Impact Of Cash Liquidity On The Performance Of Deposit Money Banks In Nigeria

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Impact Of Cash Liquidity On The Performance Of Deposit Money Banks In Nigeria


Abstract


This study examines the impact of cash liquidity on the performance of deposit money banks in Nigeria. Cash liquidity is essential in all banks to meet customer withdrawals, compensate for balance sheet fluctuations, and provide funds for growth. The broad objective of the study is find out the effects of account receivable on financial performance of commercial banks in Nigeria and also to establish the effects of account payable on financial performance of Commercial banks in Nigeria. The primary source of data collection was used and the stratified questionnaire was used to gather relevant information regarding the subject matter. The random sampling method was used to select 50 respondents which serve as the sample size of the study. The chi-square statistical tool was used to test the stated hypotheses and the findings revealed that loans and advances do not have significant impact on the profitability of Nigerian banks and that liquidity necessary affects the investment portfolio performance. It was concluded that liquidity management in the attainment of maximum profitability is indispensable of any bank that does not place premium on its role. The study recommends among others that monetary policy should be designed to stimulate growth in the banking industry.


Chapter One


Introduction

1.1 Background to the Study

Cash liquidity reflects a financial institution’s ability to fund assets and meet financial obligations. Cash liquidity is essential in all banks to meet customer withdrawals, compensate for balance sheet fluctuations, and provide funds for growth. Funds management involves estimating liquidity requirements and meeting those needs in a cost-effective way. Effective funds management requires financial institutions to estimate and plan for cash liquidity demands over various periods and to consider how funding requirements may evolve under various scenarios, including adverse conditions.

Banks must maintain sufficient levels of cash, liquid assets, and prospective borrowing lines to meet expected and contingent liquidity demands. Liquidity risk reflects the possibility an institution will be unable to obtain funds, such as customer deposits or borrowed funds, at a reasonable price or within a necessary period to meet its financial obligations. Failure to adequately manage cash liquidity risk can quickly result in negative consequences for an institution despite strong capital and profitability levels. Management must maintain sound policies and procedures to effectively measure, monitor, and control liquidity risks.

In business, economics or investment, market liquidity is a market’s ability to purchase or sell an asset without causing drastic change in the asset’s price. Equivalently, an asset’s market liquidity (or simply “an asset’s liquidity”) describes the asset’s ability to sell quickly without having to reduce its price to a significant degree. Cash liquidity is about how big the trade-off is between the speed of the sale and the price it can be sold for. In a liquid market, the trade-off is mild: selling quickly will not reduce the price much. In a relatively illiquid market, selling it quickly will require cutting its price by some amount.

Money, or cash, is the most liquid asset, because it can be “sold” forgoods and services instantly with no loss of value. There is no wait for a suitable buyer of the cash. There is no trade-off between speed and value. It can be used immediately to perform economic actions like buying, selling, or paying debt, meeting immediate wants and needs. If an asset is moderately (or very) liquid, it has moderate (or high) liquidity. In an alternative definition,liquidity can mean the amount of cash and cash equivalents. If a business has moderate cash liquidity, it has a moderate amount of very liquid assets. If a business has sufficient liquidity, it has a sufficient amount of very liquid assets and the ability to meet its payment obligations.

An act of exchanging a less liquid asset for a more liquid asset is calledliquidation. Often liquidation is trading the less liquid asset for cash, also known as selling it. An asset’s liquidity can change. For the same asset, its liquidity can change through time or between different markets, such as in different countries. The change in the asset’s liquidity is just based on the market liquidity for the asset at the particular time or in the particular country, etc. The liquidity of a product can be measured as how often it is bought and sold.


1.2 Statement of Problem

Liquidity management has a significant positive effect on financial performance. Bank companies under going to achieve their goals have to consider to the liquidity management. Liquidity is the ability of the business to meet its cash obligations within a specific period. For instant liquidity is best measured with cash flow statements or budgets.

Liquidity management plays a significant role in determining success or failure of firm in business performance due to its effect on firm’s financial profitability (Eljelly, 2004).

In Nigeria, the commercial banks are faced challenges of financial performance. This is seen in the fact that the firms have problems with financial performance they may defer their payments to creditors which is a harmful for companies and can result in several consequences such as worse credit terms in the future. This in the long run adversely affects profitability. When working capital is the money needed to finance the daily revenue generating activities of the firm. So, if this continues will cause the a number of problems to not only the firm who depend so much on this liquidity management, but also the various stakeholders in the banking industry. It was evident that research in the area of Liquidity management has not been done in a more comprehensive approach. The study research gap is demonstrated by the scarcity of empirical studies on determinants of liquidity management. Empirical studies (Nwakaego, 2014) and (Lawrence, 2013), Zir and Afza (2009) were inadequate as they concentrated on liquidity management other industries in Small and Medium Enterprise. Banks to remain competitive emphasis should be made on liquidity management and profitability with regards to how their ability to manage financial performance and should be provided to the organizational achievement. This study will focus on the Effect liquidity management on financial performance of commercial banks in Nigeria.


