finally guidelines for the development of liquidity management policies in Nigerian banks.
Chapter three deals with research design and methodology and also secondary data, it sources, location and method of collection.
Chapter four, deals with the research findings.
Chapter five deals with recommendation and conclusions.
Lastly, there is provision of bibliography.
1.0 Introduction 1
1.1 Background of the study 1-2
1.2 Statement of problem 2
1.3 Purpose of study 2
1.4 Objective of study 2-3
1.5 Research Questions
1.6 Research Hypothesis 3-4
1.6 Significance of study 4
1.7 Scope and limitation of study 4-5
1.8 Definition of terms
1.9 Historical background 5-6
2.0 Preview of Related Literature
2.1 concept of liquidity 8
2.1 Liquidity versus profitability in Nigerian Banking 8-9
and liquidity.
2.3 Liquidity Ratio 11-12
2.3.1 Significance of liquidity ratio 12-13
2.3.2 Computation of liquidity ratio 13-14
2.3.3 Cash ratio 13-14
2.3.4 liquidity Risks 14-15
2.3.5 Liquidity Preference 15-16
2.3.6 Liquidity Measurement 16
2.3.7 Rationale for liquidity ratio measurement 16-17
2.4 Factors affecting liquidity of Nigerian banks 18-19
the liquidity problems in Nigerian banks
Management policies in Nigerian banks. 21
3.1 Secondary Data 23
3.2 Source /location of secondary data 23
3.3 Methods of Data collection 23
CHAPTER FOUR
4.0 Findings 24
5.0 Recommendations 25-26
5.1 Conclusion 27
BIBLIOGRAPHY 28-29
Liquidity is crucial to the on-going viability of any bank as liquidity can have dramatic and rapid effects on even well capitalized banks.
When a crisis develops in a bank as a result of other problems such as deterioration in asset quality, the time available to the bank to address the problem will be determined by the liquidity therefore, the measurement and management of liquidity are amongst the most activities of banks.
The term liquidity means the ease with which an asset
can be turned to cash with certainty Orjih John (1996:152).
Liquidity in banks can be defined as the capacity of the bank to meet promptly its current obligations that is its customers demand.
A bank is considered to be liquid when it has sufficient cash and other short term financial instruments like treasure bill, treasury certificate and call money in its portfolio together with the ability to raise funds quickly from other sources to enable it meet its payment obligation and other financial commitments in time.
How much liquidity to hold and in what form constantly disturbs bank management. Banks are also required to comply with the cash reserve requirements (CRR) set by the Central Bank of Nigeria (CBN).
During periods of expanding economic activities banks are frequently faced with attractive loan situations, which can only be met if banks maintain adequate liquidity.
In Nigeria, Banking activities are registered strictly by the banking act of 1969 was amended under the control of the central bank of Nigeria. As a result of these regulations the banks required to hold specific assets equal to certain other liability in liquid form. This is known as the cash reserve requirement (CRR), liquidity ratio and stabilization securities issued by the central bank.
The combination of liquidity and profitability are essentially relevant for commercial bank managements in Nigeria. This is because the ultimate objectives of a commercial bank is to make profits at all cost, the banker must maintain confidence, and to maintain confidence he must maintain an adequate degree of liquidity in highs assets.
It is therefore against this backdrop that the researcher wishes to examine the effect of liquidity and profitability in commercial bank using guarantee trust bank plc as a case study.
The most profitable activity of a commercial banks is the lending of money by loan or overdraft but every time a bank increases its advances to customers it increases at the same time the amount that are likely to be withdrawn in cash. Most borrowers simply wish to be able to draw cheques up to the amount of their overdraft but some of them may want cash and in general a certain proportion of loans will be taken in cash. This banker is torn between two conflicting motives: On the one hand he would like to expand his loans in order to make more profit and on the other hand, he is anxious to hold sufficient cash so that he can at all times fulfill his obligations to pay cash on demand J.L Hanson (1970:37).
The major problem inherent in strategies for managing bank liquidity in this research work is how to determine the extent of liquidity holdings of a bank at a particular point in time in order to meet up the various financial obligations of the bank to their borrowing customers
The impact of liquidity problem:- This is the purpose of this study to look at problems encountered by bank managers responsible for liquidity management.
It will also focus on guidelines set by the CBN and other regulatory body for the development of liquidity management in Nigeria banks.
Finally, the impact of liquidity problems will be looked at on how it affects profitability, loans and advances to customers of commercial banks and the Nigerian economy.
The objective of this study on the effect of liquidity and profitability is to find out.
1. If the CBN has enough policies or guidelines put in place to help the banks fight this problem.
1.5 RESEARCH QUESTIONS.
1. What is the impact of liquidity problems in the Nigerian banking industry?
By this we main how the effect of excess cash holding by banks in their vault affect their progress and equally how the non-holding of cash affect their transportation too. This effect could be negative in that making banks to give out loans.
Liquidity management is very essential in that liquidity transcends the individual bank, as a liquidity short fall in a single institution can have system-wide repercussions. Consequently, the analysis of liquidity requires bank managements to measure, not only liquidity positions of their banks, on an ongoing basis, like also to examine how finding requirements are likely to evolve under crisis scenarios.
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