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LIQUIDITY PROBLEMS IN COMMERCIAL
BANKS (A Case Study Of First Bank Of Nigeria)
ABSTRACT
This
research is titled “Liquidity problem in commercial banks” (A case study of
first banks of Nigeria).
The key
objective of this research work is to find out impact of liquidity problem in
Nigerian commercial banks. The project is expected to contribute on efficient
management of bank liquidity and academic contribution since it contributes to
existing literature.
The problem
this research is set to solve is that over the years banks have continued to
fail as a result of inadequate liquidity in commercial bank which rise as a
result of poor management of cash and credit facilities given to customers. The
researcher used library materials and field work to elicit information.
The
population of this study consist all the commercial banks in Nigeria but it is
restricted to only first bank of Nigeria. In Aba and Owerri in the sample size
of 35, this is guided by the knowledge of the bank.
The
researcher made use of simple tabulation, percentages and chi-square
statistical method. The researcher tested the hypothesis and the following
findings were made.
In the
finding it showed that credit facilities given to customers do not affect the
liquidity of commercial banks and liquidity management in commercial banks help
banks get out of liquidity problems.
In
recommendation, commercial banks should endeavour to maintain equilibrium
between profitability and liquidity, also try and insure their bank with the
national deposit corporation. Also the central bank should provide close
monitor, and supervisions on the commercial bank, to see that proper liquidity
is maintained.
TABLE OF
CONTENTS
Title Page
Approval
Page
Certification
Page
Dedication
Acknowledgement
Abstract
Table of
Content
CHAPTER ONE
1.0
INTRODUCTION
1.1
Background of the Study
1.2
Statement of Problems
1.3 Needs
for the Study
1.4
Objectively of the Study
1.5 Research
Question and Hypothesis
1.6 Scope of
the Study
1.7
Assumptions of the Study
1.8
Limitations of the Study
1.9
Definitions of Terms
CHAPTER TWO
2.0
LITERATURE REVIEW
2.1 Nature
of Liquidity
2.2 Roles
and Importance of Liquidity
2.3
Liquidity versus Profitability
2.4
Equilibrium between Liquidity and Profitability
2.5 Problems
of Liquidity
2.6
Management of Liquidity Problems
2.7 Tool for
Assessing Liquidity in Banks
2.8
Computation of Liquidity Ratios
2.9
Measurement of Bank Liquidity
2.10
Statutory Requirements
2.11 Stock
Concept (Ratio)
2.12 Cash
Flow Approach
2.13 Factors
Affecting Liquidity of Commercial Banks
2.14 Federal
Governments Steps towards Solving Liquidity Problems in Commercial Banks
CHAPTER
THREE
3.0
THEORETICAL FRAME WORK AND METHODOLOGY
3.1
Introduction
3.2
Theoretical Frame Work
3.3 Nature
of Data Sources
3.4 The
Methodology
3.5 Data
Selection and Analysis
CHAPTER FOUR
4.0
PRESENTATION AND DATA ANALYSIS
4.1
Introduction
4.2 Data
Presentation, Classification and Calculations
4.3 Analysis
of Data according to Research Hypothesis
4.4 Analysis
of Data to Test Hypothesis
4.5
Interpretation of Results
CHAPTER FIVE
5.0 SUMMARY,
CONCLUSION AND RECOMMENDATION
5.1
Introduction
5.2 Summary
of Findings
5.3
Conclusion
5.4
Recommendations
5.5 Area of
Further Study
Bibliography
Appendix
CHAPTER ONE
1.0
INTRODUCTION
Banking
operation which can be traced back to the early colonial period has helped in
economy growth and development of a country.
In Nigeria,
the existence of commercial banking started with the establishment of African
Banking Corporation in 1892. The purpose of this was to distribute British
currency in Lagos and other areas or district. In 1894, the British bank for
West Africa was formed which took over the functions of the African Banking
Corporation. In 1899, Bank of Nigeria later joined the British Bank of West
Africa in 1912. In 1917, Barclays Bank was formed; these were the three first
commercial banks to operate in Nigeria. First Bank of Nigeria Plc originated
from British bank for West Africa the Union Bank of Nigeria Plc originated from
British Bank for West Africa, the Union Bank of Nigeria originated from
Barclays Bank.
