CHAPTER ONE
INTRODUCTION:
BACKGROUND OF THE STUDY
A bank is considered liquid when it
has asset and investment in security that are easily reliable at a short notice
without a loose to the bank together with the ability to raise fund from he
other source, to enable it to meet its payment obligation and financial
commitment in a timely manner. In addition there should be financial commitment
buffer to meet almost all financial emergency.
Liquidity management of a commercial
bank is a very vital issue in the banking industry. It is the ability of the
bank to manage its liquidity position so that neither the liquidity nor the
profitable will suffer. For this to be effective, liquidity management must
contribute to the achievement of the overall cooperate fund management
objectives to attain and maintain a balance of profitability, solvency and
liquidity.
Obligation of the maximum liquidity
owed by surplus unite can only be archived by holding enviable fund as cash
since it has maximum profitability. The must invest all fund on loan and
average the highest yielding, and most liquid of the entire asset in the bank.
Banks, because of the important role
they play in the economy, particularly in monetary and credit aspect of the
economy faces a lot of restriction irrespective of the fact that banks are the
most highly and closely regulated of all the business, they still have to
operate within the confines of the law and solve the problem of liquidity and
profitability dilemma in the economy. Apart form the constraints and the dual
role of liquidity and profitability, there is virtually no work on the
liquidity management in Nigeria
commercial banks. In the light of this, the researcher has decided to discuses
this topic based on the analysis of the data collected. The researcher will
suggest some solution the problem of liquidity management in the country.
STATEMENT OF THE PROBLEMS
Commercial bank asset management is a
never-ending thing of war. This war is pitched between efficient liquidity
management on one hand and profitability on the other hand. As Liquidity and
profitability are two inherent goals in commercial bank, bank managers will
continue to experience the conflict o trying provide efficient mechanism of
addressing their bank liquid and hence their safety of necessarily arising from
the nature of their liabilities.
A high proportion of commercial bank
liabilities are made up of demand deposits (current account fund deposits)
saving deposit, fixed deposit and fund from other source. Demand deposit are
those bank liabilities that are payable on demand. Necessary commercial bank
need to keep only liquid asset to meet a considerably volume of withdrawal.
Liquid asset earn little of zero return on asset. It is les risky and the less
it likely to yield adequate returns. As such, the high the less risky asset,
the more banks is expose to experience a bank run or crisis. At that rate will
probably not able to recover all its cost and then also make profit for the
owners. But behold. Commercial bank are business oriented firm with their share
holder interested on profitability. In other to satisfy its share holders, a
bank might be attempted to forget liquidity and pursue profitability by
investing on a high yielding less liquid asset that are profitable at the
expense of liquidity which is dangerous. It is always necessary to balance
liquidity and profitability in order to have efficient bank management.
The ratio or the percentage of idle
cash balance in the commercial bank are to hold at any point in time and to
what form to hold it is very necessary. While doing that, they should bear in
mind the importance of satisfactory level of profit. There are many constraints
to bank in achievement of their goal liquidity and profitability such as legal
reserve requirement and they should maintain adequate liquidity to meet the
unforeseen and seasonal loan demand and fluctuations of deposits. Cash reserves
are also needed to take the advantage of unexpected profitability investment
opportunities. In effect, banks are constrained and have to walk on a tight
rope. There is the never ending of war or what I may refer to as dilemma policy
commercial bank management in developing country. The Nigerian case is further
aggravated by the inconsistency of the monetary policy as administered by the
central bank of Nigeria.
Is the reticent of the monetary coups detach. You will just walk up one morning
and hear over the radio of via circular No XY2 that the central bank
of Nigeria
has issued a monetary circular No adjusting the private whether upward or
downward.
The federal government directive on
withdrawal on all federal parasttatals account from the commercial bank is one
of such constraint. The stock stirred up aggressive market in the banking
industry.
Although all this stock are necessary
to produce the desired control of money in the economy, but such tends to give
nightmare to the banking management. This directive causes ripples in the
banking industry as such cause more discrepancy in the liquidity position of
the commercial bank and subsequently the rate of profitability.
OBJECTIVE OF THE STUDY
The objectives of the study are;
1. To look at the liquidity management
of the bank in Nigeria
with more emphasis on their investment liquidity and profitability portion.
2. To found out why bank need to be more
liquidity than any other business organization
3. To solve the liquidity –
profitability problems of the banks. To look at the effectiveness and
management of the portfolio, by employing and using various approach, theories
and instrument in solving their liquidity profitability problems.
