LIQUIDITY MANAGEMENT AND DEPOSIT MONEYBANKS’ PROFITABILITY
ABSTRACT
The issue of liquidity and profitability is well documented in the literature. This study was Carried out to examine Liquidity management and deposit money banks' profitability. The study was carried on 8 deposit money banks in Nigeria and covered a panel data of 2010 to 2015. A model was specified and estimated using the Random effect panel data. The empirical results showed that there is a positive result on the impact of return on asset (ROA), Annual turnover (TOR), Banks' total assets (TA), and Money supply (M2). It was suggested that the banks should adopt measures that will ensure effective liquidity management which will help to avoid cases of excessive and deficient liquidity.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1 Background to the study    -    -    -    -    -    
1.2Statement of Research Problem    -    -    -    -    
1.3 Research Questions    -    -    -    -    -    -    
1.4 Research Objectives    -    -    -    -    -    -    
1.5 Research Hypothesis    -    -    -    -    -    -    
1.6 Scope of the Study    -    -    -    -    -    -    
1.7 Significance of the Study    -    -    -    -    -    
1.8 Limitations of the Study    -    -    -    -    -    
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction    -    -    -    -    -    -    -    
2.2 Concepts of Liquidity and profitability    -    -    -    
2.2.1 Importance of Liquidity to deposit money banks management    -    -    -    -    
2.2.2 Elements of Bank Liquidity    -    -    -    -    
2.2.3 Measures of Bank Liquidity    -    -    -    -    
2.2.5 Measures of Profitability    -    -    -    -    -    
2.2.6 Management of Liquidity    -    -    -    -    -    
2.3 Theories of Liquidity    -    -    -    -    -    -    
2.3.1 Theories of the relationship between Liquidity and Profitability    -    -    -    -    
2.4 Review of Literature    -    -    -    -    -    -    
2.4.1 Empirical Evidence from Nigeria    -    -    -    
2.5   An Overview of the Nigerian Financial System    -    
CHAPTER THREE: METHODOLOGY
3.1     Introduction    -    -    -    -    -    -    -    
3.2     Research Design    -    -    -    -    -    -    
3.3     Population/sample of the Study    -    -    -    -    
3.4      Model Specification    -    -    -    -    -
3.5     Data Source    -    -    -    -    -    -    
3.6     Operationalization of Variables    -    -    -    -    
3.7     Method of Data Analysis    -    -    -    -    -    
3.8     Test of Hypothesis    -    -    -    -    -    -    
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1     Introduction    -    -    -    -    -    -    
4.2     Random effect (Panel Data)    -    -    -    -    
4.3     Fixed effect (Panel Data)    -    -    -    -    -    
 4.4     Discussion of Findings    -    -    -    -    -    
CHAPTER FIVE: SUMMARY, RECOMMENDATIONS AND CONCLUSION
5.1     Introduction    -    -    -    -    -    -    -    
5.2     Summary    -    -    -    -    -    -    -    
5.3     Conclusion    -    -    -    -    -    -    -    
5.4     Recommendations    -    -    -    -    -    -    
Bibliography    -    -    -    -    -    -    -    
Appendix I    -    -    -    -    -    -    -    -    
CHAPTER ONE
INTRODUCTION
1.1   BACKGROUND TO THE STUDY
In every system, there are major components that are paramount to its survival. This is also applicable to the financial system where deposit money banks contribute significantly to the effectiveness of the entire system. They do this by providing an efficient mechanism for the mobilization of resources and efficiently channeling them for productive investment (Wilner, 2000). Therefore, the two major functions of deposit money banks, deposit mobilization and credit extension define their financial intermediation role in the economy. However, efficient financial intermediation by a deposit money bank demands the purposeful attention of the bank’s management to the conflicting goals of liquidity and profitability. Both goals run in opposite direction in the sense that an attempt by a bank to achieve higher profitability will certainly take a toll on the liquidity level and solvency position and vice versa (Olagunji, Adenanju and Olabode, 2011) .
