ABSTRACT
This
research work is aimed at identifying the impact of liquidity problems on the
Nigerian banking sector with regards to their profit and previous 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.
TABLE
OF CONTENTS
Title page i
Approval
page ii
Acknowledgement iii
Dedication iv
Abstract v
Table
of contents vi
CHAPTER ONE
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 3-4
1.6 Significance of study 4
1.7 Scope and limitation of study 4-5
1.8 Definition of terms 5-6
CHAPTER TWO
2.0 Preview of Related Literature 8
2.1 Liquidity versus profitability in Nigerian
Banking 8-9
2.2 Equilibrium balance between profitability 9-11
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
2.3.7Rationale for liquidity ratio measurement 18
2.4 Factors affecting liquidity of Nigerian banks
18-19
2.4 Federal government steps towards solving 19-21
the liquidity problems in Nigerian banks
2.5 Guidelines for the development of liquidity
Management policies in Nigerian banks.
21
CHAPTER THREE
3.0 Research Design and Methodology 23
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
CHAPTER FIVE
5.0 Recommendations 25-26
5.1 Conclusion 27
BIBLIOGRAPHY 28-29
CHAPTER ONE
INTRODUCTION:
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.
1.4 BACKGROUND
OF STUDY.
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 a timely.
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.
STATEMENT
OF PROBLEM.
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).
PURPOSE
OF THE STUDY.
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.
1.4 OBJECTIVES
OF THE STUDY.
The objective of this study on the impact of liquidity problem
is to find out.
1. If the CBN has
enough policies or guidelines put in place to help the banks fight this
problem.
2.
To find our banks for the correction of this
problem.
3.
The overall impact of liquidity problems on
loans and advances to customers of the commercial banks.
4.
To find out the liquidity problems in relation
to customers deposit.
5.
The profitability of commercial banks in Nigeria.
1.5 RESEARCH QUESITIONS.
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 and banks.
2.
How important
is liquidity management?
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.
3. WHAT IS THE RELATIONSHIP BETWEEN LIQUIDITY AND
PROFITABILITY IN THE NIGERIAN BANKING INDUSTRY?
Both are interwoven in a particularly way in
that in providing for liquidity one has to also check out ways of being
profitable.
Liquidity is maintained by banks for the
primary purpose of meeting depositors demand which will help this banks to have
a good standing and reputation with the public.
On the other hand banks are set up to make profit and their
profitability portion is an index of measuring the performance of the
bank. Which will also help them to meet
up with their own financial obligations.
Orjih John (1996:152-154).
SIGNIFICANCE OF THE STUDY.
The significance of this research work
is aimed at getting relevant information and solutions to liquidity problems
facing the banking sector in Nigeria.
The
researcher hopes it will be of immense benefit to the following sectors.
i.
The banking
sector in Nigeria
especially bank managers involved in liquidity management.
ii.
The government
sector.
iii.
The monetary
and fiscal policy department of the central bank of Nigeria.
iv.
Finally for
countries facing similar problems.
1.7
SCOPE AND
LIMITATIONS OF THE STUDY.
This research work is
aimed to cover Nigeria
banks such as the CBN, commercial banks, merchant banks etc.
The researcher was faced
with certain problems, which mitigate this study like:
TIME
CONSTRAINT:- As a student the
researcher has little time to get all the data needed for the kind of study.
FINANCIAL CONSTRAINTS:- Lack of fund is the man problem. Due to little cash available researcher
couldn’t go about to different places to source for data.
All this problem, not withstanding did not prevents
the continuation of this research work.
1.8 DEFINITION OF TERMS
LIQUIDITY:- This is the ability of a bank to meet
promptly, its current obligations. This
simply means the capacity of the bank to meet its customers demand as and when
due liquidity problem.
In this case a bank may be
suffering from shortage of cash in its vault to meet its current obligations
liquidity ratio:
It is the cash requirement
held by banks as directed by CBN. It is
the ratio above which banks may not raise its loans and advances relative to
its liquid assets.
This is cash deposited by
the customer to the bank, which can be withdrawn at anytime.
LOANS AND ADVANCES:-
These are by far the largest assets of the commercial
banks. The lending system of the
commercial banks can be in the form of loans and overdraft facilities. This is one of the major ways profit is made.
CASH:
This is the amount of notes and coins held in the strong room
of all the head offices of banks and in other branches to meet customer’s
demands for cash withdrawals. Cash
reserve does not yield income. It is the
most liquid of all the assets.
CALL MONEY:
Money at all is the shortest maturity instrument and it is
the next liquid item after cash. It is
an arrangement whereby banks borrow money from one another on overnight basis.
TREASURY BILL:
These are short-term instruments issued by the central bank
of Nigeria
to raise finance for the federal government, its maturity is usually for 91
days.
TREASURY CERTIFICATE:-
These are short-term instruments issued by the government
with maturity period of one to two years.
MONETARY POLICY:
Defined by the CBN as the combination of measure designed to
regulate the value, supply of money in an economy in consonance with the
expected level of economics activity.
FISCAL POLICY:
Fiscal involves the use of government income and expenditure
instruments to regulate the economy.
CASH RESERVE REQUIREMENTS;
This is the proportion of banks total deposits liabilities
(Demand, Savings and Time Deposit), Certificate of deposit, promissory notes
and other items held in cash balance with CBN.
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