Liquidity Management In Nigerian Commercial Banks

Project and Seminar Material for Accountancy / Accounting

Liquidity Management In Nigerian Commercial Banks


It examine the liquidity management of commercial banks in Nigeria with more emphasis on their investment, liquidity and profitability position in order to find out why commercial bank need to be more liquid than any other business organization. The entire work is divided into five chapters, chapter one is an introductory analysis of the topic, then the background of the study, significance, scope and limitation, the purpose and hypothesis. The second chapter dealt with the literature review and theoretical consideration. Here related past work were review and the theoretical consideration on the present study was also brought into focus. Then chapter three contains an explanation of how and where the needed information for the study obtained and the limitation encountered in the course of conducting the research. It also contains the method of investigation. Chapter four dealt with the presentation and analysis of data collected during the filed survey after which the postulated hypothesis were tested. Finally, chapter five contains the finding of analysis and also, conclusion and recommendations.

Chapter One


1.1 Background of the Study

Liquidity is the study of how quickly and cheaply an asset can be converted into cash. It can also be seen as the ability to fund increase in assets and meet obligations as they become due.

The management of liquidity is therefore among the most important activities conducted at banks. Overtime, there has been a declining ability to rely on core deposits and an increased reliance on wholesale funding. Recent technological and financial innovations have provided banks with new ways of funding their activities and managing their liquidity, but recent turmoil in global financial market has posed new challenges for liquidity management.

Liquidity management ensure that the institution maintains sufficient cash and liquid assets to satisfy client demand for loans and savings withdrawals, and to pay the institutions expenses. It involves a daily analysis and detailed estimation of the size and timing of cash inflows and outflows over the coming days and weeks to minimize the risk that savers will be unable to access their deposits in the moments they demand them. In other to manage liquidity, an institution must have a management information system in place manual or computerized, that is sufficient to generate the information needed to make realistic growth and liquidity projections.

A liquidity shortage, no matter how small, can cause great damages to a savings institution. It takes a long time to build customers relationships, a liquidity crisis can destroy those relationships instantly. In other to avoid a liquidity crisis, management needs to have a well-defined policy and established procedures for measuring, monitoring and managing liquidity.

A savings institution should have a formal liquidity policy that was developed and written by the officials with the assistances of management. The policy should be reviewed and revised as needed, no less than annually. The policy should be flexible, so that managers may react quickly to any unforeseen events. A liquidity policy should specifically state: who is responsible for liquidity management, what is the general methodology of Liquidity management. How will liquidity be monitored or, in other words, what liquidity management tools will be used.

1.2 Statement of the Problem

In this section, the researcher focused on the problems that makes commercial banks not holding cash at any point in time, and the constraints to banks in achieving their goals of liquidity and profitability, such as:

  1. Legal reserve requirement which is the legal reserve ratio through which the central bank of Nigeria (CBN) exercise consideration control over the cash or other reserves of the banks.
  2. Special deposits and stabilization securities is also another way through which the CBN can put the commercial banks into tight corner by directing them to open up a special account.
  3. Also the federal government directive of withdrawing all federal owned parastatals account from commercial banks is one of such constraints management. These directives causes ripples in its banking industry as such cause more discrepancies in the liquidity position of commercial banks and subsequently the rate of profitability.

1.3 Objective of the Study

The objectives of the study are;

  1. To ascertain the impact of liquidity management in Nigerian commercial banks
  2. To identify why Nigeria commercial banks are excessively liquid but at the same time make high profit.
  3. To ascertain whether federal government withdrawal of parastatals and corporations deposits with commercial banks have impact first banks.
  4. To ascertain the effectiveness and management of their profile by employing and using various approaches theories and instruments in solving their liquidity profitability problems.

1.4 Hypotheses of the Study

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

  1. H0: The federal government withdrawal of parastatals and corporations deposits with commercial banks has no impact first banks.
    H1: The federal government withdrawal of parastatals and corporations deposits with commercial banks has impact first banks.
  2. H02: There is no difficulty converting the instrument that constitutes first banks near cash asset.
    H2: There is difficulty converting the instrument that constitutes first banks near cash asset.

