Liquidity Management In Banks: A Study Of Selected Commercial Banks In Nigeria (2000-2009)
This study sought to examine the challenges of Liquidity Management in Nigeria’s Commercial banks. The study identified some of the notorious factors responsible for most banks’ liquidity problems such as high ratio of Non-performing loans (NPL), excessive risks concentration, fluctuations in statutory Reserve requirements; Assets mismatch in portfolio selection, and Poor Corporate Governance. In order to tackle the magnitude of the problems, the researcher limited the scope of the study to ten year period (2000-2009) in First Bank, Access Bank and United bank for Africa PLC and established three specific objectives and related research questions to guide the study.
The secondary data generated from the Financial Statements Reports and Accounts of the selected banks as well as the Central Bank of Nigeria (CBN) reports for the period was used to test and analyze the three hypotheses, based on the stated objectives and the related research questions, using a Parametric statistical sample paired t- test model and Pearson’s Correlation coefficient as the statistical tools. Based on the research findings, it was recommended among others that banks should strengthen their institutional capacity, exercise prudence in credit administration and avoid excessive risk exposure. CBN should also re-appraise the existing corporate governance code necessary and also embrace more pro-active mechanisms in the discharge of their oversight functions for sustainable banking sector liquidity, public confidence, safety and professionalism in banking practice.
1.1 Background of the Study
The whole concept of banking is built upon confidence in the liquidity of the bank. Liquidity management is critical in the banking operations. Customers place their deposits with a bank, confident that they can withdraw the deposit when they wish. If the ability of the bank to pay out on demand is questioned, all its business may be lost overnight. Generally speaking, liquidity refers broadly to the ability to trade instruments quickly at prices that are reasonable in the light of the underlying demand/supply conditions through depth, breath and resilience of the market at the lowest possible execution cost. A perfectly liquid asset is defined as one whose full present value can be realized, i.e. turned into purchasing power over goods or services. Cash is perfectly liquid, and so for practical purposes are demand deposits and other deposits transferable to third parties by cheques and investments in short-term liquid government securities. Adequate liquidity enables a bank to meet cash withdrawal commitments when due, undertake new transactions when desirable, and discharge other statutory obligations as they arise. Liquidity is the term that best describes the ability of a bank to satisfy the demand for cash in exchange for deposits. The most important aspect of liquidity function in banks is that it helps to sustain the confidence of the depositors, who should not be given any cause to doubt the safety, solvency and viability of the bank. A bank is considered liquid when it has sufficient cash and other liquid assets to off-set its obligations readily or assets to sell at short time notice, without loss in value.
Bank’s liquidity can also be measured by its ability to raise funds quickly from the other sources such as money markets to enable it honour maturing/payment obligations, and commitments without notice. Banks are statutorily required to comply with the legal cash and liquidity ratios reserve requirements so as to cope with the demands of its financial obligations owed to its customers and other stakeholders.
However, the level of liquidity to hold and in what forms to preserve them pose serious task to the bank management. The majority of banking transactions can be anticipated in advance from the expected cash flows, deposits and earnings from loan repayments. Banking business is associated with elements of risks and for which no adequate provisions are often made to accommodate any obvious shortfalls, arising from the defaults on loan repayments.
It is for this reason that this study seeks to examine the need for keeping adequate liquidity to serve as a ‘buffer’ to cushion the effects of deposits fluctuations and compensate for the gap during periods of emergency.
Basically, liquidity management seeks to strike a delicate balance between the need to maintain sufficient liquidity to meet depositors’ cash calls. Illiquidity jeopardizes ability to service customers’ withdrawal demands while excess liquidity erodes the earning capacity and profit performance of the banks. Liquidity Management therefore appears more crucial than any other aspects of bank management like bank marketing, because negative signals of illiquidity in a bank cannot be hidden for too long.
In Nigeria, the activities of the commercial banks are subjected to the extensive prudential regulations under Banks and Other Financial Institutions Act 1991 (BOFIA). The essence of these regulations is to maintain trust, stability and public confidence in the banking system. The commercial banks in Nigeria are mandated to keep certain percentage of their cash as legal reserve. Experience in Nigeria has shown that most commercial Banks run into problems of illiquidity because of assets mismatch, excessive risks concentration on portfolio investments, massive fraud and other insider -related abuses.