4. To examine the bank investment outlet
(e.g. loan and advance investment in treasury bills. Banker unite fund, bankers
certificate called money, equity participation in small and medium scale firms
etc) and the degree of liquidity of such establishment shall be examined.
5. To take critical look of the asset
portfolio management of banks with a view to determine if there is a
relationship between the rate of profitability and liquidity.
6. To identify why Nigeria banks are excessively
liquid and at the same time make high profit.
SIGNIFICANCE OF THE STUDY
The importance of liquidity
management in the banking industry cannot be over – emphasized. Since not more
contribution was made in the topic liquidity management, the researcher will
carefully examine those relevant to efficient liquidity management for a
successful achievement of the desired profitability.
It is hoped that the result obtained
form the study will benefit the management and the non-bank financial
institution, business enterprise and student of financial accounting, banking
and finance student and other related course.
Readers of this study/work will be
expose as regarding the input of future study. The basis of this research work
is the position of liquidity of the Nigerian commercial bank as determinant of
profitability.
LIMITATION OF THE STUDY
In study of this nature which involve
the analysis of the commercial bank statement and qualification of their
investment and degree of there liquidity. In such a study, the limitability of
the data available and its type obviously limits the extent and scope of the
analysis. This study is concentrated in a selected commercial bank in Enugu urban, the research
will examine how the commercial bank carry out effectively their portfolio
management in the following areas;
a. Loan and advance
b. Investment in security E.g. treasury
bill.
c. Balance held with and for other bank.
Internally and still meets their
depositors and share holders demand.
The lending pattern of the Nigerian
commercial bank to various sector of the economy will be critically examined.
The nature of their loan matrurity and an appraised or the step commercial bank
takes to cover their dept when costumers default their loan repayment
agreement.
In this regard, the management of
commercial bank asset/liabilities will be discussed. The review of liquidity
and profitability theories will be carried out. The manage of the asset and
liability which means the source of fund are acquired and the use in which they
are put are found in the balance sheet of the bank. The tool employed by the
central bank of Nigeria (CBN) in controlling banks. Liquidity position will be
looked into and the extent to which commercial banks adhere to the liquidity
issue by the banks in Nigeria.
The research was limited to commercial bank fund management and the component
and portfolio management of their assets.
The study was carried out purely as
an academic excise and therefore could neither receive any form government or
was financed be any private business
organization. The limited resources of the researcher constrained the study.
The researcher found it difficult to obtain official information or data
relevant to thus study form banks due to bank oath of secrecy and fear. There
was also the problem of taking down records from those interviewed, as tape
recorders were not used.
DEFINITION OF TERM
Portfolio: this is a list of security and
investment loan stock, shares and lands held/owned by a bank, individual or and
organization
Portfolio management: this goes with the
management of the security holding (investment portfolio of a bank or a
business firm). A committee or portfolio management department or any other
body might manage a portfolio.
Liquidity: it is the ability of bank to pay
cash immediately when called upon to do so for all of its demand liability.
Liquidity management: it is the ability of the bank to
manage the liquidity position so that neither the liquidity nor the
profitability will suffer. It evolves the provision for the withdrawal of
deposit, short term, and cash cyclical and satirical cash requirements.
Bank deposit: these are fund deposited in a bank.
It is divided into demand saving and time deposits
Demand deposit: this also known as checking the
account deposit payable on demand that is without pro notice of withdrawal.
Saving deposit: this type of deposit is usually
evidence by a past book under which the depositor customer of the bank is
required to notify the bank before withdrawal, but it is not the same in
practice.
Asset: these are the entire property of a
bank and other investment in other profitable organization.
Asset management: it is the allocation of fund, the
basic objective being the maximization of profitability, solvency and
regulatory constraints.
Bank run: A run occurs in a bank where there
is mismanagement of liquidity and profitability.
REFERENCE
Thirktel G.I (P.116) basic economic
liquidity vs. profitability of the banks.
Rousakis E.N (1977) managing
commercial bank fraud. (Proeger publisher).
Edoziem F.C.A (1982) critical
assessment of the role of banks in the Nigeria economy.
Nwankwo G.O (1991) bank management oxford
Wallace R.S.O (1983) article on
profitability and liquidity of banks in Nigeria. Presented on the 17th
annual banking seminar of the Nigerian institute of bankers, edited by Femi
Akenkanuya.
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