CHAPTER ONE
1.1 BACKGROUND OF THE STUDY
Liquidity
banks means, “The ease with which banks assets could be converted into
cashâ€. The liquid assets include cash in
the banks vault with the Central banks and to their government securities that
have not been used as those assets is cash.
There are many reasons why a bank
should have reasonable liquid assets in it assets portfolio, these include to
be due to meet prompt demands for deposit withdrawals, that is the banks must
maintain confidence and also be able to utilize profitable opportunities that
may come out in future.
However, it should be noted that bank
like most other business are profit oriented, operating to make profit for
these share holders.
These profit could be realized only
if there is enough depositors. The
deposit will not come unless the depositors could be assured of the safely of their deposits to be assured. There has to be enough liquidity in the
banks.
It
is a known fact that action designed to make profit brings about illiquidity in
the bank and versa.
Therefore, equilibrium has to be
sought between the two these two extreme cases have been the constant concern
of bank management.
Liquidity
management involves provision for depositors withdrawals, short term cash
requirement and cyclical and circular cash requirements. It also involves provisions to met with legal
reserve requirements.
In
Nigeria, the activities of
the commercial banks are regulated by the banking act of 1970 as amended under
the control of Central bank of Nigeria. The essence of these regulations were to
maintain trust and confidence in banking systems as well as to achieve a
special economic objective thus, in the period of mounting excess liquidity as
was the case in the 1970’s, bank were expected to hold some of their assets
equal to a certain percentage of their deposits in liquid for this is known as
legal reserve requirement. The components
of legal reserve requirements are, cash establishment securities issued by the
Central banks.
The
rational for the use of those instruments was to map out the excess liquidity
in the economy and also to stop the inflationary trends in the economy.
The
excess liquidity in the banking sector give rise to inefficiencies in banks
operation. Bank staff were no longer
polite since they had little outlets to invest money, banks have devised new
method of attracting deposits from their customers thus, the recent innovations
in the banking sector.
1.2
SIGNIFICANCE OF THE STUDY
This research will also help the
monetary authorities in no
small way towards the formulation and
the implementation of their monetary and fiscal policy. Merchant Banks in Nigeria and in deeds other related
countries with similar problems will equally also serve as a reference point to
their researchers.
1.3
OBJECTIVES OF THE STUDY
1.
Identify
Federal Government policies about commercial banks Liquidity position;
2.
To
identify Commercial Banks Liquidity problems during the period 1988 – 1990;
3.
To
find out the effect of the various liquidity of Commercial Banks on their
profitability;
4.
To
examine the extent to which banks liquidity problem have affected their loan
policy;
5.
To
find out the effect of liquidity problems in relation to deposits from
customers;
6.
To
identify problems of Commercial Banks with particular reference I.B.W.A;
7.
To
examine Federal Government steps towards solving liquidity problems in
Commercial Banks;
1.4
SCOPE AND LIMITAITON OF THE STUDY
This research work which is based on
the experiences of the
Commercial Banks is for easier
collection of data, two banks are chosen from the whole Commercial Banks in the
country.
These two banks are selected from
both jointly owned with forewing equity banks.
These banks are the African Continental Bank Plc, and The International
bank for West Africa Ltd. (IBWA) respectively.
The aim behind choosing these banks is for accurate representation of
the capital situation in all the banks both those financed within and those
that can get foreign aid.
Concepts like banks interest
inflation rates treasury bills and certificate rates money creation by banks
were thoroughly reviewed but not subjected to experificial study in this work.
1.5
DIFINITION OF TERMS
BANK DEPOSITS
This is the amount outstanding to the
credit of is the customers of the bank but must be paid back when
demanded. Deposits are not held in trust
but are borrowed from customers. This
type of deposit include the deposit.
DEPOSIT ACCOUNT
This is an account with the bank,
withdrawal from which usually require a period of notice to be given, and on
which interest is paid.
This type of deposit account includes
time and saving although in Nigeria,
the operation is different in that, it is operated just like cheque accounts.
TIGHT MONEY
An alternative term for dear money
BANKERS ACCEPTANCE
This is a draft that ahs been
accepted by drawer bank. The draft is
changed into 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 lead to it.
BANKERS UNIT FUND
This
was introduced into the market in September 1985, it is a scheme under which
banks and other financial institutions can ivest past of their access liquidity
resources. This instrument was designed
to channels commercial and merchant banks and other financial
institutions. Surplus funds into federal
government stock through the issue of treasury bills and treasury certificates.
TREASURY BILLS
These
are short term instrument normally issued within the maturity dated of 91
days. This instrument is issued by the
Central banks of Nigeria
to finance for the Federal Government.
MONEY AT CALL
This
is the money lent to the borrowing bank from overnight to about seven days and
payable on call. It is thereby as good
as each but unlike cash, it earns some interest.
TIME DEPOSITS
A
bank deposit which can only be withdrawn if prior notice is given or after
expiry of a fixed time.
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