1.5 Significance of the Study

The importance of liquidity management in the banking industry cannot be over emphasized. Since not much contribution was made on the topic, liquidity management, the researcher will carefully consider those factors relevant to efficient liquidity management for a successful achievement of the desired profitability. Readers of this study/work will be exposed as regards the impact of future study. The basis of this research work as a determinant of profitability.

1.6 Scope and Limitation of the Study

In the study this nature which involves the analysis of commercial banks statements, qualification of their investment and degree of their data available and its type obviously limit the extent and scope of the analysis.

This study is concentrated in one selected commercial bank in Enugu Urban the researcher will examine how this commercial bank efficiently carry out their portfolio management in the following areas:

  1. Loans and advances
  2. Investment in securities of treasury bills
  3. Balance held with and for other banks internally and still meets their depositors and shareholders demand.

The lending pattern of Nigeria Commercial Banks to various sectors of the economy will be critically examined, the nature of this loans opportunity and an appraisal of the steps commercial banks take to recover their debts when customers default in their loan repayment agreement. In this research, the management of commercial banks assets/liabilities will be discussed. The review of some liquidity and profitability, theories will be carried on it, the management of the asset and liabilities which mean the sources of fund (liabilities and uses of fund (assets). The sources from widely funds are acquired and the uses to which they are put can be found in the balance sheet of a bank.

The tools employed by the Central Bank of Nigeria (CBN) in controlling banks. Liquidity position will be looked into, and the extent to which commercial banks adhere to the guidelines issued by the Central Bank of Nigeria (CBN).

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.

1.9 Definition of Terms

1. Portfolio:

It is a list of securities and investment loan stock, shares and bands, etc. held (owned) by a bank, individual or organization.

2. Portfolio Management:

This goes with the management of security holding (investment portfolio) of a bank or business firm. A portfolio may be managed by a committee or a portfolio management department or any other body.

3. Liquidity:

It is the ability of banks to pay cash immediately when called upon to do so for all its demand liabilities.

4. Liquidity Management:

It is the ability of the bank to manage the liquidity position so that neither the liquidity nor profitability will suffer. It involves the provisions for the withdrawal of deposits, short-term cash cyclical and circular cash requirement of the apex financial institutions.

5. Bank Deposits:

There are funds deposited in a bank. It is divided into demand, savings and time deposits.

a. Demand Deposits:

This is also known as checking account deposit payable on demand that is without prior notice.

b. Saving Deposits:

This type of deposit is usually evidenced by a passbook under which the depositor/customer of the bank is required to notify the bank before withdrawal. But it is not so in practice.

c. Time Deposits:

This deposit cannot be withdrawn until after a specific period of time.

6. Assets:

There are the entire properties of a bank and other investment in other profitable organization.

7. Asset Management:

It is the allocation of fund, the basic objectives being maximization of profitability, solvency and regulatory constraints.

8. Bank Run:

A run occurs in a bank when there is mismanagement of liquidity and profitability.

9. Solvency:

The solvency of a bank or a firm is measured by its ability to turn its assets into cash to meet its deposit obligations.

10. Treasury Bill:

These are ninety-one days short-term maturity debt instruments issued to raise finance for the federal government.

11. Debentures:

These are long-term debt instrument or security insurable by banks in order to increase their capital base. This represents a debt.

12. Trading on Equity:

This is a situation whereby a firm earns more with borrowed fund than what it cost to borrow the fund.

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 liquidity management in Nigerian commercial banks

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 liquidity management in Nigerian commercial banks

5.2 Summary

This study was on liquidity management in Nigerian commercial banks. Four objectives were raised which included: To ascertain the impact of liquidity management in Nigerian commercial banks, to identify why Nigeria commercial banks are excessively liquid but at the same time make high profit, to ascertain whether federal government withdrawal of parastatals and corporations deposits with commercial banks have impact first banks, To ascertain the effectiveness and management of their profile by employing and using various approaches theories and instruments in solving their liquidity profitability problems. 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.

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