Effect Of Liquidity On The Profitability Of Commercial Bank In Nigeria (A Case Study Of Union Bank Of Nigeria Plc)

Project and Seminar Material for Accountancy / Accounting

Effect Of Liquidity On The Profitability Of Commercial Bank In Nigeria (A Case Study Of Union Bank Of Nigeria Plc)

Chapter One


1.1 Evolution of Commercial Bank in Nigeria

The history of banking business in Nigeria dated to the colonial era with the establishment of first commercial bank.

The African Banking Corporation

It opened its first branch in 1892 in liver pool Dempster and co a shiping firm organized a trust and registered in liver pool with Monetary backing from British colonial government. The sole responsibility of African Banking Corporation was the distribution of bank of England notes for the British treasury.

The bank experienced some initial difficulties and eventually decided to transfer its interest to elder Dempster in 1983.

This led to the formation of a new Bank known as the British bank of west African (BBWA) in 1983 with $10,00 capital which was later increased to $100,00 during the same year. The first Lagos branch was opened in the year 1894 while the second Nigeria branch was opened in old Calabar in 1900.

During the early stage of commercial banking in Nigeria, the few available banking service were mainly and specifically provided and tailored to suit the needs and requirement of the colonial administration. In other words, banking services were largely designed and intended to serve the interest of the British government in Nigeria. During the period the British Bank of west African (1894) took over the assets and liabilities of Afican Banking Corporation. (1894). This Bank is now known and called First Bank of Nigeria Plc. It remained the sole bank until (1917) when the colonial bank Barclays bank DCO (Dominion Colonial and Oversea) now union bank of Nigeria plc enjoyed a virtual monopoly but the banking industry.

Before 1894 have become used to cowries and manila as units of monetary transaction. This means that banking system did not come to Nigeria in 1894 as a fresh experience.

This is supported by the fact that they has their small trust groups and kept money in safe places. The idea of cowries and manila was introduced by the merchants of the Royal Niger Company, the antecedent of the present U.A.C to standardize coinage system when the British Bank of West African (BBWA) was established people were very suspicious of its intention.

However, such men as kind Jaja of Opobo, Taiwo Olowo, Da-Rocha and many other to name after were largely used in getting the message across to the people (Akinosho 1984p.7)

Another Bank called the Angro-African Bank was established in 1899 in old calabar by the Royal Niger company (U.A.C) to complete with the British bank of west African (BBWA) the bank later change its name to bank of Nigeria and established branches in Buruta Lokoja and Jebba. However due to fierce competition and monopoly for the importation of silver from the Royal mint enjoyed by the british of west African in 1991. to reflect the independent status of most west African countries, the british bank of west African (BBWA changed its to bank of west african). (BWA) in 1956 owing to ownership structure of the present company (standard chartered bank plc in U.K) it again changed its name to standard bank of Nigeria Ltd in 1979 the following Nigeria acquisition of majority chares it becomes First Bank of Nigeria (FBN). Barclays Bank (DCO) joined it in 1916 and opened it branch in lagos in 1917. Barclays Bank DCO was renamed Union Bank of Nigeria Limited (UBN) after 80% Nigerian share, soon after (line (9) other branches were opened.

The British and French Bank now called the United Bank for African Plc (UBA) a subsidiary of banquet national depairs was incorporated on February 23, 1961-67 year after to take over the banking business with paid up capital of over N5 million these made it the third expartriate bank to dominate early Nigerian commercial banking.
The foreign bank comes principally to render service in connection with the international trade so their relation at that time was chiefly with the expatriate trading companies and with the government. The largely ignored the development of local African entrepreneurship. Together these three (3) banks controlled closely to 90% aggregate bank deposit from 1894 to the early 1930s. Several abortive attempts were made to established locally owned and managed bank to break foreign monopoly.

In 1929 the industrial and commercial bank was set up by a handful of patriotic Nigerian. It folded up in 1930 due to under capitalization, poor management and aggressive competition from expatriate banks.
In 1931 another indigenous bank. The Nigeria Mercantile Bank was established like its predecessor it went into liquidation in 1936, three years after another set of patriotic Nigerian like Messrs Akintola maja, theophilus, Adisa subar Akinremi Adeshinyin, Alfred latunde Johnson, Adisa Subair, akinremi Holloway and Issac Ayoola Ogunlana owned the credit of establishing

National Bank of Nigeria (NBN) with initial capital of about N10,00, making the third commercial bank indigenously owned and also the first indigenously owned bank to make a successful debit into the banking industry (it has liquidity problem but has recapitalized).

