Abstract
This study examined the impact of liquidity performance in commercial using
First Bank of Nigeria Plc as case study. Secondary data used in this study
were carried from text books, journals, magazines and newspaper. Our
findings indicate that there was a positive relationship between liquidity
management and the existence of any banks. Based on this findings we
recommend that should be prudent in extending credit facilities to their
client/customers to avoid problem of load loss management and competence
in banking system should be enhanced to increase asset quality.
INTRODUCTION
BACKGROUND OF THE STUDY
The impact of liquidity position in management of financial institution and
other economic unit have remained fascinating and intriguing, though very
elusive in the process of in investment analysis visa- visa bank port folio
management.
There appears to be an interminable argument in the literature over the
years on the roles, meaning and determinants of liquidity and credit
management. The Nigeria financial environment has noticed increase in credit
which has become a problem to the country.
Credit control described as to maximize the value of the firm by
achieving a trade a trade off purpose of credit control is not to maximize sales
or to minimize the risk of bad debt.
In fact the firm should manage it credit in such a way that sales
are expanded to an extent to which risk remains within an acceptable
unit. These costs include the credit administration expenses bad debt, losses
and opportunity cost of the fund field up in receivables, the aim of liquidity
management should be to regulate and control these cost that cannot be
eliminated together.
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According to Begg, fisher and Rudiger (1991:130) liquidity refers to
the speed and certainty with which an asset can be converted back into
money (cash, income) whenever the
Asset holder desires, money itself is the most liquidity asset o all
liquidity management seeks to ensure attainment of the short term objective.
A liquid bank is one that stores enough liquid assets and cash together
with the ability to raise funds quickly from other source to enable it meet its
payment obligation and financial commitment in a timely manner.
Therefore according to Ngwu (2006:36) liquidity management is the
act of storing enough funds and raising funds quickly from the market to
satisfy depositor loan customer and other parties with a view to maintain
public confidence.
STATEMENT OF THE PROBLEM
Liquidity is considered as the success of as bank, therefore ay
ineffectiveness in its management consuetude’s a huge problem i.e. it
encounter a huge problem that affect the affairs of the financial institution.
This problems is therefore analyses here as the basis for this research study.
The analysis commence from the era of banking in inception in Nigeria
through it growth stages and till what is it today. The initial bank failures
recorded were principal dues to inefficiencies in the management of the
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liquidity of such bank which in one way or the other had something to do with
either liquidity inadequacy and the relative inefficiency in their management.
As an institutional problem, it has persisted over the years, in
determining the survival or otherwise of banks. Although it must be said that
some relative degree of banking it is believed that any banking institutions
that is properly managed and has adequate liquidity should be able to swim
above troubled waters.
Problems sometimes also evolve from banks inordinate urge to make
phenomenal profit. In the process of doing this there is the tendency for these
banks to get carless in the resources utilization and particularly their
management of liquidity.
The resultant effect is usually loss substance and consequently, loss
accumulation, a situation which can lead to banking failure. The marginal
loans in the banking system calls to mind the important factor that national
government of all` time preoccupy themselves with banks. This shows the
degree of importance attached to liquidity and its management by these
governments and deviation from its ratio or inadequacy of it management
always spells trouble for the banking concerned.
The far reacting consequences of inadequate liquidity management can
also be examined. Apart from profit declines. Other of attendant consequences
to a bank includes loss of confidence in the particular bank its inability to
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fulfill both its short term and long-term obligation, lack of trust on the part o
depositors and other customers alike; and the concomitant reduction in level
of operations.
A recent example of the eminent distress facing Nigeria bank which is as
a result of improper liquidity position management as well as loan lossaccumulation (marginal loans)
OBJECTIVES OF THE STUDY
Considering the nature of banking itself which is a risk taking
venture, i.e borrowing short and lending long one sees the indispensability of
liquidity for a banks effective and profitable operation liquidity is needed to
finance the gap created by mismatching funds. Again liquidity adequacy is a
sure way of minimizing the risk portfolio of any bank. The need to put some
family into the management of banks liquidity has always been considered a
serious issue by the authorities and this has often influenced periodic
prudential regulation. As a check on banks against holding excessive cash,
Central Bank presently stipulated liquidity ratio of 24.69%, is considered by
the Apex bank as being the reasonable maximum any an expression of the
bank liquidity assets which comprise cash marketable securities and
investments over the bank banks total liabilities (Ngwu 2006:56)
The objectives of the study include
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(a). To examine in details the liquidity position of banks in Nigeria
using first bank Nigeria as a case study.