Furthermore,
indigenous commercial banks were incorporated to commence operation; the first
among all was the industrial and commercial banks in 1927, which failed in
1930. Following were the indigenous commercial bank that followed suit.
The National
Bank of Nigeria 1933 Agbomagbe Bank, now Wema Bank Plc in 1946.
After the
first banking ordinances in 1952, many banks died off as a result of inability
to meet up with the law. But the African Continental Bank and Agbomagbe bank
were able to survive the ordinance.
Banking is
an institution, which accept deposits of money and repays cash on demand.
Though it provides many services to their customers, its main objective
immediate needs with interest. (i.e.) the banks take from the surplus units and
give to the deficit units.
For the bank
to be able to meet the demand of their customers, they have to maintain good
liquidity position. The liquidity of bank means the case to which a bank can
convert it’s assets into cash. To maintain good liquidity position, banks have
to keep adequate volume of non-earning assets the bank, which include. Cash,
which is the most liquid assets of the bank, call money treasuring bill,
short-term stock certificate of deposit and other short-term measuring
instruments in its portfolio.
Rationale
for maintaining liquid assets by banks in its portfolio include:
a. Meeting
the reoccurring expenditure and profitable investment opportunities to come in
future and also meeting the central bank’s liquidity prescriptions.
b. To meet
the demands of the customers
c.
Maintaining public confidence.
However,
banks like other business are profit oriented, therefore banks should invest in
caring assets. Banks could only invest on earning assets when there are enough
deposits in the bank. Banks are said to be maintaining profitability position
when their earning is high. It is believed that in cause of banks making profit
or investing in earning assets bring about liquidity problems in banks.
Therefore,
equilibrium has to be maintain between liquidity and profitability though it’s
always a conflicting concept.
1.1
BACKGROUND OF THE STUDY
Pre
independence period
The bank
traces its history to 1894 and the bank of British West Africa. It originally
served the British Shipping and trading agencies in Nigeria. The found or,
Alfred Lewis Jones, was a shipping magnate who originally had a monopoly on
importing silver currency into West Africa through his Elder Dempster shipping
company according to him without a bank economics were reduced to using barter
and a wide variety of mediums of exchange, leading to unsound practices. A bank
could provide a secure home for deposits and also a uniform medium of exchange.
The bank primarily financed foreign trade, but did little lending to indigenous
Nigerians who had little to offer as collateral for loans.
Post
independence
In 1957,
Bank of British Africa changed its name to Bank of West Africa. After
independence in 1960, the began to extend more credits to indigenous Nigerians.
In 1965,
standard bank of South Africa acquired Bank of West Africa and changed its
acquisition name to standard Bank of West Africa. In 1969, standard Bank of
West Africa incorporated it In Nigerian operations under the name standard bank
of Nigeria. In 1971 it listed its shares on the floor of Nigerian stock
exchange and placed 13% of its share capital with Nigerian investors. Then
after the civil war the bank was control by indigenous directors hence it
change its name to first bank of Nigeria.
Presently
the bank is one of the top banks in Africa and one of the largest financial
groups in Nigeria. The current chairman is Umarn Metallab the bank is the
largest retail lender in the nation, first bank has created a small market for
some of its retail clients.
At the end
of August 2006 the bank had assets to totaling N650 billion Naira ($5 billion
dollars). It was also the most highly capitalized stock on the Nigeria stock
exchange and had about 10 billion outstanding shares. The bank auditors are
Akintola Williams Deloitte and Touche (Chartered accountant). The firm has
solid short and long ratings due to its low exposure to non-performing loans.
1.2
STATEMENT OF PROBLEMS
Over the
years, Nigeria commercial banks have been facing series of re-capitalization.
These ranges from two million (N2000000) to five million (5000000) to 500
million (500.000, 000) and now it is twenty five billion (25,000,000.000).
In spite of
these, banks have continued to fail in meeting their financial obligations as
at when due. People are worried as to whether the liquidity problem in Nigeria
banks can be solved. It is on this premise that this research work is carried
out. This work is aimed at identifying the problems of liquidity in commercial
banks. These problems include:
1. To what
extent are banks faced with liquidity problems.
2. Com
adequate liquidity management help bank to get out of distress.
3. To what
extent to the loan and advances given out to customers affect the liquidity of
commercial banks.