The next private indigenous bank to be established was the Agbonmagbe Bank founded by chief Okufe in 1945. the bank was taken over by the western state government in 1969 and its name was changed to WEMA Bank Plc. The fifty bank.

The Nigeria Penny Bank was set up in the early 1940s and collapsed in 1946 under the weight of mis management. This was followed by the Nigeria farmers and commercial bank in 1947 which later failed in 1952.

Liquidity Versus Profitability

At the micro-level, the individual commercial bank is viewed as an economic unit whose goals is to maximize profit. Banks hold port folio of assets and given the characteristics and distribution of their liability they attempt to structure their portfolio of asset in such a manner as to unheld the greater return.

The assets are the two (2) group of balanced sheet items called loan and investments, while non-interest earning deposit with central bank.

Profits are generated by earning assets (loan and investments) while liquidity is provided partly by earning assets like short-term investment and partly by non-earning assets e.g cash balanced held in the bank vault and allot at the central bank, call money reserves etc.

1.2 Statement of the Research Question

The project will analyzed the problem by the commercial banks in maintaining equilibrium between profitability and liquidity some of the problems beings faced by the commercial banks maintaining equilibrium between profitability and liquidity are form.

Like other companies banks also income substantial cost and must earn an income at least sufficient to meet their cost. They are also accountable to their share holder who have invested in them with the aimed of good return interim of future divided from these point of view banks need assets which produce income substantially higher them that paid on deposits.

At that sometimes, the assets of a bank must be kept reasonably liquid so as to meet possible demands from depositors and to maintain public confidence. This is why central bank prescribes minimum level of liquidity that a bank must maintain both as regards cash and as regards other liquid assets which can be converted to cash.

1.3 Objective of the Study

This project aims at bringing out the effect of the regular power given to central bank of Nigeria over the commercial banks in Nigeria as contained in the CBN decree 24 of 1991 and BOFIA decree 25 of 1991. This project will analyzed the effect of liquidity on profitability of commercial banks in Nigeria so as to determine whether the control is effective the purpose of the control of the economy in general will be corrected in this project.

The purpose of liquidity control by the CBN will be examined, so that it may be conducted whether the control is really achieving its objectives or not. The project will make suggestions on how to solve the problem of balancing liquidity and profitability determiner. The problem of optimal assets selection to yield maximum profit will also be analyzed in this project.

1.4 Significance of the Study

Working on the promise that the days of cheap profits are gradually being eclipsed and that in future, bank would need to complete more fiercely for limited business, only those bares show innovative approaches to treasury and find management will be capable of surviving the competition ahead. Although the Nigeria service had remained up till now a sellers market, with banks returning impressive results, strong balanced sheet, huge profit and impressive divideds.

This trend in unlikely to continue much longer, hence it has now become expedient for banks to reappraise their assets mix policies goals and procedures, so that they are not out changed by the time unless new and relevant portfolio management strategies are brought into place, bank might in future be left in the vurch.

Apart from the foregoing consideration, the present treasury and fund management techniques used by Nigeria Bank are often time based on haphazard and subject factor which tends to increase the rish of goals achievement the generally accepted techniques of quantitative and scientific techniques are very rarely used in a publication by Adekanye Femi (1986) he noted that up till now, there is no report of the use and application of management science/operation research technique in banking where as considerable integration of these technique for banking decision have been evoke in American, Europe and Japan.

The main focus of this project is therefore to develop a decision model in asset more (Treasury and Fund management) for the policy making and serve programming model. The model will hopefully assist bank in enhancing their profitability effectively from its present low ebb, thus unproven target planning and achievement.

1.5 Scope of the Study

The control weapon of the CBN-liquidity ratio affects the profitability of all banks and other financial institution but this project will be limited to any effect of liquidity on profitability of commercial banks in Nigeria because this control weapon of central bank usually affect commercial bank more than the other financial institution. This study is a theoretical exposition within focuses attention on the central problem of banks management reconducting the conflicting bank goal of profitability, liquidity and solvency which in all effect the operation of the bank.

