Liquidity Management Practice

Project and Seminar Topics with material for Banking and Finance

Project and Seminar Topics with material for Banking and Finance

Chapter One


1.1 Background Of The Study

A bank is considered liquid when it has asset and investment in security that are easily reliable at a short notice without a loose to the bank together with the ability to raise fund from he other source, to enable it to meet its payment obligation and financial commitment in a timely manner. In addition there should be financial commitment buffer to meet almost all financial emergency.

Liquidity management of a commercial bank is a very vital issue in the banking industry. It is the ability of the bank to manage its liquidity position so that neither the liquidity nor the profitable will suffer. For this to be effective, liquidity management must contribute to the achievement of the overall cooperate fund management objectives to attain and maintain a balance of profitability, solvency and liquidity.

Obligation of the maximum liquidity owed by surplus unite can only be archived by holding enviable fund as cash since it has maximum profitability. The must invest all fund on loan and average the highest yielding, and most liquid of the entire asset in the bank.

Banks, because of the important role they play in the economy, particularly in monetary and credit aspect of the economy faces a lot of restriction irrespective of the fact that banks are the most highly and closely regulated of all the business, they still have to operate within the confines of the law and solve the problem of liquidity and profitability dilemma in the economy. Apart form the constraints and the dual role of liquidity and profitability, there is virtually no work on the liquidity management in Nigeria commercial banks. In the light of this, the researcher has decided to discuses this topic based on the analysis of the data collected. The researcher will suggest some solution the problem of liquidity management in the country.

1.2 Statement Of The Problems

Commercial bank asset management is a never-ending thing of war. This war is pitched between efficient liquidity management on one hand and profitability on the other hand. As Liquidity and profitability are two inherent goals in commercial bank, bank managers will continue to experience the conflict o trying provide efficient mechanism of addressing their bank liquid and hence their safety of necessarily arising from the nature of their liabilities.

A high proportion of commercial bank liabilities are made up of demand deposits (current account fund deposits) saving deposit, fixed deposit and fund from other source. Demand deposit are those bank liabilities that are payable on demand. Necessary commercial bank need to keep only liquid asset to meet a considerably volume of withdrawal. Liquid asset earn little of zero return on asset. It is les risky and the less it likely to yield adequate returns. As such, the high the less risky asset, the more banks is expose to experience a bank run or crisis. At that rate will probably not able to recover all its cost and then also make profit for the owners. But behold. Commercial bank are business oriented firm with their share holder interested on profitability. In other to satisfy its share holders, a bank might be attempted to forget liquidity and pursue profitability by investing on a high yielding less liquid asset that are profitable at the expense of liquidity which is dangerous. It is always necessary to balance liquidity and profitability in order to have efficient bank management.

The ratio or the percentage of idle cash balance in the commercial bank are to hold at any point in time and to what form to hold it is very necessary. While doing that, they should bear in mind the importance of satisfactory level of profit. There are many constraints to bank in achievement of their goal liquidity and profitability such as legal reserve requirement and they should maintain adequate liquidity to meet the unforeseen and seasonal loan demand and fluctuations of deposits. Cash reserves are also needed to take the advantage of unexpected profitability investment opportunities. In effect, banks are constrained and have to walk on a tight rope. There is the never ending of war or what I may refer to as dilemma policy commercial bank management in developing country. The Nigerian case is further aggravated by the inconsistency of the monetary policy as administered by the central bank of Nigeria. Is the reticent of the monetary coups detach. You will just walk up one morning and hear over the radio of via circular No XY2 that the central bank of Nigeria has issued a monetary circular No adjusting the private whether upward or downward.

The federal government directive on withdrawal on all federal parasttatals account from the commercial bank is one of such constraint. The stock stirred up aggressive market in the banking industry.

Although all this stock are necessary to produce the desired control of money in the economy, but such tends to give nightmare to the banking management. This directive causes ripples in the banking industry as such cause more discrepancy in the liquidity position of the commercial bank and subsequently the rate of profitability.

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