Impact of Liquidity Management on the Financial Performance of Deposit Money Banks in Nigeria
Chapter One
Objectives of the Study
The broad objective of the study is to examine the impact of liquidity management on the financial performance of deposit money banks in Nigeria. The specific objectives of the study are:
- To assess the impact of liquidity ratio on the financial performance of deposit money banks in Nigeria.
- To investigate the impact of cash reserve ratio on the financial performance of deposit money banks in Nigeria.
- To explore the impact of loan-to-deposit ratio on the financial performance of deposit money banks in Nigeria.
CHAPTER TWO
LITERATURE REVIEW
LIQUIDITY MANAGEMENT IN NIGERIAN BANKS
The management of banks liquidity in Nigeria is of paramount interest to profitability operation. It connects the distribution of funds amongst investment, such as Cash, loans and advances and other assets. Essentially, bank liquidity management at all times allocates funds available to them in such a way as to ensure high liquidity to the assets with maximum profitability.
C.B.N (1998) series contend that liquidity management in Nigeria includes the provision of short run reserve needs of the banking system for purpose of meeting short term liquidity obligations.
Before the introduction of open market operation on 30th June 1993, the C.B.N employed the direct techniques of liquidity management which involved the setting of credit ceilings discount rates, liquidity and cash ratios.
As a supplement to cash and liquidity ratios, banks also, occasionally called for special deposits from the banking system as well as issued stabilization securities. Since June 1993, open market operations have become the dominant instrument of liquidity management while the use of stabilization securities exists only as a fall-back position to augment other instruments as the need arises. The use of credit ceiling has been phased out, while the application of the discount rate, liquidity and cash ratio is still in force as the main adjustment instruments.
The management of liquidity by banks is constrained, by the following factors:
Banks are usually highly regulated by the monetary authorities. The high level of regulation ensures that bank liquidity are managed with the legal and regulatory frame work.
The relationship between a bank and his customers imposes another constraint. This relationship is basically one of trust and accommodator. The customer expects the bank to honour all obligations at maturity.
Olutan (2004) examined the components of bank health which impact upon them for stability, has discovered that loans and advances is views as a major component for banks profitability, since the volume of income made by the bank is in part a function of the interest income receivable on credit facilities booked. However, bank should lend at a level. Such that loan/deposit ratio will not jeopardize the liquidity.
THE IMPORTANCE OF LIQUIDITY MANAGEMENT
The proportions in which the various forms of assets are kept vary from bank to bank, country to country also vary with the state of trade. The larger the liquidity of the assets, the more confidence will a bank inspire, but the lower will be in project and vice versa.
The whole activity of the banking business rests mainly on the confidence of the people in relating to the banks ability to pay their money on demand. If such confidence it costs which is contagious, there will be ream on the bank. No bank can face a run because all the banks assets are not in liquidity form.
The issue of liquidity is very important to banks management. Asuzu (1995), Nzotta (2004) gave the importance of liquidity to include the following:
- To provide timing difference in its cash flow arising from deposits being repayable at shorter notice than its loan.
- To provide a margin to meet overall increases in demands for advances and/or withdrawals of deposit.
- To meet depositors demand for repayment in cash.
- To provide for any information of interruption (or any interruption) in its expected inward cash flow arising for example, however be enable to repay on dictate.
- To provide for its own operating on capital expenses.
- To provide caution against losses from bad debts.
Thus; liquidity management usually employed to minimize revenues while holding risk of insolvency to desired levels. They four main liquidity management policies includes
Effective cash mobilization
Cash flow forecasting
Identification of needs for productive liquidity.
Productive use of liquid assets.
The bank should mobilize cash through accelerating collections and to hand disbursement so that minimum cash is available.
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
This Chapter discussed the methodology, procedure of data collection, sampling design and how the data selected would be analyzed to achieve our objective functions by using the appropriate models.
RESEARCH DESIGN
This research would have been best conducted in all the existing banks in Nigeria and for all years in pursuit of excellence liquidity management in Banks. As a result of finance and other constraints, the research work was narrowed to four variable predictors of liquidity management, covering the period of 1985 to
2004 of the financial statistics from the CBN statistical bulletin.
It was carried out through secondary source. The data was gathered through the CBN statistical bulletin, where this data was not satisfactory, the researcher would initiate questionnaires, personal interviews with the respondents for better understanding and clarification.
METHOD OF DATA COLLECTION
As previously mentioned, the data was collected through secondary source. The secondary data utilized for this research include CBN Bulletin, selected Deposit Bank’s annual reports and financial statements which gives us the profit after tax of these banks from 1985 to 2004.
Asika (2000) emphasized that no one type of design ever gives secondary data but that secondary data emanates from processing of data from primary sources that is the processing of primary data.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
INTRODUCTION
This chapter focuses on the presentation, analysis and interpretation of the data collected through the central bank of Nigeria (CBN) publications. Hence, only secondary data are applied in the analysis, covering the period, 1985-2004.
Perhaps, we need to add that two statistical approaches are adopted – descriptive and inferential statistics. While the descriptive statistical method involves the use of percentages, charts and graphs etc where applicable. Under the inferential statistics the four hypotheses formulated under the section 1.5 of our report.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
SUMMARY OF FINDINGS
The study evaluated the effect of liquidity management on bank performance, testing the following hypotheses:
Cash reserve ratio has no significant effect on bank profitability
Liquidity ratio does not significantly impact on bank profitability
Loans-to-deposit ratio does not exert any significant effect on bank profitability
There is no significant relationship between bank loans and advances and the profitability of the banks
The results of the above-stated hypotheses yielded the following major findings.
There is a significant positive relationship between cash reserve ratio and bank profitability.
There is an insignificant and negative relationship between liquidity ratio and bank profitability.
The relationship between loans-to-deposit ratio is both insignificant and negative.
Bank loans and advances exert an insignificant but positive effect on profitability of banks.
CONCLUSION
On the basis of the foregoing, we reach the conclusion as follows:
Liquidity ratio and bank loans and advances, going by the signs of their coefficient appear to meet conforming to our a prior expectations.
Cash reserve ratio and loans-to-deposit ratio do not meet the a prior expectation for the period under study
There is high level of relationship between all the explanatory variables taken together and the level of bank profitability
The explanatory variables have been able to explain at least 98% of the total variation in the level of bank profitability.
RECOMMENDATION
This study on the basis of the above conclusions and findings will offer the following recommendations:
Banks should always endeavour to administer their credit effectively by adhering strictly to the rules on granting of credit.
Similarly, credits must only be extended to customers on the basis of good credit rating. Through this, the incidence of non-performing loans will be ameliorated and price boosts the profit level.
The Negative relationship between loan-to-deposit ratios also presupposes the fact that banks need to overhaul the credit evaluation methods.
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