Project Abstract

<p> Banking business is a very risky business. The operation of banks include; the mobilization of<br>deposit and the extension of credit. A bank can be defined as the instrumental agency through<br>which debt and credit are converted and changed between. Banks also act as intermediaries, they<br>mobilize deposit and pay interest on them and make loans and receive interest thereof.<br>Management of liquidity occupies strategic positions in the management of banks in Nigeria. The<br>purpose of this project work arose from the need to know the problem inherent in the management<br>of liquid assets otherwise known as liquidity management. Primary data were collected through<br>the administration of questionnaires and oral interviews on members of staff of the selected banks.<br>The data captured in the questionnaire, which are on perception of banks liquidity management,<br>were analyzed using percentages which then facilitated inferential statistical analysis using chisquare.<br>The study revealed that there are two types of problems inherent in the management of<br>liquidity. They are the problems of excess liquidity and shortage of liquidity. It also showed that<br>profitability will be optimized only when liquidity is effectively and efficiently managed. Based on<br>these, the study suggested that banks should not solely concentrate on the profit maximization<br>concept but should also adopt measures that will ensure effective liquidity management which will<br>help to minimise or avoid cases of excessive and deficient liquidity as their effects. Also banks<br>should schedule the maturity periods of their secondary reserve assets to correspond to the period<br>in which the funds will be needed. <br></p>

Project Overview

<p> 1.0 INTRODUCTION<br>1.1 BACKGROUND OF THE STUDY<br>Liquidity is necessary for banks to compensate for expected and unexpected balance sheet<br>fluctuation and to provide funds for growth. It also represents a bank‟s ability to efficiently<br>accommodate the redemption of deposits and other liabilities and to cover funding increases in the<br>loan and investment portfolio (Grueving and Bratanovic 2003).<br>A bank has adequate liquidity potential when it can obtain needed funds (by increasing liabilities,<br>securitizing or selling assets) promptly and at a reasonable cost.<br>Sayers (1960:59), asserts that the perfectly liquid asset is of course cash itself. The more the cash a<br>banker holds the more obviously can he exchange for deposits. But cash is an „‟idle asset‟‟, it earns<br>no income at all. To make a profit, the banker must hold some assets which are imperfectly liquid.<br>What should be the nature (other than income earning) of the imperfectly liquid assets of a bank?<br>The answer which bankers have given to this question has generally left an ambiguity about the<br>word „‟liquidity‟‟, an ambiguity that has its root in the banking conditions of earlier years.<br>According to Olagunju, Adeyanju and Olabode, (2011), liquidity is the ability of the company to<br>meet its short term obligations. It is the ability of the company to convert its assets into cash.<br>According to Nwankwo (2004), in banking, liquidity management simply means being able to meet<br>every financial commitment when due, whether it is withdrawing from a current account, maturing<br>euro or interbank deposit or a maturing issue of commercial paper. Bank liquidity refers to as the<br>ability of a bank or banks to raise certain amount of funds at a certain cost within a certain period of<br>time to discharge obligations as they fall due. It follows, therefore, that quantity, that is, amount,<br>time and cost, are at the heart of liquidity management. The greater the amount of funds a bank can<br>raise in a certain time at a specified cost, the more liquid it is. Similarly, the sooner a bank can raise<br>2<br>a given amount of fund at a certain cost, the greater is its liquidity; and the less it costs a bank to<br>raise a given amount of funds in a certain period of time, the more liquid it is. This has two<br>implications to be effective, liquidity management must contribute tom the achievement of the<br>overall corporate funds management objective of attaining and maintaining a balance of<br>profitability, solvency and liquidity.<br>To satisfy depositor‟s claims, a bank must be able to convert its assets into cash quickly. But this is<br>not all, if the depositor‟s claims are to be fully satisfied, the banker‟s assets must be converted into<br>cash without loss. When bankers have said that they aim at liquidity, they have generally included<br>both these attributes<br>According to Ariyo (2005), in a non-barter economy (like that of Nigeria), money serves as the<br>measure and store of value. It also oils the wheels of the economy by serving as the means of<br>exchange. In this regard, one unit of physical output or service rendered need to be backed up with a<br>similar unit of currency to ensure parity in value between the real output and the unit of currency.<br>Regulatory agencies like Central Bank of Nigeria (CBN) and Nigerian Deposit Insurance<br>Corporation (NDIC) were normally established to ensure appropriate liquidity. Bindseil (2000:1),<br>asserts that „‟liquidity management” of a Central bank is defined as the frame work, set of<br>instruments and especially the rules the Central bank follows in steering the amount of bank<br>reserves in order to follow their price ( i.e., short term interest rates) consistently with its ultimate<br>goals (e.g., price stability).<br>Practically, profitability and liquidity are effective indicators of the corporate health and<br>performance of not only the commercial banks (Eljelly, 2004), but all profit oriented ventures.<br>These performance indicators are very important to the shareholders and depositors who are major<br>publics of a bank. (Olagunju, Adeyanju and Olabode, 2011)<br>3<br>1.2 STATEMENT OF THE PROBLEM<br>Just as a bank is a going concern, so is the problem of management of liquidity of Nigerian banks.<br>In particular, the liquidity management is a continuing dilemma. A significant proportion of the<br>problem facing banks are attributable to their inability to manage the liquidity/profitability conflicts.<br>In fact, there is a short trade off between liquidity and profitability by banks which is currently<br>giving some concern to the regulatory authorities like the CBN and the NDIC.<br>Given that poor banking habits has been the bane of the Nigerian society, how could the liquidity<br>and hence profitability position of Nigerian banks maintain acceptable level or standard in<br>developing banking culture.<br>Though it has been established that excess liquidity entails the risk of low earnings or less earning,<br>on the other hand, liquidity problems bring about a loss of faith and confidence in the Nigerian<br>banks. So banks must strike a balance between the two (in excess liquidity and shortage of<br>liquidity).<br>1.3 OBJECTIVE OF THE STUDY<br>All over the world, banks are subjected to varying degrees of regulations because of their sensitive<br>nature as custodians of funds and their ability to create money. However, in the Nigeria context,<br>these controls are mainly direct and administrative resulting invariably in less efficiency in the<br>management and allocation of resources. Through the use of the instruments of the monetary policy,<br>the Central Bank of Nigeria, directly changes the levels of banks cash reserves and indirectly<br>induces changes in the terms and availability of credit and ultimately money supply and general<br>economic activities. Managing liquidity therefore entails striking a balance between the customer‟s<br>need for liquidity and the demand to optimizing interest earning by tying down deposits in other<br>less liquid assets such as loans and advances.<br>The summary of the objective of the study can be stated as follows;<br>4<br>i. To examine how excess liquidity affects the profitability of Nigerian banks.<br>ii. To examine how shortage of liquidity affects the profitability of Nigerian banks.<br>iii. To show whether loans and advances do affect the profitability of Nigerian banks.<br>1.4 RESEARCH QUESTIONS<br>i. To what extent does excess liquidity affect the profitability of Nigerian banks?<br>ii. To what extent does shortage in liquidity have significant effect on profitability of the<br>Nigerian banks?<br>iii. How do loans and advances affect the profitability of Nigerian banks?<br>1.5 HYPOTHESES OF THE STUDY<br>On the basis of the above views, the researcher hereby proposes the following hypothesis:<br>Ho1. Excess liquidity does not have a significant impact on the profitability of Nigeria banks<br>Ho2. Shortage in liquidity does not have a significant impact on the profitability of Nigerian banks<br>Ho3. Loans and advances do not have significant impact on the profitability of Nigerian banks.<br>1.6 SCOPE OF THE STUDY <br></p>