Given the above explanations, it therefore becomes imperative that a commercial bank that is profit –oriented should remain focused, prudent and pro-active in liquidity management for a sustainable service delivery. In all, the crux of liquidity management issues is for the banks’ management to strive at all times in creating a right equilibrium and adequate liquidity level, suitable for a healthy banking sector performance. The importance of liquidity therefore transcends the individual institution, since any negative impact of liquidity shortfall in First Bank, Access Bank and United Bank for Nigeria (UBA), under research study may invoke systemic repercussion, causing harm to the whole financial stability of a country.
1.2 Statement of the Problem
The importance of the banking sector in the growth of a nation’s economy cannot be over-emphasized. It is therefore imperative for the authorities in the sector to guard their financial system seriously against any anticipated liquidity crisis. It is a common knowledge that all commercial banks continuously strive towards high profitability to sustain its continued existence and maximize shareholders wealth. Some of the problems identified ranges from; exposure to excessive risk concentration on investments which often result to capital erosion and liquidity trap, assets mismatch on portfolio selection that attract negative or no returns to the bank’s liquidity net, Poor credit administration, leading to problems of Non-performing loans, bad debts, or classified debts which mostly end up as irrecoverable, poor ownership structure of some commercial banks and appointment of mediocre to the board/management of banks, Poor Corporate Governance and regulatory lapses in the discharge of bank’s oversight- sight functions.
Massive workers retrenchment due to low profit earnings and poor patronage in banking transactions.
Evidence in the past revealed that most Nigerian commercial banks were driven into liquidity problems, owing to exposure to excessive risks concentration and poor assets mismatch in portfolio selection. Added to this problem were the effects of other factors such as massive defaults on loan repayments by borrowers, poor ownership structure of banks, appointment of mediocres as board members who exert political influence on banking matters, financial frauds through margin loans and insider-abuses and poor supervisory/regulatory oversight and absence of strict corporate governance practices. These factors pronounced negative consequences that pose serious challenges to the liquidity management of banks. Given the above ugly scenario, most commercial banks in Nigeria began to record poor net-income earnings and also experienced low level patronage in banking transactions. Consequently, massive retrenchment of bank workers ensued and the displaced workers miserably joined the labour market which is already saturated with unemployment problems.
1.3 Objective of the Study
The main objective of the research is to examine the effects of liquidity on the selected commercial banks like Access bank and First bank operating in Nigeria.
Specifically the study sought:
- To examine the extent to which Non-performing loans influence Commercial banks’ liquidity.
- To ascertain the extent to which fluctuations in commercial bank’s liquidity levels affect its profitability.
- To establish the extent to which statutory reserve requirements influence commercial bank’s liquidity position.
1.4 Research Hypothesis
Considering the problems and objectives highlighted above, the following hypotheses were formulated for the purpose of this research study
- HO: Non-performing loan does not negatively affect commercial bank’s Liquidity.
HI: Non-performing loan significantly effect commercial Bank’s Liquidity.
- HO: Changes in the liquidity levels of a Commercial bank do not negatively affect its profitability.
HI: Changes in the liquidity levels of a commercial bank significantly affect its profitability.
- HO: Changes in bank’s Statutory Reserve Requirements do not negatively affect its liquidity.
HI: Changes in bank’s Statutory Reserve Requirements have significant effect on its liquidity position.
1.6 Significance of the Study
This study is coming at a time when the banking sector is passing through a stage of serious banking sector reforms as a result of the negative consequences inflicted by the problems of illiquidity. The study will therefore be of importance to various stakeholders in the banking sector, particularly the operators of banks, depositors, fund borrowers, regulatory authorities and even the general public at large. The tudy would educate funds borrowers on the negative implications of loans repayment defaults as it affects commercial bank’s liquidity. t will bring to light the extent of unethical sharp practices inherent in the banking sub-sector.The study would educate funds borrowers on the negative implications of defaults loan repayment, as it affects banks’ liquidity to cope with maturing obligations as they fall due.To the academia, it would contribute meaningfully as a reference material for further academic development.
1.7 Scope of the Study
The scope of the study borders on the effects of liquidity on the selected commercial banks. This study was restricted to the period of 2000-2009 and carried out in the selected Access and Firstbank situated in Enugu metropolis.
1.8 Limitation of the Study
Generally, academic research in developing economies like Nigeria faces environmental problems. In course of this study, the major constraint encountered by the researcher was the inability to have unimpeded access to the selected banks for information and data collection from the Financial Statements Reports relative to the study.
