LIQUIDITY MANAGEMENT IN THE NIGERIAN BANKING
SECTOR
(A CASE STUDY OF FIRST BANK OF NIGERIA PLC, ENUGU MAIN
BRANCH AND ZENITH BANK PLC, OKPARA AVENUE , ENUGU.)
BY
ONYEKWELU, OBIAGELI MERCY
REG. NO. BF/2009/122
DEPARTMENT OF BANKING AND FINANCE, FACULTY OF MANAGEMENT
AND SOCIAL SCIENCES, CARITAS UNIVERSITY AMORJI-NIKE,
ENUGU, ENUGU STATE.
AUGUST, 2013
i
TITLE PAGE
LIQUIDITY MANAGEMENT IN THE NIGERIAN BANKING SECTOR
( A CASE STUDY OF FIRST BANK OF NIGERIA PLC, ENUGU MAIN BRANCH AND
ZENITH BANK PLC, OKPARA AVENUE. ENUGU)
BY
ONYEKWELU, OBIAGELI MERCY
REG. NO. BF/2009/122
BEING A RESEARCH PROJECT SUBMITTED TO THE DEPARTMENT OF
BANKING AND FINANCE, FACULTY OF MANAGEMENT AND
SOCIAL SCIENCES, CARITAS UNIVERSITY, AMORJI - NIKE, EMENE ENUGU,
ENUGU STATE NIGERIA.
IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF
BACHELOR OF SCIENCE (B.Sc) DEGREE IN BANKING AND FINANCE.
AUGUST, 2013.
ii
APPROVAL PAGE
This research work was read and approved for meeting the requirements is recommended for the
award of Bachelor of Science (B.Sc) Degree in Banking and Finance, Caritas University, AmorjiNike, Enugu.
----------------------------Mr. Okafor. I. G.
(Project Supervisor)
----------------Date
----------------------------Mr. Okafor. I. G.
(Head of Department)
----------------Date
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CERTIFICATION PAGE
I, Onyekwelu, Obiageli Mercy an under-graduate student of the Department of Banking and
Finance with the registration number BF/2009/122, have submitted this project report for the
award of the Degree of Bachelor of Science (B.Sc) in Banking and Finance. The work embodied
in this project report is my original work and has not been submitted in part or in full for any other
degree or diploma in this University or any other institution.
-------------------------------
----------------------
Onyekwelu, Obiageli Mercy
Date
We certify that this project report has been successfully been defended and accepted for the award
of the Degree of Bachelor of Science (B.Sc) in Banking and Finance.
---------------------------------Mr. Okafor I.G
(Project Supervisor)
-----------------------Date
---------------------------------Mr. Okafor I.G
(Headof Department)
---------------------Date
--------------------------------Dr. Onwumere J.U.J
External examiner
---------------------Date
iv
DEDICATION
This work is dedicated to GOD Almighty for being there every step of the way. Thank you
Heavenly Father.
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ACKNOWLEDGEMENTS
I begin with immeasurable gratitude to God Almighty, who has sustained, protected and provided
for me throughout my stay in Caritas University despite the difficulties and rigors of studying in
the school.
My undying appreciation goes to my parents, Chief and Chief (Mrs.) Onyekwelu.
My profound gratitude goes to my amiable supervisor ─ Mr.Okafor I.G for his guidance, support,
constructive criticism and supervision during the research work which is responsible for the
success of this work, words cannot express my appreciation but may God see you through in all
your life endeavours and grant success to the work of your hands.
I must also appreciate all my lecturers in the department of Banking and Finance: Dr. S.M Takon,
Mr. Nwadiubu, Anthony, Mr Ezeamama, Martins .C, Prof F.O. Okafor, Mrs. Ebere who in their
endless effort have impacted knowledge in me.
Special appreciation goes to the Deputy Vice Chancellor- Rev. Fr. Prof Remy Onyewuenyi and
the Registrar Sir T. Ochang for being fatherly figures to me.
My appreciation also goes to our patron, ST. Jude Thadeaus and the members of ST. Jude for your
efforts and prayers through out my stay in Caritas.
I want to also thank my special, very one and only Ezeude, Onyedika Temple, my friends and
roommates ─ Helen, Esther, Chisom, Mercy, Chika, Anna, Chinwedu, Fatima, Sylvester, my
siblings ─ Okechukwu, Akuabia, Chidiebere, Nneamaka, Jideofo, Chinazaekpere and all who
have helped me in one way or the other in the course of this research work, my regards and
gratitude to you all.
vi
ABSTRACT
Banking business is a very risky business. The operation of banks include; the mobilization of
deposit and the extension of credit. A bank can be defined as the instrumental agency through
which debt and credit are converted and changed between. Banks also act as intermediaries, they
mobilize deposit and pay interest on them and make loans and receive interest thereof.
Management of liquidity occupies strategic positions in the management of banks in Nigeria. The
purpose of this project work arose from the need to know the problem inherent in the management
of liquid assets otherwise known as liquidity management. Primary data were collected through
the administration of questionnaires and oral interviews on members of staff of the selected banks.
The data captured in the questionnaire, which are on perception of banks liquidity management,
were analyzed using percentages which then facilitated inferential statistical analysis using chisquare. The study revealed that there are two types of problems inherent in the management of
liquidity. They are the problems of excess liquidity and shortage of liquidity. It also showed that
profitability will be optimized only when liquidity is effectively and efficiently managed. Based on
these, the study suggested that banks should not solely concentrate on the profit maximization
concept but should also adopt measures that will ensure effective liquidity management which will
help to minimise or avoid cases of excessive and deficient liquidity as their effects. Also banks
should schedule the maturity periods of their secondary reserve assets to correspond to the period
in which the funds will be needed.
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TABLE OF CONTENTS
Cover Page
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Title Page-
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Approval Page-
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Certification Page-
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Dedication-
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1.0
Introduction- -
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Background Of The Study
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Statement Of The Problem
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Objective Of The Study-
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Research Questions
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Hypothesis Of The Study
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Scope Of The Study -
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AcknowledgementsAbstract-
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Chapter One
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1.8 Limitation To The Study -
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1.9 Definition Of Terms
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Chapter Two
2.0. Review Of Related Literature
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2.1. Introduction-
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2.2. Theoretical Review
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2.2.1. Relevance Of Liquidity And Profitability To Nigerian Banks-
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2.2.2. The Concept Of Liquidity
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2.2.3. Concepts Of Liquidity Management
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2.2.4. Liquidity Components -
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2.2.5. Element Of Liquidity -
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2.2.6. The Management Of Liquidity In Commercial Banks -
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2.2.7. Liquidity Measurement In Commercial Banks -
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2.2.8. Functions Of Liquidity -
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2.2.9. Theories Of Bank Liquidity
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2.2.10. Sources Of Liquidity --
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2.2.11. Potential Sources Of Bank Liquidity -
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In Nigeria-Cbn‟s Role
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2.2.14. Guidelines For Liquidity Managers -
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2.2.15. Guidelines For The Development Of Liquidity Management Policies
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Research Methodology
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3.1.
Sources Of Data
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3.1.1. Primary Sources Of Data
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Questionnaire Design
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Determination Of Population And Sample Size
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Method Of Investigation
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Chapter Three
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Data Presentation And Analysis
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Data Presentation
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4.2.1. Techniques Applied
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4.2.2. Hypothesis Testing
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Summary Of Findings, Conclusions And Recommendations
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Summary Of Findings
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Chapter Five
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Conclusions
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Appendices
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Letter To Respondent
Questionnaire
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xi
CHAPTHER ONE
1.0
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
Liquidity is necessary for banks to compensate for expected and unexpected balance sheet
fluctuation and to provide funds for growth. It also represents a bank‟s ability to efficiently
accommodate the redemption of deposits and other liabilities and to cover funding increases in the
loan and investment portfolio (Grueving and Bratanovic 2003).
A bank has adequate liquidity potential when it can obtain needed funds (by increasing liabilities,
securitizing or selling assets) promptly and at a reasonable cost.
Sayers (1960:59), asserts that the perfectly liquid asset is of course cash itself. The more the cash a
banker holds the more obviously can he exchange for deposits. But cash is an „‟idle asset‟‟, it earns
no income at all. To make a profit, the banker must hold some assets which are imperfectly liquid.
What should be the nature (other than income earning) of the imperfectly liquid assets of a bank?
The answer which bankers have given to this question has generally left an ambiguity about the
word „‟liquidity‟‟, an ambiguity that has its root in the banking conditions of earlier years.
According to Olagunju, Adeyanju and Olabode, (2011), liquidity is the ability of the company to
meet its short term obligations. It is the ability of the company to convert its assets into cash.
According to Nwankwo (2004), in banking, liquidity management simply means being able to meet
every financial commitment when due, whether it is withdrawing from a current account, maturing
euro or interbank deposit or a maturing issue of commercial paper. Bank liquidity refers to as the
ability of a bank or banks to raise certain amount of funds at a certain cost within a certain period of
time to discharge obligations as they fall due. It follows, therefore, that quantity, that is, amount,
time and cost, are at the heart of liquidity management. The greater the amount of funds a bank can
raise in a certain time at a specified cost, the more liquid it is. Similarly, the sooner a bank can raise
1
a given amount of fund at a certain cost, the greater is its liquidity; and the less it costs a bank to
raise a given amount of funds in a certain period of time, the more liquid it is. This has two
implications to be effective, liquidity management must contribute tom the achievement of the
overall corporate funds management objective of attaining and maintaining a balance of
profitability, solvency and liquidity.
