THE EFFECT OF LIQUIDITY MANAGEMENT ON THE PROFITABILITY OF COMMERCIAL BANKS IN NIGERIA

THE EFFECT OF LIQUIDITY MANAGEMENT ON THE PROFITABILITY OF COMMERCIAL BANKS IN NIGERIA

(A case study of selected banks in Nigeria)

ABSTRACT

This work investigated the effect of liquidity on the profitability of bank in Nigeria. The work is necessitated by the need to find solution to liquidity management problems in Nigerian banking industry. Three banks were randomly selected to represent the entire banking industry in Nigeria. The proxies for liquidity management include cash and short term fund, bank balances and treasury bills and certificates, while profit after tax was the proxy for profitability. Elliot Rothenberg Stock (ERS) stationary test model was used to test the run association of the variables under study while regression analysis was used to test the hypothesis. The result of this study has shown that liquidity management is indeed a crucial problem in the Nigerian banking industry. The study therefore recommends that banks should engage competent and qualified personnel in order to ensure that right decision are adopted especially with the optimal level of liquidity and still maximize profit.

CHAPTER ONE

INTRODUCTION

1.1   Background of the Study

In every system, there are major components that are very important for the survival of the system. This is also applicable to the financial system. The financial institution have contributed immensely to the  growth of the entire financial system, as they offer an efficient institutional method through which resources can be mobilized and directed from less productive uses to more productive uses.

In performing these financial role, the financial institutions has proved to be an effective link between savers and borrowers, among the financial institutions that have partake in these important financial role are the commercial banks. The functions of the commercial banks have become the strong base for the two major functions of the commercial banks namely deposit mobilization and credit extension. Commercial banks have become a very important institution in the financial system as it helps in facilitating the movement of financial assets that are less desirable to the more desirable public who needed the financial assets. In view of this role and activities commercial banks play in the society, the commercial bank is selected as the main focus of this study.

An adequate financial intermediation requires the attention and focus of the bank management to the profitability and liquidity, which are the two conflicting objectives of the commercial banks. These objectives are parallel in the sense that an attempt for a bank to achieve higher profitability will gradually destroy its liquidity and solvency position and vice versa. Practically, profitability and liquidity are effective indicator of the corporate wealth and performance of not only commercial bank but to all profit oriented venture. These performance indicators are very important to the shareholders and depositors who are major publics of a bank. As the shareholders expect the bank to increase lending in order to give them maximum return in money invested while the depositor expect the bank to keep much idle cash in order to meet their demand. With profitability objective conflicting with that of liquidity, and with the interest of the shareholders conflicting with that of the depositors, there is the need for reconcile and harmonize these conflicting positions through effective liquidity management so as to ensure the survival and growth of the commercial banks.

1.2   Statement of Problem

Through these financial roles, the commercial banks use the idle funds borrowed from the lenders by investing such 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 lose confidence and these will cause 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 number 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 proportion 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   Objectives of the Study

The main objective of this study is to examine the effect of liquidity management on the profitability of commercial banks in Nigeria.

1. To examine the effect of bank cash asset on profitability.
2. To examine the effect of bank balance on profitability.
3. To examine the effect of Treasury bill and certificate on profitability.

1.4   Research Questions

The following research questions are given consideration in this work:

1. Does bank asset have any significant effect on profitability?
2. How can bank balance have effect on profitability?
3. What will be the effect of Treasury bill and certificate on profitability?

1.5   Statement of Hypothesis

From the statement of problem, objective of study and research questions of the study, the following hypotheses are formulated:

H_OI:  There is no significant relationship between bank cash asset on profitability.

H_O2:  There is a significant relationship between bank cash asset on profitability.

H_O3:  There is no significant relationship between Treasury bill and certificate on profitability.

1.6   Significance of the Study

For the fact that commercial banks operate on liquidity and profitability motives in the mind to satisfy their major publics, the shareholder and depositor, the need arise for them to bring into agreement these two public concurrently. With this, the commercial bank need effective and efficient liquidity management approaches and principles that will help them realize these motives. The result gotten from this study will reveal the level of attachment of the commercial banks to the monetary policies (Liquidity ratios) established by the government and these will help the government to set appropriate liquidity ratios and cash ratios that will not be harmful to the operation and survival of the commercial banks. It will also help banks operations and credit policy guideline which affect profitability level and finally minimize the effect of liquidity and help in providing effective liquidity formulations.    

1.7   Scope of Study

This study examines the effect of liquidity management on commercial bank profitability. The variables used are liquidity management which was the proxies is bank cash asset, bank balance and treasury bill and certificates. Profitability which is the second variables was proxied by profit after tax.

1.8   Definition of Term

1. Liquidity: Ability with which asset can be easily converted into cash. It also determines a firm ability to meet its short-term obligation.
2. Liquidity management: The planning and control necessary to ensure that organization maintain liquid assets so as to meet its obligations to customers.
3. Profitability: Profit is the ultimate measure of overall performance that is the excess of income over cost.
4. Commercial bank: The business of receiving money from outside sources as deposits, irrespective of payment of interest and granting of money loan and acceptance of credit or purchase and sales of securities for the account of others or incurring of obligations to acquire claims in respect of loans prior to maturity.