Project Abstract

<p> </p><p>One of the major indicators of financial performance<br>is profitability .Every stakeholder in the banking sector is interested in<br>liquidity and performance (profitability) of the bank, the Shareholders are<br>interested in profitability of the bank because it determines their returns on<br>investment. Depositors are concerned with the liquidity position of &nbsp;their &nbsp;banks because it determines the ability of the<br>bank to response to their withdrawal<br>needs, which are normally on demand or on a short notice as the case may be.<br>The tax authorities are interested in the profitability of the bank in order to<br>determine the appropriate tax obligation to the government.</p><p>In a bid to see how the interest of the various<br>stakeholders could be protected, the effects of liquidity on the loan portfolio<br>performance of Nigerian Banks was examined. This study found out whether<br>liquidity proxies (loans to deposit ratio and liquidity ratio) have significant<br>impact on the loan portfolio performance (Profitability) of Nigerian banks with<br>Lending spread as proxy for loan performance.</p><p>To achieve the objectives of this research, a<br>quantitative research method (secondary data) was adopted. Using purposive data<br>collection approach, the study carried out a time series, cross</p><p>sectional analysis on the 12 banks listed on the Nigerian<br>Stock Exchange over a period of 8 years from 2008 to 2015. The selection of the<br>banks was determined by data availability for the period and the data were<br>retrieved from the Annual financial reports of the 12 banks as obtained in the<br>Nigerian Stock Exchange (NSE) and the respective banks’ websites. Panel data<br>regression analysis from Stata statistical software was employed to analyse the<br>data.</p><p>The study concluded that there is significant negative<br>impact of both liquidity ratio and loan to deposit ratio on lending spread. That<br>means, profitability is significantly but negatively influenced by liquidity. &nbsp; </p><p><b>Keywords</b> Liquidity,<br>Loan portfolio, Lending Spread, Profitability, Loans- to- deposit ratio &nbsp; </p> <br><p></p>