To satisfy depositor‟s claims, a bank must be able to convert its assets into cash quickly. But this is
not all, if the depositor‟s claims are to be fully satisfied, the banker‟s assets must be converted into
cash without loss. When bankers have said that they aim at liquidity, they have generally included
both these attributes
According to Ariyo (2005), in a non-barter economy (like that of Nigeria), money serves as the
measure and store of value. It also oils the wheels of the economy by serving as the means of
exchange. In this regard, one unit of physical output or service rendered need to be backed up with a
similar unit of currency to ensure parity in value between the real output and the unit of currency.
Regulatory agencies like Central Bank of Nigeria (CBN) and Nigerian Deposit Insurance
Corporation (NDIC) were normally established to ensure appropriate liquidity. Bindseil (2000:1),
asserts that „‟liquidity management” of a Central bank is defined as the frame work, set of
instruments and especially the rules the Central bank follows in steering the amount of bank
reserves in order to follow their price ( i.e., short term interest rates) consistently with its ultimate
goals (e.g., price stability).
Practically, profitability and liquidity are effective indicators of the corporate health and
performance of not only the commercial banks (Eljelly, 2004), but all profit oriented ventures.
These performance indicators are very important to the shareholders and depositors who are major
publics of a bank. (Olagunju, Adeyanju and Olabode, 2011)
2
1.2
STATEMENT OF THE PROBLEM
Just as a bank is a going concern, so is the problem of management of liquidity of Nigerian banks.
In particular, the liquidity management is a continuing dilemma. A significant proportion of the
problem facing banks are attributable to their inability to manage the liquidity/profitability conflicts.
In fact, there is a short trade off between liquidity and profitability by banks which is currently
giving some concern to the regulatory authorities like the CBN and the NDIC.
Given that poor banking habits has been the bane of the Nigerian society, how could the liquidity
and hence profitability position of Nigerian banks maintain acceptable level or standard in
developing banking culture.
Though it has been established that excess liquidity entails the risk of low earnings or less earning,
on the other hand, liquidity problems bring about a loss of faith and confidence in the Nigerian
banks. So banks must strike a balance between the two (in excess liquidity and shortage of
liquidity).
1.3
OBJECTIVE OF THE STUDY
All over the world, banks are subjected to varying degrees of regulations because of their sensitive
nature as custodians of funds and their ability to create money. However, in the Nigeria context,
these controls are mainly direct and administrative resulting invariably in less efficiency in the
management and allocation of resources. Through the use of the instruments of the monetary policy,
the Central Bank of Nigeria, directly changes the levels of banks cash reserves and indirectly
induces changes in the terms and availability of credit and ultimately money supply and general
economic activities. Managing liquidity therefore entails striking a balance between the customer‟s
need for liquidity and the demand to optimizing interest earning by tying down deposits in other
less liquid assets such as loans and advances.
The summary of the objective of the study can be stated as follows;
3
i.
To examine how excess liquidity affects the profitability of Nigerian banks.
ii. To examine how shortage of liquidity affects the profitability of Nigerian banks.
iii. To show whether loans and advances do affect the profitability of Nigerian banks.
1.4 RESEARCH QUESTIONS
i.
To what extent does excess liquidity affect the profitability of Nigerian banks?
ii. To what extent does shortage in liquidity have significant effect on profitability of the
Nigerian banks?
iii. How do loans and advances affect the profitability of Nigerian banks?
1.5
HYPOTHESES OF THE STUDY
On the basis of the above views, the researcher hereby proposes the following hypothesis:
Ho1. Excess liquidity does not have a significant impact on the profitability of Nigeria banks
Ho2. Shortage in liquidity does not have a significant impact on the profitability of Nigerian banks
Ho3. Loans and advances do not have significant impact on the profitability of Nigerian banks.
1.6 SCOPE OF THE STUDY
This work is designed to preview the liquidity management of Nigerian banks. It will also show the
inter-relationship that exists between Nigerian banks. This study centres on the Enugu main branch
of First Bank of Nigeria PLC and Zenith Bank PLC, Okpara Avenue, Enugu.
1.7
SIGNIFICANCE OF THE STUDY
In this regard and taking into consideration the changing trend in our banking system, this study is
undertaken in other to contribute to the existing literature by updating it as much as possible. This
study is hoped to unveil problems likely to rise out of some dimension which Nigerian banking
business is fast assuming in this country. This writer intends to identify imminent consequences
4
including future prospects and challenges of management of liquid assets and liability of Nigerian
banks.
In addition, suggestions will be made to help in checking the anticipated undesirable consequences
and consolidate the positive effects of the policy measures. This study provides good reading
materials for practicing bankers, Professionals in finance, accounting, economics and other related
fields.
1.8 LIMITATIONS TO THE STUDY
The researcher has constraints in visiting other Nigerian banks considering the time and financial
involvements as a student researcher. Some other problems that hindered my work include the
inability of the researcher in obtaining adequate and reliable information from the staff of Enugu
main branch of First Bank of Nigeria and Zenith Bank PLC, Okpara Avenue, Enugu. Banks would
like to keep their secret of success of such important information from their competitors.
Finally, availability of the required data will expose the operational results of the banks which they
might not be willing to release for fear of getting into the hands of their competitors as earlier
mentioned.
1.9 DEFINITION OF TERMS
 Banks deposit: the amount outstanding to the credit of the bankers but must be repaid on
demand. Deposits are not held in trust but are borrowed by customers.
 Liquidity: the quality of an asset that makes it easily convertible into cash with little or no
risk of loss. That is, a state of being able to raise funds easily by selling assets.
 Assets: aspect of a balance sheet that shows the investment decisions of the bank.
 Liabilities: aspect of a balance sheet that shows the financing decisions of a firm.
 Balance sheet: a statement that shows a summary of a bank‟s financial position or
performances. That is, a bank‟s investment and financing decisions.
5
 Bank: an organisation offering financial services, especially loans and the safe-keeping of
customer‟s money.
 Portfolio: a collection of (in this discussion) bank‟s investment assets.
6
CHAPTER TWO
2.0. REVIEW OF RELATED LITERATURE
2.1. Introduction
This study reviews related literature on the relationship between liquidity management and
commercial banks‟ profitability. It focused attention not only on liquid assets or liquidity cum
profitability of banks, but also on asset management and risk inherent therein.
This chapter discusses the meaning and importance of liquidity and profitability to Nigerian banks;
overview of Nigerian financial system; the role of commercial banks in the economy; the concept of
liquidity; the impact of liquidity and working capital on the profitability and performance of quoted
companies. It is also pertinent to examine the CBN instruments of monetary policy, paying
particular attention to the applicability and effectiveness of each instrument in the Nigerian context.
2.2. THEORETICAL REVIEW
Banks are major providers of liquidity in an economy. The field of research on the role of banks as
liquidity providers started long time ago. (Diamond and Dybvig, 1983). More recently, Kashypap,
Rajan and Stein (2002) describe the links between banks liquidity and depositors and borrowers
through credit lines. These have made the changes in the industry sporadic and ubiquitous today.
Similar features are evident among other countries the world over. Mergers and liquidity problems
in banking in Malaysia did not begin until the economic crises in 1997. And as at the end of 2000,
the country had re-engineered its banking and other financial sectors to be more liquid and vibrant.
Similarly, according to Carietti et al. (2006), banks mergers in the European countries resulted in
competition and liquidity improvements which were similar to those of United States and Asia. As
at the 1990s, more than half of the books in countries like Canada, Italy and Japan, pooled resources
together to shore up their liquidity. The fall-out of the mergers forced many other countries in the
world like Belgium, France, the Netherlands and Sweden among others to become smaller in
7
numbers but often constitutes more than 70% of the national banking sectors. Thus, the banks in
these countries became more vibrant in terms of liquidity and performances. The Nigerian
experience was however not different as eighty-nine banks shrank to twenty-four banks in 2004 and
2005 fiscal year and now to twenty-three banks with Intercontinental bank becoming a subsidiary of
Access bank PLC, Bank PHB transforming into Keystone bank limited and Mainstreet bank
limited, formally Afribank lately in 2011 fiscal year. However, Carletti et al. (2006) submits that
consolidation may lower liquidity needs and this according to him may reduce the activity in the
interbank market in Canada. However, in Nigeria, excess liquidity has raised the volume of
commercial loan and borrowing in inter-bank market activities through the quantum of loan of loan
to the real sector is significant as the banks are not prepared to take more risks by raising venture
capital to the sector. It is theoretically plausible that in Nigeria, consolidation has brought extensive
efficiency in the use of funds, reduction in cost of operations (overheads) and brought product mix
among other improvements in the banking sector. However, most of the first generation banks in
the country incurred huge overhead bills because the number of staff is exceedingly high. Similarly,
in Malaysia, Canada, Japan and some other countries, the ratio of cost to average asset decline from
6.5% in 1999 to 5.3% in 2000 (D‟Souza and Alexandra, 2000).
It is submitted by (Carletti et al, 2006), that mergers and consolidations are more likely, “Ceteris
Paribus”, to increase aggregate liquidity needs in developing countries than in industrial once. They
pointed out that aggregate liquidity of banks in the five top players in the world economy, United
States, Belgium, Canada, France and Netherland had lowered significantly. According to Allen and
Gale (2000) and Freizas et al. (2000) as quoted by Carletti et al. (2006), a small but sudden liquidity
shocks can metamorphose into serious liquidity deficit in the banking system and thus, in the
absence of a good regulatory framework from the central bank, it could lead to contagious and
chronic liquidity crises.
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2.2.1. RELEVANCE OF LIQUIDITY AND PROFITABILITY TO NIGERIAN BANKS.
Liquidity is the ability of a company to meet its short-term obligations. It is the ability of the
company to convert its assets into cash. Short-term, generally, signifies obligations which mature
within one accounting year. Short-term also reflects the operating cycle: buying, manufacturing,
selling and collecting. A company that cannot pay its creditors on time and continue to fail its
obligations to the suppliers of credit, services and goods can be declared a sick company or
bankrupt company. Inability to meet the short-term liabilities may affect the company‟s operations
and in many cases it may affect its reputation too. Lack of cash or liquid assets on hand may force a
company to miss the incentives given by the suppliers of credit, services and goods. Loss of such
incentives may affect the probability of the business. So there is always a need for the company to
maintain certain degree of liquidity. However, there is no standard norm for liquidity. It depends on
the nature of the business, scale of operations, location of the business and many other factors.