The problems
of bad debts and fraud, which have continued to plague the commercial banks
liquidity position, problem of excess investment on non-earning assets that
affects the profitability and liquidity of commercial banks. In any case this
research will attempt to solve the above problems.
1.3 NEED FOR
THE STUDY
This work
will help banks in no small measure to formulate policies that will help them
to strike a balance between profitability and liquidity.
Merchant
banks and other related banks with similar problems will equally benefit from
this work. Also it will also help banks to channel their assets in the form of
loan and advances to areas of high profitabilitys, credit worthy and honest
customer.
Furthermore,
this work will help the government and monetary authorities towards the
formulation and implementation of their monetary and fiscal policies and also
this research will serve as a reference point to other researchers.
1.4
OBJECTIVES OF THE STUDY
This
research is set out to:
a. Find out
the effects of various liquidity problems of commercial banks on their
profitability.
b. To find
the effects of loans and advances to
Customers
and their effects on the liquidity of banks and loans policies.
c. To find
out the effects of liquidity problem in relation to deposit from customers.
1.5 RESEARCH
QUESTION /HYPOHESIS
RESEARCH
QUESTION
1. What are
the effects of liquidity problem in commercial banks? As regards their
profitability and customers relations?
2. What
extent can the loan and advances give out to customer’s affect the bank’s
liquidity?
3. To what
extent has investment in non-earning assets affects the bank’s liquidity?
RESEARCH
HYPOTHESIS
For further
proceeds, the hypotheses below have been formulated.
H0:
Liquidity problem in banking system do not affects profitability of commercial
banks.
Hi:
Liquidity problem in the banking system affects the profitability of commercial
banks.
H0: Credit
facilities granted to customs do not affect the banks.
Hi: Credit
facility granted to customers affect the liquidity of commercial banks.
H0:
Liquidity management in commercial banks does not help banks to get out
distress problems.
Hi:
Liquidity management in commercial banks helps bank to get out of liquidity
problems.
1.6 SCOPE OF
STUDY
The sources
of this work are restricted geographically to Owerri and Aba that is to say
that the data in this work regarding liquidity problems and management are from
Owerri and Aba branches.
This
research work which is based on the experiences of excess and inadequate
liquidity in our commercial bank which is to be considered.
1.7
ASSUMPTIONS OF THE STUDY
There are
some assumptions made in this work which will guide the writer based on the
problem as for the purpose of this study, the following assumptions were made:
1. Liquidity
in banking systems affects profitability of the bank.
2. Adequate
management of liquidity and profitability position enhances efficiency and
effectiveness in banking system.
3. Excess
profitability position in a banking system affects liquidity position of banks.
4.
Equilibrium between profitability and liquidity position reduces problem in
banking system.
1.8
LIMITATIONS OF THE STUDY
In the
course of carrying out this study, the researcher was confronted with many
kinds of constraints.
To collect
this data at different branch locations, photocopying of materials that serve
as reference this entails huge financial commitments, the finance is not only
the problems, but also the time involved is insufficient for the researcher to
carry out the study. Also the non-co-operative attitude portrayed by some staff
who felt that their bank secretes are begin exposed forms another limiting
factor, further, the non-availability of current information from textbooks
also serve as one the limiting factor.
1.9
DEFINITIONS OF TERMS
Money at
Call: This is overnight loan granted to banks for the purpose of meeting
liquidity pressure on borrowing banks.
Bank
Deposits: These are amount outstanding to the credit of the customers of a
bank. Bank pays back these deposits on demand.
Bankers
Acceptance: These are commercial documents which banks have accepted
responsibility to pay in case debtors default.
Treasury
Bills: This is a government security: it is a short-term instrument issued with
a maturity of 91 days. This is issued by the central bank to control the amount
of money in circulation and it used to raise finance for the government.
Bank Fraud:
This is a conscious or deliberate effort aimed of obtaining unlawful financial
advantage at the detriment of another person who is the rightful owners of the
fund.
Equity/debt
Swap: This is an arrangement used for solving debt problems. The bond holder
exchanges their debt instruments for equity holding, this converts the
creditors to equity holders (share holders).
Liquidity
Risk: This is when bank finds it difficult to meet it’s commitments when due
and to undertake new transactions when desirable.
Credit Risk:
This is the risk on the interest or the principal or both on loan and security
will not be paid as agreed.
Liquidity:
This is the speed with which an assets can be converted into cash.
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