ABSTRACT
This study
is aimed at appraising the liquidity problems in commercial banking in Enugu
state with a view of determining how these problems affects commercial banking
business, as well as determining whether the policies imposed by the central
bank has actually solved the liquidity problems of commercial banks or
not. In doing this, we want to classify
the period under review (1980-1980) into want to pre-sfem period and the
post-sfem period. In order words, the
study intends to discuss the pre-sefem and post-sfem experiences of banks and
offer useful suggestions as to how their problems could be alleviated if not
eradicated.
For this purpose, empirival survey and
history research was carried out and the statistical tool used is
percentages. The source of data for this
study are both primary and secondary where the primary soruce consists of
questionnaires and oral interviews, the secondary source is in the form of
books, journals and news papers.
The research revealed that prior to
the introduction of the structural adjustment programme with the second tier
foreign exchange market (sfem) as its main feature, the problem has been that
of excess liquidity, however, the introduction of the structural adjustment
programmes (SAP) brought about the present liquidity crunch in the banking
system. It was further found out that
both excess liquidity and shortage of liquidity affect the banks loans and
advances as well as their profits.
Further more, it was observed that the policies imposed by the central
bank has not solved the (excess and shortage of) liquidity problems of
commercial banks.
As a result of these, it is suggested,
among others, it is suggested among others, that banks should intensity their
efforts towards acquiring more deposits drive for deposits (as it is popularly
known) in order to alleviate the present problem of liquidity shortage in the
system. Moreover, there should be
effective supervision of the policies imposed by the central bank to combat the
liquidity problems of commercial banks to ensure that the policies are
adequately implemented. Other measure to
alleviate either the excess or shortage of liquidity problems include
adjustment of interest rates, adjustment of liquidity ratio, diversification of
commercial banking services, establishment of more rural banks to mobilize
rural savings and so on. The essence of
these is to maintain adequate liquidity and at the same time make enough profit
for the shareholders.
PREFACE
As a matter of fact, a lot
has been written on the liquidity problems in commercial banking in Enugu state. The basic challenge of this text attempts to
discuss the two experiences (Excess liquidity and shortage of liquidity) of
commercial banked in Nigeria
and on a final note offer useful suggestions as to how these problems could be
alleviated if not eliminated. It is true
that liquidity and profitability are among the many problems with which bank
management struggles constantly. This is
because of the need to balance the pursuit of profit will the need to remain
liquid.
As indicated above, commercial banks
in Enugu state
have obviously experienced excess liquidity era and are presently going the
specific experience or shortage of liquidity.
This study therefore aims to find out the ways of the two experiences on
the profitability of commercial banks, whether the agencies imposed by the
federal government of ten though the central bank have solved the problems or
not and how the dual problems have affected commercial banks loans and advances
to their customers.
In terms of chapter organization, the
next is arranged into five chapters. The
first chapter is devoted to introduction and some fundamental issues related to
the research work. The second chapter
contains the review of related literature to the research work. Here, too, the exposition of the liquidity
problems of commercial banks in Enugu
state is carried out. The approach used
here is pre-sfem and post-sfem experiences of banks. Discuss here also, is the policies introduced
by the federal government, mostly through the central bank, in alleviating the
liquidity problems of banks. Pre-sfem
policies and post-sfem policies approach has been used here too; chapter three
deals with research design and methodology which include the sources of data,
interview questions, samples used, methods of investigation and scope and
limitations of the study. Chapter four
bears the presentations, interpretation, test and analysis of data. Finally, in chapter five are the summary
finding, conclusion and recommendations.
Recommendation are based on the two experiences of banks, although on
the two experiences of banks, although situation since it is the prevailing
situation of commercial banking system in Enugu
state.
TABLE OF
CONTENTS
Title page
Dedication
Approval page
Abstract
Preface
Acknowledgement
Table of contents
CHAPTER ONE
INTRODUCTION
1.1
Background of study
1.2
Statement of the study
1.3
Objective of the study
1.4
Significance of the study
1.5
Scope and limitations of the study
1.6
Definition of terms
CHAPTER TWO
REVIEW OF
RELATED LITERATURE
2.1
Liquidity ratio significance of liquidity ratio
computation of liquidity ratio
2.2
Cash ratio
2.3
Liquidity risk
2.4
Liquidity requirements of commercial banks in Enugu state
2.5
Liquidity problems of commercial banks in Enugu state pre-SFEM
Experience post-SFEM Experience
2.6
Policies introduced by the central banks of Nigeria in solving liquidity problems of
commercial banks in Enugu
state. Pre-SFEM policies post-SFEM policies
CHAPER THREE
Summary of findings, conclusions, and recommendations
3.1
Summary of findings
3.2
Conclusions
3.3
Recommendation
Bibliography
Appendix
CHAPTER ONE
INTRODUCTION
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 reserve
requirement. In the legal reserve
requirements are liquidity ratio requirement, cash reserve requirements,
stabilization securities issued by the central bank and special deposits.