Liquidity refers to the ability of a concern to meet its short term obligations as and when they
become due. Liquidity plays a significant role in the successful functioning of a business firm. A
firm should ensure that it does not suffer from lack of or excess liquidity to meet its short term
compulsions. Short fall in liquidity results in bad credit ratings, and finally, it may result in the
closure of the company. At the same time, a very high degree of liquidity is also bad as an idle asset
earn nothing. (Bhunia .A. 2010). A study of liquidity is of major importance to both the internal and
the external analysts because of its close relationship with day-to –day operations of a business.
2.2.2. THE CONCEPT OF LIQUIDITY.
The concept of liquidity has been a source of wrong to management of firms of the uncertainty of
the future.
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Liquidity is a financial term that means the amount of capital that is available for investment.
Today, most of this capital is credit, not cash. That‟s because, the large financial institutions that do
most investments prefer using borrowed money.
High liquidity means there is a lot of capital because interest rates are low, and so capital is easily
available. Why are interest rates so important in controlling liquidity? Because these rates really
dictate how expensive it is to borrow. Low interest rates mean credit is cheap, so businesses and
investors are more likely to borrow. The return on investment only has to be higher than the interest
rate, so more investments look good. In this way, high liquidity spurs economic growth.
Liquidity can be defined as the state or conditions of a business organisation which determines its
ability to honour or discharge its maturing obligations. These maturing obligations are composed of
current liabilities and long term debts. (Olagunju, Adeyanju and Olabode, 2011:28).
Liquidity can also be defined as a measure of the relative amount of asset in cash or which can be
quickly converted into cash without any loss in value to meet short term liabilities. Liquidity assets
are composed of cash and bank balances, debtors and marketable securities. Liquidity is the ability
of a firm to meet all obligations without endangering its financial conditions. (Olagunju, Adeyanju
and Olabode, 2011:28).
Liquidity will help a firm to avoid a situation where a firm will be forced to liquidate with its
attendant problems of selling assets at distressed prices and the extra fees paid to lawyers, trustees
in bankruptcy and liquidators on liquidation. The definition above implies that, as liquidity
increases, the profitability of technical insolvency is reduced. The definitions above, went ahead to
expand the views by recognizing two dimensions of liquidity namely, the time necessary to convert
an asset into money and the degree of certainty associated with the conversion ratio or price realized
for the assets.
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2.2.3. CONCEPTS OF LIQUIDITY MANAGEMENT.
Nigerian banks like virtually all economic entities need liquidity. Liquidity is the quality of an asset
that makes it easily convertible into cash with little or no risk of loss.
The crucial part in managing working capital is required by maintaining its liquidity in day-to-day
operation to ensure its smooth running and meets its obligations. (Eljelly, 2004). Liquidity plays a
significant role in the successful functioning of a business firm. A firm should ensure that it does
not suffer from lack of or excess liquidity to meet its short term compulsions. A study of liquidity is
of major importance to both the internal and the external analysts because of its close relationship
with day-to-day operations of a business, (Bhunia, 2010). Dilemma in liquidity management is to
achieve desired trade off between liquidity and profitability, (Raheman et al. 2007). Referring
theory of risk and return, investment with more risk will result to more return. Thus, firms with high
liquidity of working capital may have low risk than low profitability. The issue here is in managing
working capital, firm must take into consideration all the items in both accounts and to balance the
risk and return, (Lee et al. 2008).
2.2.4. LIQUIDITY COMPONENTS.
According to Olagunju, Adeyanju and Olabode, (2011), the following are liquidity components:
. Vault cash
. Balances held with CBN
. Balances held with other banks in Nigeria
. Money at call in Nigeria
. Inter-bank placement
. Placement with discount houses
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. Treasury bills
. Treasury certificates
. Investment in stabilization securities
. Bills discounted payable in Nigeria
. Negotiable certificates of deposits
. Bankers‟ acceptance and commercial paper
. Investments in FGN development stock
. Industrial (other) investments
2.2.5. ELEMENT OF LIQUIDITY.
Liquidity is a complex concept as the rate of liquidity among different liquid assets differs. For
instance, a savings or time deposit is more liquid than common stock and common stocks in turn are
more liquid than real estate. Liquidity is a relative concept because there is no specific level of any
balance sheet ratio that indicates that the firm is no longer liquid.
Liquidity involves three elements or characteristics namely; marketability, stability and
conservatism. Liquid assets should be more marketable or transferable. That means, they are
expected to be converted to cash easily and promptly, and are redeemed prior to maturity. All assets
that cannot be redeemed at maturity are said to be illiquid.
Another quality of liquid asset is price stability. Based on this characteristics, bank deposits and
short term securities are more liquid than equity investments such as common stocks and real estate
due to the fact that the price of the former are fixed and have lesser viability than the prices and
value of the later experience considerable fluctuation.
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Conservatism quality of liquidity refers to the ability of the holders of liquid assets to recover the
cost of the asset on the time of resale. On the basis, common stocks are not considered highly liquid
assets despite its ready market ability. This can be attributed to the fact that on certain periods, the
current prices are lower than their initial or original prices. In consideration of these quantities,
people and firms decide to hold cash which is the only perfectly liquid asset.
Double coincidence of wants was one of the problems that made trade by barter unpopular and
caused for its replacement with money. For the fact that all other asset is converted into money
before they are used and for the fact that money ensures that an asset is converted to any other asset,
make money the most popular liquid asset with high rate of convertibility needed of any liquid
asset.
2.2.6. THE MANAGEMENT OF LIQUIDITY IN COMMERCIAL BANKS.
Bank liquidity refers to the ability of the bank to ensure the availability of funds to meet financial
commitments or maturing obligations at a reasonable price at all times. Bank liquidity means a bank
having money where they need it particularly to satisfy the withdrawal needs of the customers. The
survival of commercial banks depends greatly on how liquid they are since illiquidity being a sign
of imminent distress can easily rode the confidence of the public in the banking sector and results to
deposit. Equally important is the need for adequate income through interest on loan to ensure
continued provision of productive resources and survival. It therefore becomes uneconomic and
financially unreasonable for banks to allow excess idle cash in the vault or excess liquidity. Hence,
a need for effective liquidity management to maximize revenues while holding risks of insolvency
to desired level.
Liquidity management refers to the planning and control necessary to ensure that the organisation
maintain enough liquid assets as an obligation to the customers of the organisation so as to meet
some obligations incidental to survival of the business. For a commercial bank to plan for or
manage its liquidity position, it first manages its money position by complying with the legal
13
requirement. Actually, management of money position is essential if a bank must avoid excess or
deficiencies of required primary reserves. Where there is a decline in market price of securities or
where additional funds needed to correct the bank reserve position and for a very short time, it will
be definitely expensive to sell securities than to borrow from another bank. Moreover, it may be
more desirable to borrow for bank‟s liquidity needs than to call outstanding loans or to cancel or
place embargo on new loans, a situation that will reduce the existing and potential customers of a
bank. Commercial banks are expected to maintain certain levels of reserves. These reserves are
statutory requirements stipulated by the central bank specifying the cash reserves equal to certain
fraction of the banks‟ deposits or loans and advances which banks must maintain.
Originally, the purpose of the reserve requirement is to compel banks to maintain a reasonable
degree of liquidity in order to be able to meet cash demands. But currently, these reserves are used
as control device through which the federal government can influence the monetary system.
Most commercial banks in their bid not to contravene the regulation specifying legal minimum
reserve requirement and in order to provide against unforeseen large withdrawals, resolve to
maintain reserves in excess of their legal requirements. For the fact that keeping excess reserve for
the purpose of short run safety means to forgo income or earnings, commercial banks need to
manage their reserves adequately. Effective liquidity management therefore involves obtaining full
utilization of all reserves.
2.2.7. LIQUIDITY MEASUREMENT IN COMMERCIAL BANKS.
Practically, liquidity management in commercial banks is surrounding both size of the prospective
needs for liquidity at any given time and the availability of sources of liquidity sufficient to meet
them. The importance of accurate liquidity measurement cannot be over stressed as it reveals the
liquidity positions of the banks through which the operators of the financial market and other
creditors adjudged the credit worthiness of the banks.
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Liquidity can be measured as a stock or as a flow. From the stock perspective, liquidity
management requires an appraisal of holding of assets that may be turned into cash, Ruossakis,
(1999). The determination of liquidity adequacy within this framework requires a comparison of
holding of liquid assets with expected liquidity needs. Stock concept of liquidity management has
been criticized as being too narrow in scope.
From the “flow” point of view, one considers liquidity not only as the ability to convert liquid assets
into cash but also the ability of the economic units to borrow and generate cash from operators. This
approach recognizes the difficulty involved in determining liquidity standards since future demand
are not known. It also recommends accurate forecast of cash needs and expected level of liquidity
assets and cash receipts over a given period of time for there‟s to be a realistic appraisal of a bank‟s
liquidity position.
Between the two concepts, the stock concept is the widely used and involving the application of
financial ratios in the measurement of liquidity positions of commercial banks, one of the popular
financial ratios which measure the ability of the bank to meet its current obligations. The liquidity
ratios are composed of current ratio and quick ratio.
