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PROFITABILITY AND LIQUIDITY IN
COMMERCIAL BANK (A Case Study Of Afribank Plc Enugu Branch)
ABSTRACT
This is a
work based on a topic which has been critically viewed by many people as an
area which has been under serious treat in recent years.
The banking
industry has for some times come under heavy supervision as to whether there
should be any reliability on the industry or is it just collecting money from
people today and then go in to distress, the next day. With the help of this
reform program, the central Bank of Nigeria (CBN) has on July 2004 announced a
major reform program aimed at transforming the banking landscape of the
country. The main thrust of the 13 point reform agenda then was the
prescription of minimum share holder’s funds of 25 billion not later than
December 31 2005. Also the central bank of Nigeria (CBN) announced on the 1st
of January 2006 that 13 out of 89 banks failed to meet its 25 billion
capitalization target and therefore is to be liquidated. And then the number of
banks that emerged at the consolidation exercise was 25 banking groups, and
Afribank plc which is my case study is among those banks that were given fresh
licenses to operate in Nigeria. This work is to bring to memories of people the
role the banking industry plays and they generate its revenue. And expenditure
further more, it went ahead to establish a firm prove on the relationship
between profitability and Afribank Plc. The researcher went further to outline
the functions of commercials banks. The core of its assets and liabilities how
they most operate to remain liquid and the danger of excess liquidity.
The researcher
analysed a financial report of the bank (Afribank Plc) and was able to show the
growth trend of the bank and finally made recommendations on the liability of
the bank and its prospect in the years to come.
TABLE OF
CONTENTS
Title Page
Approval
page
Dedication
Acknowledgement
Abstract
Table of
content
CHAPTER ONE
1.0
INTRODUCTION
1.1
Background of Study (Afribank)
1.2
Statement of Problems
1.3 Research
questions and Hypothesis
1.4 Purpose
of study
1.5
Significance of Study
1.6 Scope
and Limitation of the Study
1.7
Operation Definition of Terms
CHAPTER TWO
2.0 REVIEW
OF RELATED LITERATURE
2.0
Functions of a Commercial Bank
2.1 Assets
and Liability Quality and Structure
2.2 2.1.1
Monetary Policy Administration in Nigeria
2.1.2
Deposit Fluctuations
2.1.3
Behaviours of Bank
2.1.4
Behaviours of Non Bank (Public)
2.3 Banks
Capital Adequacy
2.4 Business
and Financial Risk Analysis
2.5
Competition in Banking Industry
2.6
Liquidity Management
2.5.1
Liquidity Doctrines
2.6 Commercial
Loan theory
CHAPTER
THREE
3.0 RESEARCH
METHODOLOGY
3.1
Population and Sample Size
3.2 Nature
and Sources of Data
3.3 Data
Collection Method
3.4 Data
Analysis Techniques
CHAPTER FOUR
4.0 DATA
PRESENTATION AND ANALYSIS
4.0
Introduction
4.1
Financial Statement Presentation
4.2 Data
Analysis
CHAPTER FIVE
5.0 SUMMARY
OF FINDINGS CONCLUSION AND RECOMMENDATIONS
5.0 Findings
5.1
Conclusion
5.2
Recommendation
Bibliography
Appendix
CHAPTER ONE
1.1
INTRODUCTION
BACKGROUND
OF STUDY
Banking in
Nigeria has gone through very dramatic changes, since the appointment of
(professor charles soludo) as the new Governor of central bank of Nigeria on
Tuesday 6th of July 2004 signaled the beginning of a revolution in the Nigerian
Banking industry. Before the appointment of (Professor Charles Soludo) C.B.N
pronouncement was that the operation of the banking system was nothing to write
home about, indeed the banks were rated sound and satisfactory. While 25 were
rated marginal and unsound, exhibited weakness ranging from under
capitalization and solvency, weak and poor assets quality, poor earnings,
management illiquidity.
To put
things right and ensure a sound banking system for Nigeria (Soludo) proposed a
13 point banking reform programme that anchored on the following.
- Capital
base requirement of N25 Billion through consolidation of Bank via merger and
acquisition by December 31st 2005 etc. To create a safe banking system, the
apex bank must have been encouraged by the fact that global size has become an
important ingredient for success. Furthermore an enhanced capital base given a
bank a competitive edge enables it to acquire relevant technology to engage
high quality personnel to absorb cost to provide better services and ultimately
increase in its earning although the 25 billion minimum capitalization
requirement and the bank consolidation exercise is meant to create a sound
banking system that depositors can trust, it does not necessarily guarantee or
address the observed weak corporate governance practices excessive risk taking
poor credit policies and administration loans Nigeria banking system.
The reform
of the banking system is the right panacea the country needs for the industrial
take off. This is in view of the fact that banking system plays a critical role
in the economic growth and development of a country.
According to
Prof. G. O Nwankwo, (1991), since they are the providers of the means of
payment a failure in banking system could have a devastating consequences on
the economy especially as financial institutions and markets are key
intermediaries through which government bring their macro economic activity.
In banking
transactions, the commercial banks operate on a profit. Motivated basis that is
their sole aim of being in operation is for profit maximization and they try to
make their shareholders happy by recording huge profit in their financial
report every year. Banks represent a significant and influential sector of the
economy and play a major role in the monetary system. There is, therefore
considerable and widespread interest in their management and performance.
The quality
of their financial statement will help to foster public confidence in the banks
as well as in evaluating their performance.
A little
history of banking in Nigeria needs highlighting to enable us form a firm
understanding of the business generally. Modern commercial banking in Nigeria
dates back to early colonial period. The decline in barter system of trade and
the rise in financial transactions of the colonial government required on
institution in the form of a commercial bank for safety and transmission of
funds it was for this purpose that African Banking corporation based in South
African was invited in 1892 to open a branch office in lagos.