(b). To identify causes of illiquidity or factors that influence liquidity
management.
(c). To examine how these banks are able to adjust their liquidity and
control management in Nigeria financial environment.
(d). To analyses the consequences of inadequate of liquidity control
management.
(e). To make some suggestion on policy guideline to the monitory
authorities who can after banks current liquidity and credit
management practices.
RESEARCH QUESTIONS
The essence that the respective bank should manage their balance sheet
inn such a way as to operate within that maximum range and still remain
liquid.
The basic questions this research attempt to answer includes:
(a). what is the impact of liquidity position in management?
(b). what is the relationship between liquidity and profitability?
(c). what are the criteria for determining adequate liquidity for a bank?
(d). how does liquidity influences a bank investment policy?
(e). what are the predicament of inadequate liquidity control management.
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SIGNIFICANCE OF THE STUDY
The study justification arises given the unsavory experience of the
deregulated banking era in Nigeria and the present global economic meltdown.
Apart from this liquidity has always been a source of concern with some
Nigeria banks. The importance of liquidity has even acquired a new dimension
in the advanced countries of the world in recent years. This is basically
because of responses to structural changes and funds management
techniques in these countries. The development of new technical innovations
that do not necessarily fit into the world of the age long liquidity tests.
The key role played in any banking set-up further epitomizes it
importance. Right from time liquidity has been associated with allocation of
assets. According to their capacity to generate the cash necessary to satisfy
creditors and depositor calls on the bank liabilities.
However, with the emergence of active liability management strategies
liquidity has been more than a function, particularly in some instance of the
of the banks capacity to acquire additional funds in the market place.
Limitation of the study
Time constraints were one of the limitations encountered in the case of the
study.
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This is because, this study was carried out during an academic session,
the researcher did not have enough time to properly concentrating on this
particular study.
Secondly, finance was yet another problem that put a check on the
extent of investigation.
Finally there was the problem of inadequate information and unavailable
material or information for the study.
SCOPE OF THE STUDY
Due to time and resources constraints the study at hand has been limited to
First Bank of Nigeria Plc.
DEFINITION OF TERMS
The following definition terms are given to facilitate better understanding.
LIQUIDITY MANAGEMENT
This is the act of storing enough funds and razing funds quickly from the
market to satisfy depositors, Loan customers and other parties with a view to
maintain public confidence.
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BANK
A bank is a financial house established for the purpose of accepting
deposits and lending out funds in addition to other services.
Central bank of Nigeria
This is the national apex and financial institution that regulates the
banking system value supply and cost of finds in the economy.
FINANCIAL SYSTEM
The aggregation of financial market arrangement institutions agent that
inter-act with each other and other economic unit together with the se of rules
and regulation that guide their interactions.
NIGERIAN DEPOSIT INSURANCE CORPORATION (NDIC)
This is the body which ensures that customer funds are insured in the
commercial banks at liquidation they make sure the customer are paid bank
their deposits.
PROFITABILITY RATIO
This a class of financial metrics that are used to asses a business ability
to generate earning and compared to it expenses and other referent costs
incurred during a specific period of time, for most of these ratios, having a
higher value relative to a competitors ratio or the same ratio from a previous
period is indicative that company is doing well.
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LIQUIDITY ASSTS THEORY
This theory argues that banks should hold large sum of liquid assets to
avert sudden payment request that might be received.
CALL MONEY
They are banks excess reserves on daily or short-term basis with the
correspondent banks.
SHORT-TERM GOVERNMENT SECURITIES
These are gifted securities with short-term maturity which are being
bought and sold in active market.
MARGINAL LOANS
This is a loan made by a brokerage house to a client that allows the
customer to buy stocks on credit
LIQUIDITY RATIO
This is a class of financial metrics that is used to determined a company
ability to pay off its short term debts obligation. Generally the higher the value
of the ratio, the larger the margin of safety that the company posses to over
short-term debts.
LIQUIDITY PORTFOLIO
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Liquidity is the ability for the bank to have sufficient capital in it account
or cash deposited by individuals and portfolio is any collection of financial
assets such as stock bonds and cash it may be held by individual investor
and or managed by financial professionals hedge financial institution, or a
portfolio is a brief case for caring lose papers