Current ratio is a measure of a commercial bank‟s short term solvency and is calculated by dividing
current assets by current liabilities incurred. The current assets are composed of cash and those
assets which can be converted into cash in a short period which include marketable securities,
receivables, inventories and prepaid expenses. Current liabilities consist of all obligations maturing
within a year. They include, accounts payable, bills payable, note payable, accrued expenses and
liability. The problem associated with the measure of liquidity with current ratio is that it is the test
of quantity and not quality of the assets and hence, it does not reveal the true position of a firm‟s
liquidity. Current ratio gives the rough idea of the firm‟s liquidity.
Another aspect of liquidity ratio is quick ratio, which indicates the relationship between liquid
assets and current liabilities. Quick ratio is calculated by dividing the quick asset (current assets less
15
inventories) by current liabilities. The quick assets are the assets that can be converted into cash
immediately without losing their values. Inventories are subtracted from the current assets because
they normally require some time for realizing cash and their value has a tendency to fluctuate.
Quick ratio is considered to be a better guide to the short term solvency of a firm. A quick ratio is
considered to represent a satisfactory current financial condition. However, each industry has its
own operating characteristics which demands different financial standards.
Other ratios which have been developed to measure liquidity are; liquid assets to total assets; liquid
asset to total deposits; loans and advances to deposits. Calculating the ratio of liquid assets to total
assets explains the importance of a bank‟s liquid assets among its total assets. It indicates the
proportion of a banker‟s total assets that can be converted into cash at a short notice. The ratio of
liquid assets to total deposits shows what percentage of a bank‟s deposits is held in liquid form. It
relates liquid assets directly to deposit level. The principal limitation of these two ratios is the
difficulty in ascertaining what should be the liquidity characteristics of cyclical secondary reserves.
The ratio of loan and advances to deposits reflects the quantity or proportion of the customer‟s
deposits that has been given out in form of loans and the percentage that is retained in the liquid
form. The ratio serves as a useful planning and control tool in liquidity management since
commercial banks use it as a guide in lending and investment, and to make a total evaluation of
their expansion program. When the ratio rises to a relatively high level, banks are encouraged to
lend and invest and vice versa, to make some benefit of profitability.
2.2.8. FUNCTIONS OF LIQUIDITY.
According to Nwankwo (2004), adequate liquidity is a sine-qua-non (essential condition) of
banking. Liquidity problems tend to surface in the long run when there is a large increase in the
demand for currency. It becomes a crisis if the bank (or banks) cannot meet its demand and assets
cannot be sold quickly at prices that permit the bank or banks to meet the commitments. Therefore,
adequate liquidity enables a bank to meet commitments when due and to undertake new
16
transactions when desirable. The significant of adequate liquidity lies in the fact that while an astute
banker can live for sometimes with an inadequate capital or an interest rate gamble that has gone
sour, he cannot survive even in the short run without liquidity. Liquidity is what keeps the doors of
a bank open in the short run. It is after reasonably providing for this that the bank can carry on
normal business without the fear of being forced into a panic bid for funds at the worst moment.
Adequate liquidity enables a bank to meet commitments when due and to undertake new
transactions when desirable.
Adequate liquidity enables a bank to meet three risks, one is funding risk; the ability to replace net
outflow of funds either through withdrawals of retail deposits or non-renewal of wholesale funds.
When a bank grants a loan or facility repayable at a specific time, a time risk is incurred. Adequate
liquidity is needed to enable the bank to compensate for the non receipt inflows of fund if the
borrower or borrowers fail to meet their commitments. The third risk arises from calls to honour
maturing obligations or formal request for funds from important customers. Adequate liquidity
enables the banks to find new funds to honour the maturing obligations such as a rapid increase in
borrowing under automatic or agreed lines of credit or to be able to undertake new lending when
desirable, e.g., a request from a highly valued customer. In these circumstances, the bank must be
prepared to fund these unanticipated increases in the interest of good customer relations, and it
requires adequate liquidity to be able to do so.
By enabling the bank to meet its contractual obligation, adequate liquidity helps to generate and
sustain public confidence in the solvency of the bank. The most important is the confidence of the
depositors and holders of bank paper who should be given no cause to doubt the solvency and the
viability of the bank. There is also the confidence of the financial markets to enable the bank to
continue to raise further funds in the market. This is important, if the financial market perceives a
bank to have liquidity problems, the bank may find it difficult to raise further funds except at a
premium. If the perception continues, it becomes widespread and is widely held, the bank may be
17
unable to buy funds at any price anywhere. It thus, closes off its access to the market for funds.
More serious problems may arise which may lead to a drastic restructuring of the balance sheet of
the management or even to liquidation.
Adequate liquidity is also needed by commercial prudence (caution) and to avoid forced sales of
assets, that is, forced sales at unfavourable market conditions and at heavy losses.
Finally, adequate liquidity enables a bank to avoid non-volitional or involuntary borrowing from the
central bank. When a severe liquidity pressure forces a bank to discount window in an involuntary
basis, the banks put itself literally at the mercy of the central bank; in effect, it hands over the
control of its destiny to the central bank.
2.2.9. THEORIES OF BANK LIQUIDITY.
Accordingly, many theories have been developed over the years concerning bank liquidity. They
are liquid asset theory, the shiftability theory, the anticipate income and liability management
theory (Nwankwo, 2004), Fry, Goodhart and Ameida, (1996).
1. Liquidity assets theory: it argues that banks must hold large amount of liquid assets as
reserves against possible demands for payment, the original intent being prudent cushion in
the face of uncertainty. The theory is defective in at least two important respects. There is,
first the problem of determining accurately the quantity of notes that might be presented at
any one time. The theory is also, grossly deficient in a world of active money markets and
purchased funding where the flow of funds can shift with considerable speed and banks are
increasingly dependent on the market.
2. Commercial bills or loans theory: it states that bank funds should principally be invested
in short term self liquidating loans for working capital purposes confined to financing the
movement of goods through the successive stages of the production circle-production,
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transportation, storage distribution and consumption. Excluding loans for long term
purposes-financing plant, equipment, real estate e.t.c.
3. Shiftability theory: according to this theory, the liquidity of a bank is sustained if it holds
assets that could be shifted or sold to either the lender or the investors for cash. The
implication of this will be manifested in the type of collateral that would be acceptable to
banks against possible loan default. In essence, such collateral must be marketable and
should be converted into cash without delay if when necessary. Hence, this theory
subjugates loan decision to the overriding goals of ensuring adequate liquidity of the bank.
In contrast to the commercial loan doctrine which emphasized maturity, the degree of
shiftability or marketability of loans and investments provided the liquidity base for bank
operations under the shiftability doctrine (Ariyo, 2005:35).
4. Anticipated income theory: according to this theory, the desired liquidity position of a
bank can be planned if loan repayment schedule is anchored on the project (future) income
of the borrower. The theory therefore gives additional consideration to the profitability and
preferably the cash flow of business rather than exclusive reliance on collateral provided. It
also emphasizes on the need for future orientation in banks‟ lending behaviour, or implicitly
gives preference to the going concern principle in their dealing with (corporate) loan taking
customers. In addition, it underscores the need to evaluate very critically the viability of a
project and its cash flow potentials.
5. A basic feature of the four theories is that like the liquid asset theory, they are all asset
based. They are therefore subject to the same criticism as the liquid asset theory in a world
of liability management. Apart from this criticism, which is common to all asset based
liquidity theories, each of the asset theories has its special defects.
6. Liability management theories: in contrast to the above asset based liquidity approaches,
liability management theory focuses on the liability side of the balance sheet for
supplemental liquidity. Developed in the micro electric revolution, the liability management
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theory argues that since large banks can buy all the funds the need, there is no need to store
liquidity on the asset side of the balance sheet. Focusing on the liability side, it assumes that
increasing the interest rate offered, for funds will pluck increase in supply and provide for
liquidity needs. In this way, the theory assumes stable normal situations and unshaken
confidence of the market on the credit worthiness, viability and integrity of the borrowing
bank.
2.2.10. SOURCES OF LIQUIDITY.
In managing their liquidity, banks probably are not conscious of following any one liquidity theory.
From a practical point of view, all theories are employed to some degree, with some banks
emphasizing one and some another. This is evident in the sources of bank liquidity. From the
various liquidity theories discussed above, two principal sources may be identified-stored liquidity
and purchased liquidity. Stored liquidity is asset based while purchased liquidity is liability centred.
Stored or warehoused liquidity consists of assets in which funds are temporarily invested,
warehoused or stored, with an assurance that they will either mature or be paid when liquidity is
needed, or will be readily sellable, without material loss, in advance of maturity. It incorporate
elements of the three asset based liquidity theories, liquid asset and asset conversion or shiftability
discussed above. The idea is to shift or convert or cash (on maturity) or call back the liquid assets
into cash to meet to needs of the bank. The focus of the approach is safety or liquidity at the
expense of profitability. Given the squeeze on profits due to narrowed margins resulting from
increased competition in the seventies and eighties, banks have increasingly resorted to purchased
liquidity. (Nwankwo, 2004).
In contrast to stored or warehoused liquidity, purchased liquidity incorporates the liability
management theory of liquidity management. By this means, funds are acquired in the market at a
price for profitable employment in lending. Liability management focuses on a permanent
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expansion of bank assets based as opposed to the compositional change in assets of the liquidity
reserve assets approach. (Nwankwo, 2004).
2.2.11. POTENTIAL SOURCES OF BANK LIQUIDITY
Asset warehouses or stores of liquidity:
1. Cash and due from: this includes vault cash, balances with the central bank and balances
held with banks both at home and abroad.
2. Call money funds sold: these are expenses reserves sold to other banks in the interbank
market. Maturing from overnight to about seven days. The call money earns income for the
lending bank, and is unsecured.
3. Short term government securities: these include 90 days treasury bills and 6-18 months
treasury certificates, long term federal government development loan stocks with up to three
years to maturity are also included. Usually risk free.