1.4 Objectives of the Study

The broad objective of this study is to examine the impact of cash liquidity on the performance of deposit money in Nigeria.

However, the following are the sub-objectives;

  1. To find out the effects of account receivable on financial performance of commercial banks in Nigeria.
  2. To establish the effects of account payable on financial performance of Commercial banks in Nigeria.
  3. To determine the effects of cash management on financial performance of commercial banks in Nigeria.

1.4 Research Hypotheses

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

  1. H0: Excess cash liquidity does not have a significant impact on the profitability of Nigeria banks.
    H1: Excess cash liquidity has a significant impact on the profitability of Nigeria banks.
  2. H02: Shortage in cash liquidity does not have a significant impact on the profitability of Nigerian banks.
    H2: Shortage in cash liquidity has a significant impact on the profitability of Nigerian banks.

1.5 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.


1.6 Scope and Limitation of the Study

Due to time and resources constraints the study at hand has been limited to First Bank of Nigeria Plc. A time frame of 5 years was used. The researcher encounters some constrain which limited the scope of the study;

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational Privacy:

Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.


1.7 Definition of Terms

Liquidity Management:

Is the ability to meet cash and collateral obligations without incurring substantial losses.

Financial System:

Is the system that enables lenders and borrowers to exchange funds.

Profitability Ratio:

This compares income statement accounts and categories to show a company’s ability to generate profits from its operations.

Liquidity Assets 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 determine a company ability to pay off its short term debts obligation.

Liquidity Portfolio:

Is the ability for the bank to have sufficient capital in it account or cash deposited by individuals and portfolio.


1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  • Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
  • Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
  • Chapter three deals on the research design and methodology adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain impact of cash liquidity on the performance of deposit money banks in Nigeria

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of cash liquidity on the performance of deposit money banks in Nigeria


5.2 Summary

This study was on impact of cash liquidity on the performance of deposit money banks in Nigeria. Four objectives were raised which included: To find out the effects of account receivable on financial performance of commercial banks in Nigeria, to establish the effects of account payable on financial performance of Commercial banks in Nigeria, to determine the effects of cash management on financial performance of commercial banks in Nigeria. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of first bank, Enugu state. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made up accountants, human resource managers, customer care officers and marketers were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies.


5.3 Conclusion

This research study underpins or supports with evidence the fact that there exist a strong positive relationship between efficient liquidity management and banking performance in terms of Profitability and Return on Capital Employed (ROCE). Therefore the need for efficient liquidity management in the banking industry cannot be over emphasized particularly for reasons of maximizing profit levels and concurrently remaining liquid. For the banking industry in Nigeria, there is the need to emphasize ‘the need to remain liquid’. The study buttresses the fact that efficient liquidity management can significantly influence returns on capital employed by a bank and as well impact positively on the bank’s profitability and thus its stability. The high number of illiquid banks in the Nigerian banking industry as seen in recent times appears to attest to the fact that most bank management in Nigeria do not either place emphasis on strategic liquidity management or are deficient in it. Even though they may be efficient, most businesses in the Nigerian economy are transacted purely on cash basis such that managing liquidity effectively becomes cumbersome. Effective liquidity management creates good public confidence in the financial system of a country and good public confidence prevents a ‘run’ on the banking system and consequently on the liquidity state of banks. Since economic laws and variables from this study and other related researches have attested to the fact that there is correlation between efficient liquidity management and banking performance, the poor liquidity state of Nigerian banks could be hinged on management. Therefore, there is the need to formulate policies that will enhance effective liquidity management in the banking industry in Nigeria and the public usage of cash.


5.4 Recommendation

Below are the recommendations of the study:

  1. The need to replace being practiced in the advance economies of the world. Investing on human capital may be beyond just employees but also frequently creating an interactive forum where bank clients could be sensitize on a variety of activities they indulge in that are capable of hindering effective liquidity management.
  2. The need to invest on human capital by banks as it offers the highest returns in terms of increasing performance and it also enhances the level of competence of the employee.
  3. Regulatory authority should put in place appropriate policy with compliance measures to check high volume cash transaction and cash hoarding prevalent in the economy. This is important because liquidity management is cumbersome and may be ineffective in an economy that operate solely on large volume of cash transaction or conducts a large proportion of its transactions in cash. The Central Bank of Nigeria must critically review and follow-up or monitor the effectiveness of liquidity policy tools in banks and where necessary, appropriate sanctions placed on erring banks. This may be so in order to ensure effective implementation of these policy tools in an attempt to achieve desired liquidity level. While it may be true that CBN is effectively enacting and reviewing liquidity management tools such as the Open Market Operation , Cash Reserve Requirement , Liquidity ratios , Monetary Policy Rate among as often been stated in their Annual and Economic reports, compliance by the beneficiary banks is not guaranteed as bank returns to the regulatory authority has been reportedly falsified over times.

Impact Of Cash Liquidity On The Performance Of Deposit Money Banks In Nigeria


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