1.6 Limitations of the Study

Finance is the main constraint facing this research work, coupled with short available time. The researcher is self sponsored and so could not afford the cost of elaborate area of coverage.

Another major limitation is the difficulties in obtaining material information as there are reluctances from sources.

1.7 Plan of the Study

The plan of the study is how the research work is to be done; these plans spelt out the research work and contain five Chapters.

  • The first chapters of the research work contain the background of the study, statement of the research question, objective of the study, significant of the study, scope and limitation of the study, definition of term and plan of the study.
  • Chapter two treated theoretical frame work literature review.
  • Chapter three deal with research methodology, determination of population, statement of hypothesis, selection of sample, sources and collection of data, validation of questionnaire and selection of analytical method.
  • Chapter four deals with the data presentation and analysis, Questionnaire analysis and interpretation of results.
  • Chapter five, these finally discuss the summary of the finding, conclusion and recommendation.

1.8 Definition of the Terms


Bank liquidity is the ability of a bank to be in a position to meet the demands of depositors and borrowers. Virtually all economic units need liquidity.


It can be considered as the main motive of bank as its maximization ensure the survival and growth of the economic unit


Its. Often used as a synonym for liquidity it is the ability of bank to meet its day-to-day obligations to deposits and credit customers, solvency is the ability of the bank to meets its long terms obligation


These are losts of securities and investment (stock, shares) owned by a bank.

Demand Deposit:

These are money saved by customers of a bank subjected to recollection on demand


This is the existence of one or few economic unit in a particular industry thereby enhancing the few economic units to have uncompetitive control over the industry

Expatriate Banks:

These are foreign owned banking institutions

Indigenous Banks:

These are locally owned banking institution

Chapter Five

Summary, Recommendations and Conclusions

5.1 Summary

Based on the analysis of data of the work, the following results were found:

  1. The banks huge cash balance are not effectively and efficiently invested because of the fear of liquidity which consequently limits the profitability of banks.
  2. There is a weak demand for loan by eligible banks customers which often lead to excess cash stock in the banks.
  3. Adequate but not excessive liquidity is important for the viability of commercial banks so as not to in hunt project making.
  4. The CBN controls are inevitable for the survival of commercial banks in Nigeria as banks strive to reconcile liquidity and profitability dilemma.

5.2 Recommendations

From the result obtained from the hypothesis tested. It can be concluded that liquidity and profitability are rivaly variable both of which are inevitable to banks management.

  1. Having shown that both portfolio management and earning were sub-optimal using the present method (i.e. d.O.F.A and a.A.a.) I recommend full implementation of linear programming techniques which has been discussed in chapter two of this study. I believe this will result in higher returns in more diversified portfolio and better compliance with credit guidelines.
  2. The present position of banks cash balance is un acceptance it is relatively to high and requires immediate top management attention (inventory theoretic model cash management should be used to find the optional level of cash holding annually based on demand for cash.) The huge surplus balance of banks could have been more profitability used for increasing investment in Treasury bill, Treasury certificates etc. if proper cash management system has been in use.
  3. There is excess liquidity position for Nigeria banks. This is an indication that demands for loanable fund do not necessarily expand their lending in order to bring their reserve or liquidity ratio to the stipulated minimum. This can be overcome by inventory excess assets in the prepared sector of the economy without contravening the laws.

The yields on these assets are relatively high and CBN does not place restriction on the maximum amount but stipulate the minimum that must be invested. Investment in deventire stocks should also be increase to the maximum obtainable on view of its high yield relatively short maturity and safety.

5.3 Conclusion

In the high of the revelations made by this study, the following conclusions, can be drawn

  1. The asset selection on commercial banks was not optimal.
  2. That the actual gross earning recorded at the end of each financial year was not optimal due to poor asset selection

The need for senior management of banks in Nigeria to recognize the superiority of scientific approach to decision making over decision based only on experience or human judgment cannot be over emphasized. as banking business in Nigeria is becoming more competitive every passing day, this is the line for Nigeria banks to introduce scientific methods to manage their scene resource effectively.

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