4. Commercial paper, acceptances, negotiable certificates of deposit, bankers unit funds
and Floating Rate CDs (FRCD): private obligations, these include the recently introduced
refinancing and rediscounting export bills. In developed money markets, active trading
occurs in these instruments with secondary markets in many cases. The money market is
very under-developed in Nigeria at present. The bankers‟ unit fund was established to
encourage banks to invest part of their liquidity funds federal government stocks. They
count as part of liquid assets and are repayable on demand.
5. Securities purchased under agreement to resell (Repos): they are temporary purchased of
government or other securities in which the seller agrees to repurchase at fixed prices and
set times in the future. The holder gains the difference between the sale and purchased price.
6. Other marketable securities: these are short term government agency and state and local
government obligations. Which such securities exist in development money markets of
major countries like US and UK.
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Purchased liquidity items:
1. Borrowings from the central bank through discounts or advances: these are temporary
assistance at rates fixed by the central bank. Bank access this as a privilege not a right and
are not expected to borrow permanently or too often, expect at penalty rates.
2. Call money held for other banks: these are purchased of other banks‟ excess reserves on a
daily or short term basis. How much a bank obtains through this source depends on its credit
rating and limits established by lenders. Like the call-money sold, these are unsecured.
3. Securities under repurchase agreements: these are temporary sales of government
securities with the bank undertaking to buy back at fixed dates and specified rates.
4. Certificate of deposits, negotiable and non-negotiable, bankers‟ unit funds and floating notes
sold.
5. Other liabilities: here, banks can also buy large time deposits of state government, local
authorities, some pension funds and corporate concerns. The extent to which Nigerian banks
tout for these fee funds is limited by the general loans and, until relatively recently, the
armchair posture of many banks in the country.
2.2.12. LIQUIDITY RISK
As liquidity is a sine-qua-non of banking, an essential first step to managing liquidity risk is
recognition of its components in funding risk, time risk and call risk. The diversity of the sources of
liquidity in stored asset liquidity and purchased liquidity should also be noted. While the former
relates to ability to sell, discount or pledge assets at short notice without loss, the latter refers to the
ability to buy liquidity at short notice in the short term or wholesale market or more generally by
matching expected outflows with expected inflows. (Nwankwo, 2004).
The second requirement is an appreciation of maturing transformation as an inevitable feature of
banking and the desirability (but inadvisability and impossibility) a balanced maturity structure in
the sense of identity between the maturity profiles of assets and liabilities in the balance sheet. In
22
other words, since maturity mismatching is inevitability, the crucial issue is not the mismatch as
such, but whether, given the maturity profile, funds could quickly be mobilized at short notice and
with minimum loss or no loss at all to satisfy obligations as they mature, and undertake transactions
when desirable.
The third stage is to draw up a maturity profile or ladder that satisfactorily permits a comparison of
assets and liabilities with each maturity range. This gives a useful insight into liquidity. But its
limitations must be recognized. But it does not tell the whole story; it does not distinguish between
asset qualities nor does it take account of off-balance sheet operations. Besides, it does not and
cannot address the standing of the bank in the market place, an essential indicator of borrowing
ability.
Finally, instruments and markets should be mobilized for correcting and adjusting any unacceptable
or seriously mismatched profiles. Possibilities include organizing committed lines of credit from
other banks, rediscount of short term liquid assets, using the lender of last resort facilities,
lengthening interbank borrowing, where term funds are available, substituting a three or six months
CD for short term borrowing and issuing floating rate notes. (Nwankwo, 2004).
In conclusion, the probability of not being able to ensure the desired liquidity position is usually
referred to as the liquidity risk. In statistical terms, it refers to the probability of not realising the
desired liquidity position at a given point in time given the highest quality of management practice.
Causes of liquidity risk are classified into internal and external causes.
Internal causes:
There are attributes that are company specific in nature. They refer to factors that are within the
control of or attributable to the activities of the management and staff of a bank. They include the
following;
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a. A single or a few customers or shareholders controlling a very high proportion of total
resources of the bank.
b. The size of the bank may limit its funding choices for example; small unquoted banks may
not have access to capital market in terms of need and may be forced to dispose some of its
assets at distress prices.
c. Accumulation of deferred obligation they demand for which cannot be reasonably predicted
e.g. taxes, inadequate funding or improperly managed pension schemes e.t.c.
d. Inability to borrow short term through available instrument options such as bank lines of
credit, commercial paper.
e. Inability to develop and utilize early-warning signals to detect pending crisis or
developments that could precipitate unusual demand for cash or forced discharge of
obligation.
External causes:
These are attributable to those factors that are beyond the control of the management. These are
referred to as exogenous factors or variables. Some of these factors or variables include the
following;
a. Negative publicity about a bank (whether just or not).
b. Sudden and or severe deterioration of the economy.
c. Public concern about potential distress in the banking industry.
d. Reported failure of some banks that trigger panic behaviours of customers of other banks.
e. Sudden change in investor preferences.
f. Unstable and or unpredictable government policies targeted at the financial sector of the
economy.
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2.2.13. REGULATORY AUTHORITY’S MANAGEMENT OF BANKING INDUSTRY
LIQUIDITY IN NIGERIA-CBN’S ROLE.
The primary objective of the monetary policy of a modern economy is to facilitate exchange in a
manner that ensures price stability. Towards this end, the central bank is charged with the
possibility of ensuring adequate supply and control of money, with a view to ensuring adequate
liquidity within the economy.
In his view, Ariyo, (2005:40); liquidity management role of CBN entails putting in place a frame
work comprising a set of rules and instruments that will ensure an appropriate level of liquidity by
averting inadequate or excess supply of money within the system at any point in time, some groups
of indicators are helpful to the central bank towards ensuring the effectiveness of its liquidity
management functions. The first among these is accurate assessment of resources demand pressure,
such as the trend in real Gross Domestic Product (GDP) and development in labour markets. The
other relates to price based pressures such as the trends in Consumer Price Index (CPI), commodity
prices and inflation expectations. Also a good value in this regard is the close monitoring of the
trend in money supply indicators such as M1 (based money), M2 (high-power money), domestic
credit levels, interest rate spread and movement in foreign exchange rates among others.
2.2.14. GUIDELINES FOR LIQUIDITY MANAGERS
According to Rose and Hudgins (2008); over the years, liquidity managers developed several rules
that often guide their activities. First, the liquidity manager must keep track of the activities of all
departments using and/or supplying funds while coordinating his or her department‟s activities with
theirs. Whenever the loan department grants a new credit line to a customer, for example, the
liquidity manager must for possible drawings against their line. If the savings account division
expects to receive several large deposits in the next few days, this information should also be passed
on to liquidity manager.
25
Second, the liquidity manager should know in advance wherever possible, when the biggest credit
or funds-supplying customers plan to withdraw their funds or add funds to their accounts. This
allows the manager to plan ahead to deal more effectively with emerging liquidity surpluses and
deficits.
Third, the liquidity manager must make sure the financial firm‟s priorities and objectives for
liquidity management are clear. For example, in the past, a depository institution‟s liquidity position
was often assigned top priority when it came to allocating funds. A typical assumption was that a
depository institution had little or no control over its sources of funds. Today, liquidity management
has generally been relegated to a supporting role compared to most financial firms‟ number one
priority, making loans and supplying fee-generating services to all qualified customers in order to
maximize returns.
Fourth, liquidity needs must be analyzed on a continuing basis to avoid both excess and deficit
liquidity positions. Excess liquidity that is not re-invested the same day it occurs results in lost
income, while liquidity deficits must be dealt with quickly to avoid dire emergencies where the
hurried borrowing of funds or sale of assets results in excessive losses for the financial firm
involved.
2.2.15. GUIDELINES FOR THE DEVELOPMENT OF LIQUIDITY MANAGEMENT
POLICIES.
Liquidity is crucial to the on-going viability of any bank, as illiquidity can have dramatic and rapid
adverse effects on even well capitalized banks. When a crisis develops in a bank as a result of other
problems such as deterioration in asset quality, the time availability to the bank to address the
problem will be determined by its liquidity. Therefore, the measurement and management of
liquidity are amongst the most vital activities of banks.
26
The importance of liquidity transcends the individual bank, as a liquidity short fall in a single
institution can have system-wide repercussions. Consequently, the analysis of liquidity requires
bank‟s managements to measure, not only the liquidity positions of their banks, on an on-going
basis, but also to examine how funding requirements are likely to evolve under crisis scenarios.
In view of the above considerations, a viable frame work has been developed to guide banks the
management of their liquidity in line with international standards and best practices. Banks are
therefore required to develop and implement their liquidity management policies, in line with the
attached guidelines. The policies should limit liquidity risk to acceptable levels and clearly define
managerial responsibilities for managing liquidity. These policies and systems are to be observed at
all times and further reviewed from time to time, to reflect changing circumstances.
2.3. EMPIRICAL REVIEW.
Eljelly (2004) elucidated that efficient liquidity management involves planning and controlling
current assets and current liabilities to meet due short term obligations and avoid excessive
investments in these assets. The relation between profitability and liquidity was examined, as
measured by current ratio and cash gap (cash conversion cycle) on a sample of joint stock
companies in Saudi Arabia using correlation and regression analysis. The study found that the cash
conversion cycle was of more importance as a measure of liquidity than the current ratio that affects
profitability. The size variable was found to have significant effect on profitability at the industry
level. The results were stable and had important implications for liquidity management in various
Saudi countries. First, it was clear that there was a negative relationship between profitability and
liquidity indicators such as current ratio and cash gap in the Saudi sample examined. Second, the
study also revealed that there was great variation among industries with respect to the significant
measure of liquidity.
In the study of Raheman and Nasir, (2007), they studied the effect of working capital management
on liquidity as well as on profitability of the firm in Pakistan. The results showed that there was a
27
negative relationship between variables of working capital management and profitability of the
firm. Further study also found that there was a negative relationship between liquidity and
profitability and a positive relationship between size of the firm and its profitability and negative
relationship between debts used by the firm and its profitability.