Other limiting factor was the bureaucratic process for access to Central Bank of Nigeria (CBN) library that remained foreclosed to non- staff. The removal of government’s fuel subsidy which increased the cost of transportation hampered the researcher’s mobility to achieve wider research coverage earlier anticipated. The limited time-frame allowed for this research work also posed a serious challenge to the researcher’s efforts.
Summary, Conclusion and Recommendation
The main objective of the research is to examine the effects of liquidity on the selected commercial banks like Access bank, First bank and United Bank of Africa in Enugu State as case study. The study examined the extent to which Non-performing loans influence Commercial banks’ liquidity. The study ascertained the extent to which fluctuations in commercial bank’s liquidity levels affect its profitability. The study established the extent to which statutory reserve requirements influence commercial bank’s liquidity position.
Institutional approach was employed for the study and with the aid of random sampling method, three banks Access Bank First Bank and UBA in Enugu Metropolis was selected for the participant for the study. The secondary data generated from the Financial Statements Reports and Accounts of the selected banks as well as the Central Bank of Nigeria (CBN) reports for the period was used to test and analyze the three hypotheses, based on the stated objectives and the related research questions, using a Parametric statistical sample paired t- test model and Pearson’s Correlation coefficient as the statistical tools.
Banking is a very strategic industry whose activities have far-reaching consequences on other sectors of the economy. Given the objectives of this study, it has not been an easy task to put up a thesis of this depth, when delicate issues such as banks’ liquidity management are being discussed. This is particularly of interest, in view of the fact that one has to consider its vast implications on the depositors, the bankers and other stakeholders, to which the banks owe conflicting obligations. The findings from the study revealed the following:
- In relation to the first objective of the study, it indicated that Non-performing loans impact negatively on effective bank liquidity management since the ratio of non-performing loans to total loan portfolio is more than 12% and persistently higher than the tolerable limit of 10%, prescribed in the Central Bank (CBN) prudential guidelines.
- In relation to the second objective, it was revealed that the poor profitability and capital erosion observed in most commercial banks was orchestrated by some of the inhibiting factors such as institutional weaknesses, margin loans, poor perfection of realizable securities, unethical sharp practices poor corporate governance and misleading financial returns by the commercial banks. This was further aggravated by the failure of banks’ regulators to adopt more pro-active mechanisms in the discharge of their oversight functions.
- In relation to the third objective of the study it was observed that the liquidity shortfalls in most Nigerian commercial banks have no significant relationship with the changes in the statutory reserve requirements. Technically speaking, although the liquidity reserve ratio (LRR) imposed by the Central Bank has fairly remained persistent at 33%,it does not substantially impair their ability to engage readily on investments, maximize profit and satisfy other commitments.
It is therefore imperative that liquidity is very crucial and must be prudently managed, if banks are to truly remain competitive and viable. An owner of a property, placed on trust, has the right to demand it when he decides to have it back. In the light of this, the researcher therefore expressed strong opinion that the interest of depositors, investors and other stakeholders which places dilemma on a banker should be the focal point in course of discussions on banks’ liquidity management issues. It is therefore, no gainsaying the fact that only a commercial bank with adequate liquidity position can remain competitive, relevant and an active player within the domestic economy and in the global arena.
The dictum that prevention is better than cure is very apt in the management of banks’ liquidity. In a bid to prevent the problems of illiquidity in banks, the regulatory authorities should as a matter of necessity, put in place an effective mechanism, capable of enforcing stringent regulatory controls on the commercial banks. This can be achieved through regular oversight functions, carried out periodically with a view to ensuring strict compliance or imposition of sanctions against deviations to operational guidelines. Such measures and recommendations which are designed to promote sound financial condition and confidence among bank customers include the following:
- In order to build a virile, competitive and resilient banking system, there is need for the government and its regulatory agencies to enforce effective compliance to regulatory policy by the banks for a healthy financial system growth.
- The apex regulator should put in place effective control machinery and remain pro-active in the discharge of their oversight functions so as to promote good corporate governance to deter unethical conduct and other abuses that had systematically eroded banks’ liquidity in the past.
- In view of the numerous findings made in this study, it is strongly recommended that banks should introduce measures to control indiscriminate credit extension such as margin loans which has been the practice in the past, without recourse to perfect and realizable collateral security.
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