Liquidity and profitability has got tremendous importance in the corporate world. Liquidity refers to the management of current assets and current liabilities of a company. It plays key role in defining, whether a firm is able to effectively manage it short term obligations. Due to its dire importance it is important for firms to maintain a reasonable amount their assets in the form of cash in order to meet their short term obligations. Balanced liquidity level is necessary for the effectiveness and profitability of a firm. Therefore, firms need to determine the optimum level of the liquidity in order to ensure high profitability. Liquidity should neither be too low nor too high. Rather, it should maintain a reasonable level. Whereas, profitability refers to the revenues earned by firms, against their operations and incurred expenses. In order to find the profitability level of firms, Profitability ratios are used, whereby it can clearly be examined that where the firm stands in terms of profitability. Enhancement of profitability is the ultimate purpose of every firm, and each of them strives to achieve optimum profitability. Since, there is a significant relationship between liquidity and profitability of the firm, so the firm is required to maintain optimum level of liquidity.      In today’s developing and competitive world, banking sector has emerged as key player, and contributing its best to create employment, and improving the financial sector of the country. With the growing trend, it has become a challenge for the sector to earn maximum profitability. It has become necessary for firms to take dynamic decisions to effectively manage their assets. Due to this challenge followed by the growing trend, it has become necessary, that research based study should be conducted to investigate and recommend solutions that would help firms companies improve their profitability. With the same cited objective i am conducting this research.  1.2   STATEMENT OF RESEARCH PROBLEM
Commercial banks play their financial intermediation role by absorbing financial surpluses from their holders (depositors) and put them at the disposal of investors (borrowers) to be directed towards various investment channels. This investment activity carried out by the bank is hardly devoid of risks and problems, because the bank is seeking to maximize its expected profits on these investments, and this requires optimum utilization of the available resources, since the bank is exposed at any moment to meet the obligations of its clients and depositors who want to withdraw their savings, and so the bank should be ready to meet these cash withdrawal needs at any time.       The problem arises when the Bank is not able to meet these demands, especially those unexpected ones, which may embarrass the bank with its clients and may lose their trust over the time, in light of the intensive competition in the banking sector resulting from the increasing number of local banks, as well as intensive competition from the foreign banks that work in the local banking market.
Therefore, each commercial bank has to work to maximize its profits, and at the same time be able to meet the financial requirements of its depositors by holding a sufficient amount of liquidity, in order to achieve a balance between the profitability and liquidity. Banks should determine the optimal amount of cash that enable them in achieving balance between profitability and liquidity together, because each level of liquidity has a different effect on the levels of profitability, and the problem arises when the commercial banks try to maximize their profit at the expense of neglecting the liquidity effect, which may cause a technical and financial hardship with the consequent withdraw of deposits  
Therefore, the main research question of this project is as follows:
What is the effect of banks’ liquidity management on Profitability?
1.3 RESEARCH QUESTIONS
  The specific questions to be answered are:
•    What is the impact of cash reserve ratio on banks' return on assets?
•    Does efficient liquidity management affect banks' profitability?
•    Does the current ratio affect banks’ profitability?
•    Does money supply affect banks' profitability?
•    What is the impact of banks’ total asset on profitability?
•    What is the impact of banks’ annual turnover on profitability?
        1.4 RESEARCH OBJECTIVES
The main objective of this project is to investigate the effect of liquidity management on Deposit money Banks profitability in Nigeria.
The specific objectives of the study are:
•    Determine the impact of cash reserve ratio on banks' profitability.
•    Establish a relationship between efficient liquidity and banks' profitability.
•    Examine the effect of current ratio on banks' profitability
•    Find out the impact of money supply on banks' profitability
•    Examine  the impact of banks’ total asset on profitability
•    Determine the impact of banks’ annual turnover  on profitability
1.5. RESEARCH HYPOTHESIS
 The hypotheses of the study in their null form are as follows:
•    Ho: There is no significant relationship between cash reserve ratio and deposit money banks' profitability.
•    Ho: There is no significant relationship between efficient liquidity and deposit money banks' profitability.
•    Ho: There is no significant relationship between current ratio and deposit money banks' profitability.
•    Ho: There is no significant relationship between money supply and deposit money banks' profitability.
•    Ho:   There is no significant relationship between banks’ total asset and deposit money banks’ profitability
•    Ho: There is no significant relationship between banks’ annual turnover and deposit money banks’ profitability
1.6 SCOPE OF THE STUDY
This research work is concerned with management of liquidity and Deposit money banks' profitability. This work will focus on few deposit money banks in Nigeria and the period of study is 2010 to 2015.
1.7 SIGNIFICANCE OF THE STUDY
       This study is relevant to the entire populace in ascertaining how profitable a bank could be given the necessary amount of liquidity i.e Availability of funds in carrying out its activities.
1.8 LIMITATIONS OF THE STUDY
•    Lack of availability of some up-to-date data necessary for the study.