Studying on liquidity, risk and profitability analysis, Sharma (2011) discovers that marunti Suzuki
India ltd is satisfactorily giving out profits and maintaining liquidity position but at increased risk
factor. The liquidity position of the company is fluctuating but this is acceptable. He concluded that
the company is earning good profit with moderate liquidity.
Bhunia et.al, (2011) investigates the liquidity management efficiency and liquidity-profitability
relationship. The data utilized was extracted from the income statements, balance sheets and cash
flow statements of sampled firms from the India Stock Exchange and CME data base. The
purposive sample design method was applied in their analysis. Preferred sample of private sector
steel companies from 1997-2006 were utilized in the analysis. Results of the study found that
correlation and regression results are significantly positive and associated to the firm‟s profitability.
Thus, firm manager should concern on inventory and receivables in purpose of creating
shareholders‟ wealth.
Through an empirical study on inventory and its relationship with profitability for large sample of
publicity held companies from nine countries in the Organization for Economic Co-operation and
Development, Routniantsev and Netessine (2007). Using a system of equations and a semiparametric model to estimate the behaviour of three different types of inventories across countries
(raw materials, work-in-progress and finished goods), found that higher sales, accounts payable,
product margins, sales uncertainty and sales growth are all associated with higher total inventories,
both on pooled sample and within most countries. They found also that economies of sales in
inventory management existed only in four out of nine countries in their sample, whereas other
countries exhibit diseconomies of scale. They found similar results for the work-in-progress and
28
finished goods inventories. Among the three inventory components, only raw material inventories
have a consistent and negative association with Return on Sales (ROS).
Recently, a study on liquidity management of TISCO ltd had been taken by Sudipta Ghosh (2008).
Data from 1996 to 2000-01 had been analyzed. He indicated that, although the degree of association
between liquidity and profitability of the company was positive, the degree of influence of liquidity
on its profitability was low and insignificant.
Agarwal (1988) devised the working capital decision as a goal programming problem, given
primary importance to liquidity, by targeting the current ratio and quick ratio. The model included
three liquidity goals, two profitability goals, and, at a lower priority level, four current asset subgoals and current liability sub-goals (for each component of working capital). In particular, the
profitability constraints were designed to capture the opportunity cost of excess liquidity (in terms
of reduced profitability).
Singh and Pandey (2008) suggested that, for the successful working of any business organisation,
fixed and current assets play a vital role, and that the management of working capital is essential as
it has a direct impact on profitability and liquidity. They studied the working capital components
and found a significant impact of working capital management on profitability for Hindalco
Industries Limited.
Mehar (2001) studied the impact of equity financing on liquidity of 225 firms listed in Karachi
Stock Exchange for the period 1980-1994 using a pooled data. The finding of the study depicted
that equity financing plays an important role in determining the liquidity position of firms. From
this finding, it is concluded that equity and fixed assets had positive relationship with working
capital, in the long term; however, the liquidity position will be deteriorated with the increase in
paid-up-capital.
29
Kim Mauer and Sherman (1998) examined the determinants of corporate liquidity of 915 US
industrial firms for the period of 1975 to 1994 by using panel data and different model. They found
that firms with large or position in liquid assets. In addition, firm size tends to be negatively related
to liquidity. Their findings revealed that positive relationship between liquidity and cost of external
financing to the extent of that market to book ratio and firm size are reasonable proxies for the cost
of external financing. They are also found that firms with more volatile earnings and lower return
on physical assets relative to those on liquid assets lead to have significantly larger position in
liquid assets.
Olagunju, Adeyanju and Olabode (2011) examined the liquidity management and commercial
banks‟ profitability in Nigeria by using quantitative methods of research. Their findings were made
through the analysis of both the structured and unstructured questionnaire on the management of
banks and the financial reports of the sampled banks. The data obtained from the primary and
secondary sources analyzed through collection, sorting and grouping of the data in tables of
percentages and frequency distribution. They formulated a hypothesis which was statistically tested
through Pearson correlation data analysis. Findings indicated that there is significantly relationship
between liquidity and vice versa. They concluded that for the success of operations and survival,
commercial banks should not compromise efficient and effective liquidity management and that
both illiquidity and excess liquidity are “financial diseases” that can easily erode the profit base of a
bank as they affect bank‟s attempt to attain high profitability level.
2.4. SUMMARY
From the reviewed (theoretical and empirical) studies, the following can be summarized;
1. Liquidity is the ability of a company to meet its short-term obligations. It is the ability of
the company to convert its assets into cash. At the same time a very high degree of liquidity
is also bad as idle asset earn nothing. (Bhunia, 2010).
30
2. Liquidity management refers to the planning and control necessary to ensure that the
organisations maintain enough liquid assets as an obligation to the customers of the
organisation so as to meet some obligations incidental to survival of the business.
3. Liquidity involves three elements or characteristics namely; marketability, stability and
conservatism. Marketability, liquid assets are expected to be converted to cash easily and
promptly, and are redeemed prior to maturity. Stability, bank deposits and short term
securities are more liquid than equity investments such as common stocks and real estate.
Conservatism, the ability of the holders of liquid assets to recover the cost of the asset on
time of resale.
4. Liquidity can be measured as a stock or as a flow. From the stock perspective, liquidity
management requires an appraisal of holding of assets that may be turned into cash,
(Ruossakis, 1999). From the “flow” point of view, one considers liquidity not only as the
ability to convert liquid assets into cash but also the ability of the economic units to borrow
and generate cash from operators. Between the two concepts, the stock concept is the
widely used and involving the application of financial ratios in the measurement of liquidity
positions of commercial banks.
5. Accordingly, many theories have been developed over the years, concerning bank liquidity.
They are the liquid asset theory, the commercial bills theory, the shiftability theory, the
anticipated income and liability management theory, (Nwankwo, 2004, Fry, Goodhart and
Almeida, 1996).
6. From the various liquidity theories discussed above, two principal sources may be
identified. Stored liquidity and purchased liquidity. Stored liquidity is asset based while
purchased liquidity is liability centred.
7. The profitability of not being able to ensure the desired liquidity position is called liquidity
risk. It is the ability of not realizing the desired liquidity position at a given point in time
31
given the highest quality of management practice. Causes of liquidity risk are classified into
internal and external causes.
8. The empirical review, through various studies in different countries, showed different
results though some had similar relationship between liquidity and profitability. This goes
to show that liquidity management has great impact/effect on profitability of banks/firms.
32
CHAPTER THREE
3.0.
RESEARCH METHODOLOGY
This part of research report explicitly deals with how the research would be executed; type of data
to be collected should be specified. The sources of data, location and methodology of data collected
are treated.
3.1.
SOURCES OF DATA
In order to carry out this study effectively, data were collected from two (2) main sources namely;
primary and secondary sources.
3.1.1. PRIMARY SOURCES OF DATA
The primary sources were collected through the administration of questionnaires and oral
interviews.
3.2.
QUESTIONNAIRE DESIGN
The questions asked were combination of open-ended dichotomous and multiple choice questions.
The open-ended questions contain information that was otherwise not anticipated. The dichotomous
questions have the potential of a follow-up question to elicit information already given. The
multiple choice questions await the respondents with possible answers; hence, they helped to
exhaust all possible expectations and the degree of confidence which the respondents have in such
possibilities.
The questions are cohesive and well co-ordinated. The completed and returned questionnaires were
thoroughly checked to ascertain whether they have received appropriate responses or otherwise.
33
3.3.
INTERVIEW QUESTIONS
In this study, face to face (oral) interaction was conducted. Those interviewed were those at the
position to know the liquidity problems as well as the financial affairs of the banks. Also it goes like
that on the side of the CBN officials. The interviewed questions used include the following;
a. Do you have liquidity problem in your bank?
b. If yes, in what form do you have such problem?
c. If no, why?
d. What problem can these situations create in the operations of your bank?
e. What are the factors that bring about excess liquidity or illiquidity?
f. What in your opinion can the CBN do to adequately solve these problems considering the
distortion effects on the economy?
g. How effective are those measures introduced by CBN?
h. What are the effects of banks revenue requirement in banks‟ liquidity?
The above questions are different from those in the questionnaires.
3.4.
DETERMINATION OF POPULATION AND SAMPLE SIZE
For easy collection of data, First Bank of Nigeria PLC Enugu main branch and Zenith Bank PLC
Okpara Avenue, Enugu were used as samples. The observations made were used to
generalize/predict as to what is obtainable in the entire Nigerian banks and also the banking system
in general.
A total number of two hundred (200) copies of questionnaires were administered to the customers
in the two selected banks in the Enugu metropolis. The sample size of the study is one hundred and
sixty (160) in which eighty (80) respondents of member staff of First Bank of Nigerian PLC and
eighty (80) respondents of member staff of Zenith Bank PLC were randomly selected. The reason
for selecting the two banks is to be able to gather enough information on liquidity management.
34
3.5.
METHOD OF INVESTIGATION
The method of investigation chiefly adopted was the use of questionnaires and oral interview as
stated earlier. However, useful information extracted from textbooks, journals and newspapers
dealing on the subject matter were also used.
3.6.
METHOD OF DATA ANALYSIS
The chi-square statistical tool will be used in testing and analyzing the hypotheses to ensure that the
results arrived at are valid and not out of chance. It is given by the formula:
X2 =∑ (O-E) 2
E
Where X2= Chi-square
0= Observed frequency
E= Expected frequency
∑= Summation
Assumption:
Level of significance = 0.05
Degree of freedom (DF) = (R-1) (C-1)
Using this tool “chi-square” in testing hypothesis, the null hypothesis (H0), the calculated value of
the test statistics is usually compared with a critical or table value of the test statistics.
3.7.