Liquidity problems, for the purpose of
this study, are looked at as the problems encountered by bank managers who are
responsible for liquidity management, when there is either excess liquidity or
liquidity squeeze in the banking system or in commercial banks.
1.2
STATEMENT OF THE STUDY OR PROBLEM IDENTIFICATION
There is no gain-saying, the fact that prior to the
introduction of the structural adjustment programme (SAP) of which the
second-tier foreign exchange market (SFEM) is the nucleus, the commercial banks
in Enugu state
have been wallowing in excess liquidity.
Consequently, they maintained excess liquidity ratios and were in the
habit of refusing, deposits from the public.
These may be accountable to some deficiencies in the management policies
of the central bank of Nigeria
and the overall under developed nature of the entire economic system. However, the structural adjustment programme
with SFEM as the chief feature changed the trend. The situation became that of shortage of
liquidity or liquidity crunch, as it is popularly called.
In any
case, for the purpose of this treatise, the liquidity problems of commercial
banks have been identified from two perspective.
One is that
they had excess liquidity before the advent of SFEM.
The other
is that shortage of liquidity have been telling hard on them since the
existence of SFEM under SAP. In
otherwords, this treatise takes a PRE-SFEM and posi-SFEM change on the
liquidity problems of commercial banks.
With
respect to the excess liquidity situation, this study intends to find out the
effect of the excess liquidity in the banking system on the profitability of
commercial banks, it investigates whether or not the policies imposed on the
commercial banks by the central bank have succeeded in mopping up the excess
liquidity in the banking system, and finally whether or not the excess liquidity
in commercial banks affects loans and advances to their customers.
On the
other hand, the shortage of liquidity perspective, focuses on its (shortage of
liquidity) effect on the profit ability of commercial banks, whether or not the
policies of the central bank can actually corrects the shortage of liquidity
position of commercial banks, and above all how shortage of liquidity affects
loans and advances to customers.
1.3
OBJECTIVE OF THE STUDY
Having identified the problems to which this study
addressed itself, the writers shall in this work make a critical insight into
the dual problems of excess and shortage of liquidity in commercial banks in enugu state and determine
the effect and reaction of the two situations on the following:
1). The profitability of commercial banks in Enugu State.
2). Their reaction to the various policies of
the government through the CBN to correct the two anomalies.
3). The overall impact of these two situation
on loan advanced to customers of the commercial banks.
1.4
SIGNIFICANCE OF THE STUDY
This research project is of particular relevance to
the monetary and fiscal policy Department of the Central Bank of Nigeria, various commercial and (to some extent)
merchant banks in Enugu
State. It will also serve as a readable material for
future researchers.
1.5
SCOPE AND LIMITATIONS OF THE STUDY
This
research project is designed to cover the period of pre-SFEM and post- SFEM
era. These two periods are to be used
for comparative purposes.
Further
more, for easier collection of data, a bank particularly known was chosen from
the white commercial banks in the country. The bank is the first Bank of
Nigeria limited.
The writers wish to express that they
encountered great difficulties in collecting information through the
questionnaire. Another constraint
encountered was time, that is, the duration given to researchers willin the
semester is very short and financial problems.
These problems also hindered researchers from covering more bank
branches other than the one mentioned in this study.
1.6
DEFINITION OF TERMS
Bank
Deposits:
The amount outstanding to the credit of the customers of
a bank. Deposits becomes the property of
the banker but must be repaid when asked for.
Deposit
Account:
An account
with a bank, withdrawals from which usually require a period of notice to be
given, and on which interest is paid.
Tight
Money:
An alternative term for dear
money.
Bankers
unit fund:
This was
introduced in 1975 to mop up excess liquidity in the economy. The need for this additional money market
instrument arose because of the excess liquidity in the economy following the
oil boom and the government’s reluctance to increase its borrowings though the
issue of Treasury Bills and Treasury Certificate.
Bankers’
Acceptance:
It is a
draft that has been accepted by the drawer bank. The draft is changed into an acceptance by
the stamping of the word “accepted†across the face of the draft, the signature
of a bank officer who has been authorized to sign such documents and brief
description of the transaction that raise to it.
Treasury
Bills:
Are
short-term debt instrument (91 day maturity) issued by the CBN to raise finance
for the federal government.
Treasury
Certificates:
Are issued for the same purpose with a maturity of one or
two years.
Money at
call:
This is money lent to the
borrowing bank from over-night to about seven days, and is repayable on
call. It is thereby as good as cash, but
unlike cash, it earns some interest.
Time
Deposit:
A bank deposit which can
only be with drawn if prior notice is given or after the expiry of a fixed
time.
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