Project Overview

<p> </p><p><b>INTRODUCTION</b></p><p><b>1.1 &nbsp; &nbsp; &nbsp; Background to the Study</b></p><p>The<br>importance of liquidity and profitability of banks has received tremendous<br>attention in the corporate world in recent years. The management of corporate<br>liquidity is one of the most critical areas in determining whether a firm will<br>be profitable or not. Liquidity of a firm represents its ability to carry out<br>all its financial obligations without affecting the business operations. A<br>business cannot run smoothly without the presence of adequate working capital.<br>Therefore, the importance of liquidity makes it necessary for banks to maintain<br>a reasonable amount of their assets in the form of cash in order to meet their<br>short term obligations. According to Saleh, (2014), profit is the bottom line<br>or ultimate performance result showing the net effects of bank policies and<br>activities in a financial year.</p><p>Profitability<br>being a measure of loan performance also refers to excess of firm’s revenue<br>over her operational cost or measurement of the rate of return on investment.<br>Enhancement of profitability is one of the ultimate goals of every firm, and<br>generally, banks strive to strike a balance between profitability and liquidity<br>(Niresh, 2012).</p><p>The Basel<br>Committee on Banking Supervision (2008) defined liquidity as the ability of a<br>bank to fund increases in assets and meet obligations as they fall due, without<br>incurring unacceptable losses. Liquidity could be risky when a financial firm,<br>though solvent, either does not have enough <br>financial resources to allow it to meet its obligations as they fall<br>due, or can obtain, such funds only at excessive cost (Vento &amp; Laganga,<br>2009).</p><p>Liquidity<br>risk appears when there are differences between the size and maturity of assets<br>and liabilities on the balance sheet. There are<br>generally two types of liquidity risks which are funding liquidity risk and<br>market liquidity risk. Funding liquidity risk is the risk that the bank is not<br>able to respond effectively to current needs as well as future cash needs<br>without affecting its daily operations and financial condition. Market<br>liquidity risk is defined as the risk that a bank cannot easily offset or<br>eliminate a position without significantly affecting the market price (Ferrouhi<br>&amp; Lehadiri, 2014).</p><p>Profitability<br>and liquidity as performance indicators are important to the major stakeholders<br>of any firm and banks in particular. The shareholders are interested in the<br>profitability of banks because it determines their returns on investment.<br>Depositors are concerned with the liquidity position of their banks because it<br>determines the ability to respond to their withdrawal needs, which are normally<br>on demand or on a short notice as the case maybe. The tax authorities are interested<br>in the profitability of the banks in order to determine the appropriate tax<br>obligation (Olagunji, Adeyanju &amp; Olabode, 2011). This study examined the<br>effect of liquidity on the loan portfolio performance (profitability) of<br>Nigerian banks in other to contribute to the gaps in the previous studies as<br>stated below.</p><p><b>1.2 &nbsp; &nbsp; &nbsp; Statement of the Problem</b></p><p>In Nigeria and the competitive world, the<br>banking sector has emerged as a key player, contributing its best to create<br>employment, and improving the financial sector of the country. With the current<br>and growing trend in Nigeria economy, it has become a challenge for the sector<br>to create employment and contribute meaningfully to the economy due to<br>inability to earn maximum profitability. Therefore, it is necessary for banks<br>to take dynamic decisions to effectively manage their assets, particularly loan<br>portfolio in order to bring about the needed improvement in their<br>profitability.</p><p>Moreover, considering the public loss of<br>confidence as a result of distress which bedevilled the financial sector<br>especially banks in the recent past; and the intensity of competition in the<br>banking sector due to the emergence of new banks, every deposit money bank<br>should ensure that it operates profitably and at the same time meets the financial<br>demands of its depositors by maintaining adequate liquidity (Olagunji,<br>Adeyanju, &amp; Olabode, 2011).</p><p>Deposit<br>money banks are often confronted with the problem of how to choose and identify<br>the optimum point or the level at which it can maintain its assets in order to<br>optimize the set objectives (Ajibike &amp; Aremu,<br>2015). This<br>investigated the effect of liquidity (the proportion of the deposits that may<br>be demanded by the depositors at any particular time) on the profitability of<br>banks. It will investigated liquidity position of banks in Nigeria.</p><p><b>1.3</b>&nbsp; &nbsp; &nbsp; &nbsp;<b>Objective<br>of the Study</b></p><p>The main<br>objective of the study is to examine how liquidity position of Nigerian banks<br>affects their financial performance. The specific objectives are to:</p><ol><li>examine the liquidity position of <br>selected quoted banks in Nigeria and</li><li>estimate<br>the effect of liquidity on Banks’ profitability in Nigeria</li></ol><p><b>1.4 &nbsp;</b><b>Research<br>Questions</b></p><p>1. &nbsp; &nbsp; What is the liquidity position of the selected<br>Nigerian Banks?</p><p>2. &nbsp; &nbsp; What is the effect of Liquidity on the<br>profitability of selected Nigerian Banks?</p><p><b>1.5 &nbsp; &nbsp; &nbsp; Hypothesis</b></p><p>A null hypothesis has been formulated for<br>this study which is:</p><p>H0:<br>There is no significant relationship between liquidity and bank profitability</p><p><b>1.6 &nbsp; &nbsp; &nbsp; Significance of the Study</b></p><p>This<br>study would be of immense value to investors, regulators, Managers, academia<br>and other relevant stakeholders. By relating liquidity to loan portfolio<br>performance using lending spread as proxy for profitability, the study would<br>provide future researchers with an alternative measurement area which has<br>little or no research within the Nigerian context. This study evaluated banks’<br>liquidity position and how it affects their profitability.</p><p>Various studies on liquidity and<br>bank’s profitability concentrated on macroeconomic factors like Inflation and<br>exchange rate, while a few concentrated on firm level. This study employed firm<br>level data to examine the impact of liquidity on bank loan portfolio<br>performance in Nigeria.</p><p>Furthermore, the reports from empirical studies on<br>the subject matter still remain inconclusive. For instance, Ajibike and Aremu<br>(2015) reported positive relationship between liquidity and profitability but,<br>Olanrewaju and Adeyemi (2015) reported no significant relationship, while<br>Eljelly, (2004) and Dahiyat, (2016) concluded<br>that there is negative relationship between liquidity and profitability. The<br>lack of consensus among literatures clearly shows that further study needs to<br>be carried out. Also, this study<br>differs from existing literatures that examined the relationship between<br>liquidity and profitability by the use of Lending spread as proxy for measuring<br>bank’s loan portfolio performance (profitability) whereas others used either<br>Return on Assets(ROA) or Return on Equity (ROE).</p><p><b>1.7</b>&nbsp; &nbsp; &nbsp; &nbsp;<b>Scope<br>of the Study</b></p><p>The study covered 12 of the 22 deposit<br>money banks listed on the Nigerian stock exchange as at Dec. 2015 over a period<br>of 8 years from 2008 to 2015.</p><p><b>1.8</b>&nbsp; &nbsp; &nbsp; &nbsp;<b>Operational<br>Definition of Terms</b></p><p><b>Liquidity</b>:<br>This is the<br>ability of a bank to fund increases in assets and meet obligations as they fall<br>due, without incurring unacceptable losses.</p><p><b>Loan<br>Portfolio</b>: This refers to total of all loans held by a bank or finance company on<br>any given day.</p><p><b>Profitability</b>:<br>Profitability is ability of a bank to use its resources to generate revenues in<br>excess of its expenses.</p><p><b>Bank</b>:<br>This is an establishment authorized by a government to accept deposits, pay<br>interest, clear cheques, make loans, act as an intermediary in financial<br>transactions and provide other financial services to its customers.</p><p><b>Loan:</b><br>An amount of money advanced<br>at interest by a bankto a borrower, usually on collateral<br>security, for a certain period of time.</p><p><b>Lending<br>Spread</b>: This refers<br>to the difference in borrowing and lending<br>rates of financial institutions (such as <b>banks</b>) in nominal terms. i.e<br>the difference between interest paid on deposit to customers and the interest<br>charged on loans and advances.</p><p><b>Deposit</b>:<br>This refers to money placed in banking institutions for safekeeping.</p><br> <br><p></p>