DECISION RULE
The null hypothesis (H0) is rejected in any case where the calculated value is greater than the
critical or table value and we fail to accept null where the reverse is the case.
35
CHAPTER FOUR
4.0.
DATA PRESENTATION AND ANALYSIS
4.1.
DATA PRESENTATION
The presentation of data collected means the way of representing the various forms of data obtained
through various data collecting techniques to enable the researcher perform analysis and exact new
meaning from it. The data collected will be presented in simple tables and responses to questions in
the questionnaire will be analyzed by the use of simple percentages. Also the researcher has
designed a questionnaire consisting of ten (10) questions formulated in such a way that short
answers are given by the respondents.
The formula for calculating simple percentage is given below:
% = F× 100
∑F 1
Where % = percentage of response
F=frequency of response
∑F = sum of frequency of response
4.2.
DATA ANALYSIS
A total number of two hundred (200) copies of questionnaires were administered. Out of these, one
hundred and sixty (160) were returned. It was distributed to the management and staff in the
Department of Research, Banking and Treasury, Finance and Account Departments of the banks.
4.2.1. TECHNIQUES APPLIED
QUESTION ONE
Are you male or female banker?
36
First Bank of Nigeria PLC (FBN)
Zenith Bank PLC
Details
F
%
F
%
Male
35
43.75
56
70
Female
45
56.25
24
30
Total
80
100
80
100
Source: field survey, 2013.
The table above shows that 43.75% of respondents in First Bank of Nigeria PLC are males while
56.25% females. It also shows that 70% of the respondents in Zenith bank PLC are males while
30% are females, thus, First Bank of Nigeria PLC is dominated by females while Zenith Bank PLC
is dominated by males.
QUESTION TWO:
How long have you been in this profession?
First Bank of Nigeria PLC (FBN)
Zenith Bank PLC
Details
F
%
F
%
5 years and above
37
46.25
28
35
Less than 5 years
43
53.75
52
65
Total
80
100
80
100
Source: field survey, 2013.
The table above shows that in First Bank of Nigeria PLC and Zenith Bank PLC, 46.25% and 35%
of respondents respectively have been in this profession for 5years or above, 53.75% and 65%
respectively have been in this profession for less than 5years. Thus, both First Bank of Nigeria PLC
and Zenith Bank PLC are dominated by less than 5years bankers that have been in this profession.
QUESTION THREE:
What is your marital status?
37
First Bank of Nigeria PLC
Zenith Bank PLC
Details
F
%
F
%
Single
17
21.25
23
28.75
Married
63
78.75
57
71.25
Total
80
100
80
100
Source: field survey, 2013.
The table above shows that in First Bank of Nigeria PLC and Zenith Bank PLC, 21.25% and 28.75%
respectively of the respondents are single, 78.75% and 71.25% of respondents respectively are
married. Thus, both banks are dominated by married persons.
QUESTION FOUR:
Which of these assets are classified as liquid?
First Bank of Nigeria PLC Zenith Bank PLC
(FBN)
Details
F
%
F
%
Note and Coins
_
_
_
_
Treasury bills and Treasury Certificates
_
_
_
_
Promissory Notes
_
_
_
_
In land bill of Exchange
_
_
_
_
Negotiable Certificates of Deposits
_
_
_
_
All of the above
80
100
80
100
None of the above
_
_
_
_
Total
80
100
80
100
Source: field survey, 2013.
38
QUESTION FIVE:
Is the management of liquid assets a problem to your bank?
First Bank of Nigeria PLC (FBN) Zenith Bank PLC
Details
F
%
F
%
Yes
39
48.75
27
33.75
No
41
51.25
53
66.25
Don‟t know
_
_
_
_
Total
80
100
80
100
Source: field survey, 2013.
The table above shows that in First Bank of Nigeria PLC and Zenith Bank PLC, 48.75% and 33.75%
respectively of the respondents affirmed that liquid assets management is a problem to their bank while
51.25% and 66.25% affirmed that liquid assets management is not a problem to their bank. Thus, this
could be attributed to the fact that the management of the banks are aware of the consequences of poor
management of their liquid assets hence, adequate and proper management of liquid assets of the bank
is ensured.
QUESTION SIX:
What is the effect of poor management of liquid assets otherwise known as liquidity management on
your bank
First Bank of Nigeria PLC (FBN) Zenith Bank PLC
Details
F
%
F
%
High profit
25
31.25
26
32.5
Low profit
45
56.25
42
52.5
Don‟t know
10
12.5
12
15
Total
80
100
80
100
Source: field survey, 2013.
The above table shows that in First Bank of Nigeria PLC and Zenith Bank PLC, 56.25% and 52.5%
respectively of the respondents indicates that poor management of liquidity impacted on Nigerian
banks is reflected in the form of low profit.
QUESTION SEVEN:
39
What has been the effect of liquidity on the profitability portfolio management of your bank?
Details
First Bank of Nigeria PLC Zenith Bank PLC
(FBN)
F
%
F
%
High profit
50
62.5
49
61.25
Low profit
15
18.75
16
20
Don‟t know
15
18.75
15
18.75
Total
80
100
80
100
Source: field survey, 2013.
The result of the analysis shows that in First Bank of Nigeria PLC and Zenith Bank PLC, 62.5% and
61.25% respectively of the respondents said that liquidity plays a very important role on the
profitability of Nigerian banks whole 18.75% and 20% respectively of the respondents said that banks
are in form of low profit and the other 18.75% and 18.75% respectively said they have no idea
whatsoever.
QUESTION EIGHT:
What has been the effect of excess liquidity on the profitability of your bank?
First Bank of Nigeria PLC
Zenith Bank PLC
Details
F
%
F
%
High profit
48
60
40
50
Low profit
20
25
22
27.5
Don‟t know
12
15
18
22.5
Total
80
100
80
100
Source: field survey, 2013.
The result of the analysis above shows that illiquidity does not affect the profitability portfolio
management of banks negatively but rather positively in the form of high profit. This is attributed to
the fact that the liquid assets such as cash etch, have been tied down and invested on other profit
earning assets that are highly profitable such as treasury bills, loans and advances, commercial papers
etc.
QUESTION TEN:
What has been the impact of liquidity on the loans and advances to your customers?
40
First Bank of Nigeria PLC(FBN)
Zenith Bank PLC
Details
F
%
F
%
Reduction in loans and advances
23
28.75
25
31.25
Increase in loans and advances
45
56.25
46
57.5
No effect
12
15
9
11.25
Total
80
100
80
100
Source: field survey, 2013.
The analysis shows that in First Bank of Nigeria PLC and Zenith Bank PLC, 56.25% and 57.5%
respectively of the respondents said that liquidity increases loans and advances while 28.75% and
31.25% respectively of the respondents said that liquidity reduces the loans and advances while the
remaining 15% and 11.25% said that liquidity has no effect on loans and advances to customers.
4.2.2. HYPOTHESIS TESTING.
Hypothesis 1
Ho1- Excess liquidity does not have a significant impact on the profitability of Nigerian banks.
Test instrument: chi-square (X2)
X2 = ∑ (O-E
E
Where E = Expected frequency
O = Observed frequency
∑ = Summation
Assumptions:
I.
Level of significance is 5% or 0.05
II.
Degree of freedom (DF)
DF = (R-1)(C-1)
Where:
DF = Degree of Freedom
R = number of rows
C = number of columns
Decision rule:
41
Accept Ho1 if calculated value is less than table value, otherwise reject.
Hypothesis question – Question 8
What has been the effect of excess liquidity on the profitability of your bank?
OBSERVED TABLE
Details
High profit
Low profit
Don‟t know
Total
FBN
50
19
11
80
Zenith Bank PLC
40
31
9
80
90
50
20
160
EXPECTED TABLE
Details
High profit
Low profit
Don‟t know
Total
FBN
45
25
10
80
Zenith Bank
45
25
10
80
90
50
20
160
CALCULATION OF CHI-SQUARE
O
E
O-E
(O-E)2
(O-E)2
E
FBN High profit
50
45
5
25
0.6
FBN Low profit
19
25
-6
36
1.4
FBN Don‟t know
11
10
1
1
0.1
Zenith Bank High profit
40
45
-5
25
0.6
Zenith Bank Low profit
31
25
6
36
1.4
10
-1
1
0.1
Zenith
know
Bank
Don‟t 9
X2c = 4.2
DF = (R-1)(C-1)
= (2-1)(3-1)
42
=1×2
=2
Significance level = 0.05
Calculated value X2c = 4.2
Table value X2t = 5.991
DECISION: Since X2c = 4.2 is less than X2t = 5.991, we will accept Ho1. Therefore, we conclude
that excess liquidity does not have a significant impact on the profitability of Nigerian banks.
Hypothesis 2
Ho2- Loans and advances do not have significant impact on the profitability of Nigeria banks.
Decision rule: accept Ho2 if calculated value is less than table value, otherwise reject.
Hypothesis question – Question 10
What has been the impact of liquidity on the loans and advances to your customers?
OBSERVED TABLE
Details
Reduction in loans Increase in loans No effects
and advances
and advances
Total
FBN
23
45
12
80
Zenith Bank PLC
25
46
9
80
48
91
21
160
43
EXPECTED TABLE
Details
Reduction in loans and Increase in loans No effect
Total
advance
and advances
FBN
24
45.5
10.5
80
Zenith Bank
24
45.5
10.5
80
48
91
21
160
CALCULATION OF CHI-SQUARE
O
E
O-E
(O-E)2
(O-E)2
E
FBN Reduction in loans 23
24
-1
1
0.042
45.5
-0.5
0.25
0.005
10.5
1.5
2.25
0.214
24
1
1
0.042
45.5
0.5
0.25
0.005
10.5
-1.5
2.25
0.214
and advances
FBN Increase in loans and 45
advances
FBN No effect
12
Zenith Bank Reduction in 25
loans and advances
Zenith Bank Increase in 46
loans and advances
Zenith Bank No effect
9
X2= 0.522
DF = (R-1) (C-1)
= (2-1) (3-1)
=1×2
44
=2
Significance level = 0.05
Calculated value X2c = 0.522
Table value X2t = 5.991
DECISION: Since X2c = 0.522 is less than X2t = 5.991, we accept Ho2. Therefore, we conclude that
loans and advances do not have a significant impact on the profitability of Nigerian banks.
