LIQUIDITY MANAGEMENT IN NIGERIA COMMERCIAL BANKS
(A CASE STUDY OF FIRST BANK OF NIGERIA PLC)
ABSTRACT
Liquid represents the ability to work efficiently accommodate decrease in deposits and funds increase in the loan portfolio, that is to meet customers loan request fund commitments and liens of credit. A bank has liquidity potential when it has the ability to obtain sufficient cash in timely manner at a reasonable cost. The cost obtaining liquidity is a function of market conditions and the degree of risk, credit risk reflected in the balance sheet.Liquidity management in Nigeria commercial banks ever the year has been a major issue of contention.  It has generated a lot of thoughts and concerns to various groups through banking history.  Academics and professionals take divergent views about the term liquidity and its management.  Those who are involved in the management of the source and uses of fund deposit in commercial banks are raised to some degree.There is virtually no work on the liquidity management in Nigeria commercial banks.  Thus, is the challenge of the research as its attempts to discuss it.  The objective of this research work is to examine the liquidity management of commercial banks in Nigeria with more emphasis on their investment, liquidity and profitability position in order to find out why commercial banks need to be more liquid then any other business organization.  This study will look at the effectiveness and efficiency of commercial banks in grapping with the management of their profitability by employing and using various approaches, theories and instruments in solving their liquidity and profitability dilemma.There will be a thorough research to prove how the banks have been managing their liquidity and profitability.  In this work both secondary and primary data were gathered and analysed.  The primary sources was the administration of questionnaire and oral interview, while the secondary source was inform of literature review of books’ journals and newspapers.From the findings of the analysis, the research came up with conclusion and recommendation.
TABLE OF CONTENT
CHAPTER ONE
1.0              Introduction
1.1       Statement of problem
1.2              Objective of the study
1.3              Significance of the study
1.4              Statement of hypothesis
1.5              Scope of the study
1.6              Limitation of the study
1.7              Definition of terms
CHAPTER TWO
2.0              Review of related literature
2.1       Review of assets and liabilities management of commercial banks
2.2              Commercial loan theory
2.3              The shiftability theory
2.4              The anticipated income theory
2.5              The liability management theory
2.6              The operation of Nigeria Commercial Banks in terms of Assets
and Liabilities Management
2.7              The liability management of commercial banks
2.8              Credit tools used by banks in Nigeria to control commercial banks liquidity positions.
2.9              Factors to be considered in Assets Management
2.10          Investment decision – risk and returns
2.11          Similarities between assets and liabilities
2.12          Assets of commercial banks
2.13          Commercial banks investment purposes
2.14          Important factors a barher should corrider before holding cash
2.15          Allocation of commercial banks funds
2.16          Liquidity and profitability
CHAPTER THREE
3.0              Research design and methodology
3.1       Source of data
3.2              Secondary
3.3              Sample used
CHAPTER FOUR
CHAPTER FIVE
5.0       Summary of findings, conclusions & recommendation
5.1              Findings
5.2              Recommendation
5.3              Bibliography
5.4              Appendix
Questionnaire
CHAPTER ONE
1.0       INTRODUCTION
1.1              STATEMENT OF THE STUDY
A commercial bank asset management is never ending leg of war.  This war is pitched between efficient liquidity management on one hand and profitability on the other.A liquidity and profitability are two inherent goals in commercial banks, bank managers will continue to experience conflict of trying to provide efficient mechanism of addressing their banks liquidity and hence their safety is necessarily arising from the nature of their liabilities.
A high proportion of commercial bank liabilities are made up of demand deposits (current account) savings account, fried deposits and funds from other sources.  Demand deposit are those banks liabilities that are payable on demand.
Necessarily, commercial banks need to keep only highly liquid assets to meet any conceivable volume of withdrawal.  Liquidity assets can little or zero return on assets, it is less risky and the less it is likely to yield adequate returns.  As such, the higher the less risky assets, the more the bank is exposed to experience a bank run or crisis.  At the rate, banks will probably not be able to cover all its cost and also make profit for the owners.
Commercial banks are business-oriented firms with shareholders interested on profitability.  In order to satisfy its shareholders, a bank might be tempted to forget liquidly and pursue profitability by investing only on high yielding less liquid assets that is achieving profitability 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 percentage of idle cash balances commercial banks are to hold at any point in time and in what form to hold at any point in time and in what form to hold it is very necessary.  It should be borne in their minds the importance of satisfactory level of profit.
There are many constraints to banks in achieving their goals of liquidity and profitability such as legal reserve requirement but they should maintain adequate liquidity to meet unforeseen and seasonal loan demand and fluctuation of deposits.  Cash reserves are also needed to take advantage of unexpected profitability investment opportunities.
In effect, banks are constrained and have to on a tight “rope”.  That is the never-ending tug-of war or what I may refer as delima facing commercial bank managers in developing countries.  The Nigeria case is further aggravated by the inconsistency of monetary policy as administered by the Central Bank of Nigeria (CBN).  It is reminiscent of a military coup de tat, you will just wake up one morning and hear over the radio or through circular no xy2 that the Central Bank of Nigeria has issued a monetary circular number … adjusting the prevailing rate whether upwards or downwards.
The Federal Government directive of withdrawing all federal owned parastatals accounts from commercial banks is one of such constraints.  The shocks stirred up aggressive marketing in the banking industry.
