THE IMPACT OF LIQUIDITY MANAGEMENT ON COMMERCIAL BANK

THE IMPACT OF LIQUIDITY MANAGEMENT ON COMMERCIAL BANK

CHAPTER ONE

1.1  INTRODUCTION

The success of any business today is largely determined by the liquidity position and the way in which it manage its cash to ensure profitability. Solomon (2002) as the main purpose of establishing business is to make profit and not only to make profit but to optimize it therefore all necessary factors responsible for  such should be controlled and manage in order to achieve the objective (2001).

Liquidity position of bank could be considered in terms of cash and cash equivalent; loans advance prepayment, debtors, creditors etc, which could be readily ascertained to meet up with the financial obligation of banks in short term and long term (2003).

Abonede (2004) idie cash which some could refers to as surplus reserves and which could be also seen as part of the liquidity of a company could be used in such a way that it will make profit to accrue to it, therefore adequate care should be taken in the aspect of managing cash lucey (2003). There is a cost involved in maintaining a balanced liquidity position. This is especially so where the interest rate is low and credit demand is sluggish however, those cost can be minimized through the use of spread management when interest rate and credit demand are increasing a balance liquidity can be very profitable because liquidity is available to meet the loan demand maintaining a balance profitability. Joseph (1971).

John (1998) argue that by management his liquidity position a bank may be able to afford the cost that often accompany an excess as well as deficit liquidity position. In addition it can display to regulatory as well as investors a logical controlled method of ensuring that the need of the community and the asset of the shareholders are being well managed. It can be reasonably inference quoted above that there exist on important relationship between the concept of liquidity and profitability.

Efficiency in banks in terms of liquidity and profitability could be measure through trend analysis and ratio analysis. Some of the ratio includes capitals adequacy asset utilization profitability, liquidity, and cash flow ratio.

A proper consideration and analysis of this will give us a base for determining the best position for liquidity and cash management to ensure profitability in banking industry. Aborede (2004).

1.2  STATEMENT OF THE PROBLEM

Through these financial roles, the commercial banks use the idle funds in other classes of financial assets investment. These business activities of the bank is not done without problem facing it, since these deposit which have been invested by the banks for profit maximization can be demanded for at any time. When the bank is not able to meet their financial obligations, the public begins to loss confidence and these will cause a lot of competition to the financial sector. With the high increase of competition in the banking industry, every commercial bank should strive to operate on profit and at the same time meet the financial demand of its depositors by maintaining adequate liquidity. The problem then becomes how to select the optimum point at which commercial bank can maintain its assets in order to optimize these two objectives. These problems become more difficult as a large numbers of banks are basically engaged with profit maximization and tend to neglect the importance of liquidity management and these can lead to technical and legal insolvency.

This research work will also see to other problems such as the effect of excess liquidity and the problem of estimating the population of the deposits that can be demanded for at any specific time, selection of factors that will affect or influence the bank liquidity level and finally problem of satisfying the two major publics of the commercial bank simultaneously. With these solutions will be prescribe and recommendations will be made where necessary.

1.3  OBJECTIVE OF THE STUDY

The competition environment of the financial institutions is to tense that any commercial bank that aims to survive must be aware of the challenges of its liquidity and profitability obligation as both variable can make or destroy its future.

This study is largely centered on liquidity objective and ensure its ability to meet up the depositors demand thereby maximizing its value and there is also uncertainties in the asset management of the commercial banks as the new deposit does not correspond with the customer’s withdrawals, since demand is made at short notice. Therefore this study is aimed at the following goals.

• To know liquidity management will handle these uncertainties and determine their effect on profitability.
• Discovering the specific factors that are useful in improving profitability and liquidity position of the commercial banks.
• To examine the cost of liquidity and illiquidity levels at the performance of commercial banks and length at which this liquidity can be used as competitive instruments.
• To take a critical view of the adopted liquidity measures of the commercials banks and attempt to see how it has achieved.
• Finding out the effect of changes in liquidity levels on profitability.
• Aimed at discovering the credit and portfolio policies of the commercials banks.
• Finally it will attempt to identify the basic causes of liquidity problems in Nigeria commercial banks and to recommend appropriate measures to solve such problems.