Hypothesis 3
Ho3
-
Shortage in liquidity does not have a significant impact on the profitability of Nigerian
banks.
Decision rule: accept Ho3 if calculated value is less than table value, otherwise reject.
Hypothesis question –Question 9
What has been the effect of illiquidity on the profitability/portfolio management of your bank?
OBSERVED TABLE
Details
High profit
Low profit
Don‟t know
Total
FBN
48
20
12
80
Zenith Bank
40
22
18
80
88
42
30
160
45
EXPECTED TABLE
Details
High profit
Low profit
Don‟t know
Total
FBN
44
21
15
80
Zenith Bank
44
21
15
80
88
42
30
160
CALCULATION OF CHI-SQUARE
O
E
O-E
(O-E)2
FBN High profit
48
44
4
16
(O-E)2
E
0.35
FNBN Low profit
20
21
-1
1
0.05
FBN Don‟t know
12
15
-3
9
0.6
Zenith Bank High 40
profit
Zenith Bank Low profit 22
44
-4
16
0.36
21
1
1
0.05
Zenith
know
15
3
9
0.6
Bank
Don‟t 18
X2c = 2.02
DF = (R-1) (C-1)
= (2-1) (3-1)
=1×2
=2
Significance level = 0.05
46
Calculated value X2c = 2.02
Table value X2t = 5.991
DECISION: Since X2c = 2.02 is less than X2t = 5.991, we will accept Ho3. Therefore, we conclude
that shortage in liquidity does not have significant impact on the profitability of Nigerian banks.
47
CHAPTER FIVE
5.0
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.1
SUMMARY OF FINDINGS
The study revealed that there two types of problems inherent in the management of liquidity. They
are the problems of excess liquidity and shortage of liquidity otherwise known as illiquidity or
liquidity crunch. The problems of excess liquidity and liquidity crunch are attributable to the
monetary authorities whose goal is to maintain an equilibrium level in the economy. To them,
excess liquidity indicates a rise in the economy, for fear of inflationary pressure while liquidity
crunch may be characterised by recession or deflation which affects business condition.
On the other hand, to the Nigerian banks, excess liquidity may or may not affect their business
adversely depending on the management. To them, excess liquidity might signify unrestrained
credit expansion of excess profit and guaranteed growth. However, if the excess profit is in form of
idle cash, it constitutes a serious setback. The major problems are the shortage of liquidity which
reduces their profitability; that is, if the shortage of liquidity situation is as a result of very low
liquid base that inhibits business expansion. The primary and secondary data collected were
analyzed through collection, sorting and grouping of data into tables of percentages and frequency
distribution. Three hypotheses were developed which were statistically tested using chi-square.
The first hypothesis tested stated that excess liquidity does not have a significant impact on the
profitability of Nigerian banks. This test revealed that excess liquidity does not have a significant
impact on the profitability of Nigerian banks and this can be linked to the fact that the calculated
value X2C = 4.2 is less than the table value X2t = 5.991.
The second hypothesis tested that loans and advances do not have significant impact on the
profitability of Nigerian banks. This null hypothesis was accepted as loans and advances do not
48
have significant impact on the profitability of Nigerian banks and this is linked to the fact that the
calculated value X2c= 0.522 is less than the table value X2t = 5.991.
The third hypothesis tested that shortage in liquidity does not have significant impact on the
profitability of Nigerian banks. This null hypothesis was accepted as shortage in liquidity does not
have significant impact on the profitability of Nigerian banks and this is linked to the fact that the
calculated value X2c = 2.02 is less than the table value X2t = 5.991.
The study also revealed that profitability will be optimized only when liquidity is effectively and
efficiently managed. i.e., financial obligations and at the same time maximizes its profit.
5.2. CONCLUSIONS
Considering the findings of this study, the following conclusions can be drawn as evidence by the
result of our analyzed data.
1. The importance of banking system to economic stability and development necessitates
effectively administered banking laws and regulations, which will serve as operating
restraints on the bank.
2. For the success of operations and survival, Nigerian banks should not compromise efficient
and effective liquidity management. They are expected to maintain optimal liquidity level
in order to satisfy their financial obligations to customers or depositors and maximize
profits for the shareholders.
3. The optimal liquidity level is reached if banks religiously maintain the minimum liquidity
requirement as stated by Central Bank of Nigeria. This attempt helps to reduce cases of
bank distress.
4. From the study, we can rightly conclude that both illiquidity and excess liquidity are
“financial diseases” that can easily erode the profit base of a bank as they affect bank‟s
49
attempt to attain high profitability level. Therefore any bank that has the aim of maximizing
its profit level must adopt effective liquidity management.
5. Effective liquidity management also requires adequate level which will help banks to
estimate the proportion of depositor‟s funds that will be demanded at any period and
arrange on how to meet its demand.
It can finally be concluded that liquidity is inversely related to profitability. That means, as liquidity
increases, profitability decreases and vice versa.
5.3. RECOMMENDATIONS
Based on the summary and conclusions of this study, I hereby make the following
recommendations with the sincere conviction that they will help reduce if not totally eradicate the
problems associated with liquidity management in the Nigerian banking sector.
1. Since the survival of Nigerian banks depends on liquidity management, they should not
solely concentrate on the profit maximization concept but should also adopt measures that
will ensure effective liquidity management. The measures will help to minimize or avoid
cases of excessive and deficient liquidity as their effects.
2. Instead of keeping excessive liquidity as a provision of unexpected withdrawal demands of
the customers, the Nigerian banks should find it reasonable to adopt other measures of
meeting such requirements which can include borrowing and discounting bills.
3. For the fact that monetary policies of CBN grossly affect liquidity management of the
Nigerian banks, CBN should take the interest of the later into consideration while
establishing and implementing these monetary policies in general and the liquidity ratio in
particular.
4. The monetary authority should as a matter of urgency encourage and legitimate the use of
credit cards and enforce cheque usage for huge amounts in the day to day business
transactions. This action will go a long way to remedy the problem of maintaining huge idle
50
cash in vault in expectation of unprecedented withdrawal, as the movement of cash will be
highly reduced.
5. The Central bank should be encouraged, maintaining a flexible minimum Monetary Policy
Rate (MPR) or discount rate so as to enable banks take advantage of the alternative
measures of meeting the unexpected withdrawal demands and reduce the tendency of
maintaining excess idle cash at expense of profitability.
6. Banks should schedule the maturity periods of their secondary reserve assets to correspond
to the period in which the funds will be needed.
7. The Nigerian banks should create a customer forum where their customers will be educated
on varieties of deposits and the operational requirements of each of them.
8. Further research is recommended on how to achieve the optimal liquidity level in Nigerian
banks. The result will help to solve the problem of excess liquidity and its reducing effects
on profits, and arbitrary high profitability with its consequent reduction of liquidity position.
Also it is recommended that research should be launched on identifying better quantitative
measures of profitability, liquidity, risk and managerial efficiency which could lead to more
satisfactory estimation of cause – effect relationship.
9. It is finally recommended that interested researchers should dwell on the same area of this
research extensively using a wider data and area of coverage.
51
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53
APPENDICES
LETTER TO RESPONDENT
Department of Banking and Finance,
Faculty of Management and Social Sciences,
Caritas University,
Amorji-Nike Emene Enugu,
Enugu State.
23/05/2013.
Dear Respondent,
I am a final year student of the above named institution, carrying on a research work on “liquidity
management in the Nigerian banking sector”. This research work is a criterion for award of B. Sc in
Banking and Finance. Your honest answer will be highly appreciated. Feel free to complete the
attached questionnaire with objective judgement as your identity is not required and all information
supplied will be treated with strict confidence and used safely for the above mentioned purpose.
Thanks in anticipation for your corporation.
Yours faithfully,
Onyekwelu Mercy .O
54
QUESTIONNAIRE
Instruction
Please tick in the box provided to indicate your choice.
1. Are you male or female banker?
a) Male [
]
b) Female [
]
2. How long have you been in this profession?
a) 5 years and above [
]
b) Less than 5 years [
]
3. What is your marital status?
a) Single [
]
b) Married [
]
4. Which of these assets do you classify as liquid?
a) Note and coin [
]
b) Money at call [
]
c) Treasury bills and treasury certificate [
d) Promissory note [
]
e) In land bill of exchange [
]
f) Negotiable certificate of deposit [
g) All of the above [
h) None of the above [
]
]
]
]
5. Is the management of liquid assets a problem to your bank?
a) Yes [
]
b) No [
]
c) Don‟t know [
]
55
6. What is the effect of poor management of liquid assets otherwise known as liquidity
management on your bank?
a) High profit [
]
b) Low profit [
]
c) Don‟t know [
]
7. What has been the effect of liquidity portfolio?
a) High profit [
]
b) Low profit [
]
c) Don‟t know [
]
8. What has been the effect of excess liquidity on the profitability of your bank?
a) High profit [
]
b) Low profit [
]
c) Don‟t know [
]
9. What has been the effect of illiquid illiquidity on the profitability/ portfolio management of
your bank?
a) High profit [
]
b) Low profit [
]
c) Don‟t know [
]
10. What has been the impact of liquidity on the loans and advances to your customers?
a) Reduction in loans and advances [
b) Increase in loans and advances [
c) No effect [
]
]
]
56