Although all these shocks are necessary to produce the desired effect of controlling money supply in the economy level such tends to give nightmare to bank management.  These directives causes ripples in its banking industry as such cause more discrepancies in the liquidity position of commercial banks and subsequently the rate of profitability.
1.2              OBJECTIVE OF THE STUDY
The research objective here is to look into the liquidity management in Nigeria with more emphasis on their investment liquidity and profitability positions.  The researcher will try to find out why commercial banks need to be more liquid than any other business organization, what methods/techniques banks employ to solve the liquidity profitability dilemma is the concern of this work.
 This study will look at the effectiveness and management of their profile by employing and using various approaches, theories and instruments in solving their liquidity profitability problems.  The various commercial banks investment outlets leg loan and advances, investment in treasury kills, treasury certificates, call money, bankers unit fund, equity participation on small and medium scale firms, etc and the degree of the liquidity of such investment shall be examined.
At the same time, the researcher will take critical look at the assets profile management of commercial banks with a view to determining of there is a defined relationship between the rate of profitability and liquidity.
Finally, I wish to identify why Nigeria commercial banks are excessively liquid but at the same time make high profit.
1.3              SIGNIFICANCE OF THE STUDY
The importance of liquidity management in the banking industry cannot be over emphasized.  Since not much contribution was made on the topic, liquidity management, the researcher will carefully consider those factors relevant to efficient liquidity management for a successful achievement of the desired profitability.
It is hoped that the result obtained from the study will benefit management of commercial banks, non-bank financial institutions, business enterprises, students of accounting, banking & finance and other related business.
Readers of this study/work will be emposed as regards the imput of future study.  The basis of this research work is the position of liquidity of Nigeria commercial banks as a determinant of profitability.
1.4              TEST OF HYPOTHESIS
H0:      The depositors are not making impact on first banks cash inflows.
Hi:       The depositors are making positive impact on first banks cash inflows.
H0:      There is no difficulty converting the instrument that constitute first banks near cash asset.
Hi:       There is difficulty converting the instrument that constitute first banks near cash asset.
H0:      The federal government withdrawal of parastatals and corporations deposits with commercial banks have no impact first banks.
Hi:       The federal government withdrawal of parastatals and corporations deposits with commercial banks have impact on first banks.
1.5              SCOPE OF THE STUDY
In the study this nature which involves the analysis of commercial banks statements, qualification of their investment and degree of their data available and its type obviously limit the extent and scope of the analysis.
This study is concentrated in one selected commercial bank in Enugu Urban the researcher will examine how this commercial bank efficiently carry out their portfolio management in the following areas:
i.                    Loans and advances
ii.                  Investment in securities of treasury bills
iii.                 Balance held with and for other banks internally and still meet their depositors and shareholders demand.
The lending pattern of Nigeria Commercial Banks to various sectors of the economy will be critically examined, the nature of this loans opportunity and an appraisal of the steps commercial banks take to recover their debts when customers default in their loan repayment agreement.
In this research, the management of commercial banks assets/liabilities will be discussed.  The review of some liquidity and profitability, theories will be carried on it, the management of the asset and liabilities which means the sources of fund (liabilities and uses of fund (assets).  The sources from widely funds are acquired and the uses to which they are put can be found in the balance sheet of a bank.
The tools 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 guidelines issued by the Central Bank of Nigeria (CBN).
1.6              DEFINITION OF TERMS
1.         Portfolio:        It is a list of securities and investment loan stock, shares and bands, etc. held (owned) by a bank, individual or organization.
2.         Portfolio Management:         This goes with the management of security holding (investment portfolio) of a bank or business firm.  A portfolio may be managed by a committee or a portfolio management department or any other body.
3.         Liquidity:       It is the ability of banks to pay cash immediately when called upon to do so for all its demand liabilities.
4.         Liquidity Management:        It is the ability of the bank to manage the liquidity position so that neither the liquidity nor profitability will suffer.  It involves the provisions for the withdrawal of deposits, short-term cash cyclical and circular cash requirement of the apex financial institutions.
5.         Bank Deposits:          There are funds deposited in a bank.  It is divided into demand, savings and time deposits.
a.         Demand Deposits:     This is also known as checking account deposit payable on demand that is without prior notice.
b.         Savings Deposits:       This type of deposit is usually evidenced by a passbook under which the depositor/customer of the bank is required to notify the bank before withdrawal.  But it is not so in practice.
c.         Time Deposits:           This deposit cannot be withdrawn until after a specific period of time.
6.         Assets:            There are the entire properties of a bank and other investment in other profitable organization.
7.         Asset Management:   It is the allocation of fund, the basic objectives being maximization of profitability, solvency and regulatory constraints.
8.         Bank Run:     A run occurs in a bank when there is mismanagement of liquidity and profitability.
9.         Solvency:        The solvency of a bank or a firm is measured by its ability to turn its assets into cash to meet its deposit obligations.
10.       Treasury Bill:            These are ninety-one days short-term maturity debt instruments issued to raise finance for the federal government.
11.       Debentures:   These are long-term debt instrument or security insurable by banks in order to increase their capital base.  This represents a debt.
12.       Trading on Equity:   This is a situation whereby a firm earns more with borrowed fund than what it cost to borrow the fund.