The African
banking corporation was therefore the first modern commercial bank to open a
branch office in Lagos but its existence was made precarious by the trade
depression, which hit lagos in that year. In the years 1894 its operation were
taken over by the bank of British for West Africa. Later, its name was changed
to standard Bank for West African Ltd. In compliance with the company’s act of
1968, this pioneer expatriate bank has incorporated in Nigeria s the standard
bank of Nigeria Ltd. The bank changed its name was changed his name in 1978 to
first bank of Nigeria limited Liability company (PLC). We have also another one
called Barclays Bank (Dominion Colonies overseas) which came into Nigeria
banking scence in 1917. Through also the companies Act of 1968, the bank
changed its name to Barclays Bank of Nigeria limited. And in 1978 it was
re-named Union Bank of Nigeria which is now a public limited company.
There were
few of these banks that were purely indigenous right from outset which
represent the effort of Nigerian business men to establish their own banks
since the expatriate banks have not been particularly interested in giving them
assistance they normally require to manage their own business.
In order to
break the monopoly of the colonial banks indigenous banks Mushroomed, in the
absence of a banking ordinance to regulate banking business. The first attempt
to establish an indigenous bank was in 1929. Indigenous West African
businessmen resident in London required a bank in London and transferred its
operations to Lagos.
Because of
bad management the industrial and commercial bank folded up in 1930. The
Nigeria Mercantile Bank founded in 1931 collapsed in 1936, but the relational
bank of Nigeria founded as a public company in 1933, survived an early collapse
apparently because of prudent financial management.
Between 1947
–1952, well over twenty banks sprang up in the country. Almost all the mushroom
banks formed during that period, as most of them were little different from
wayside football ditch filed away before December 1959 because of:
1. Absence
of a Regulatory authority and lender of the last Resort
2. Under
capitalisation and over branding
3. Poor
customer patronage
4. Poor
liquidity
5. Poor
quality manpower.
The
government as a result of its concern over the menace and potential danger
posed for the nations economy by unregulated banking industry (as evidence by
the crop of mush room banks), issued its first banking ordinance in May 1952.
The ordinance required thus
(1) New
banks incorporating in the country to have a minimum normal capital of
N50,000.00
(2) New
Banks to incorporate with a minimum paid-up capital of N25,000.00
(3) Foreign
bank not incorporated in Nigeria to show evidence of paid-Up capital of N200.000
(4) All new
banks to obtain a licence from the finance secretary before operating.
(5) At least
20% of profit must be paid into the banks reserve until the value of reserve is
equal to the paid-up capital.
In 1991, two
new banking legislations were passed in Nigeria. They are central Bank of
Nigeria Decree N0.24 and the banks and other financial institutions Decree
N025. the banks and other financial institutions Decree (BOFID) which replaced
the 1969 banking Act and all its amendments, distinguished between the use of
the word “Bank which applies to the central Bank of Nigeria and the word “bank”
which applies to other banks. It went ahead to define the word “bank” as a bank
licensed under the banks and other financial institutions Decree 1991. therefore,
BOFID 1991 defines banking business as “the business of receiving deposits on
current account, saving account or other similar account, paying or collecting
cheques drawn by or paid in by customers: Provision of finance or such other
business as the governor of (the C.B.N) may by order published in the Gazette.
In the past
people might have been carrying on banking business without any licence, but
now it is not so. Specifically, section 2(1) of the BOFID 1991 state that “No
person shall carry on banking business in Nigeria except it is a company dully
incorporate and holds a valid banking business to carried out in Nigeria. It
must be licensed according to the laws. Then, for a commercial bank, the bank
and other financial institutions Decree 1991, defines it as “any bank in
Nigeria whose business includes the acceptance of deposits, withdraw-able
cheques. This is the major destination between category of bank of banks and
others only the commercial Kingdom, they are simply referred to as clearing banks.
One striking feature about the ownership of Nigerian commercial bank is the
state and federal government participation in Nigeria banking dates back to
1952 when two states government came to rescue the three them surviving
indigenous banks. The Eastern Regional Government rescues the African
Continental Bank, and Aghonmaghe bank (now Wema bank) were rescue by the
government of Western region.
The Federal
government on the Other hand came into banking business participation in 1974,
when the federal government required 40% share in “Big three” expatriate banks.
The standard Bank of Nigeria (Now first Bank) Barclays Bank of Nigeria (now
union bank) and United Bank of African. The Federal Government later increased
their share holding to 60% in 1976. All these are in a bid to check the
activities of these banks.
Since the
C.B.N. Decree No. 24 of 1991 and the other financial institutions Decree No 25
of 1991 came into being more laws relevant to a sound banking operation have
been promulgated, they included.
- Failed
Banks (debt Recovery) and other financial malpractice Decree No. 18, 1994:
- Money
laundering Decree No. 3 1995 and
- Foreign
exchange (monitoring and miscellaneous provisions) Decree No. 17 1995.
The three
decree, though promulgated for purposes different from the CBN Decree No 24 and
BOFID No. 25 both of 1991, have helped to sanitized banking operations in
Nigeria, which is also a main objective of C.B.N. Decree No. 24 and BOFID No 25
the federal government in its 1997 budget mandated commercial banks to increase
their mandatory minimum equity capital requirement to N500,000,000 (five
hundred million). By 1999 the minimum capital of new banks was raised to N1
billion. By 2001 minimum capital was further raised to N2 billion for new
banks. And the new regulation according to Charles Soludo the C.B.N Governor
2004 during financial institution summit held at Abjua on 6th of June 2004 has
directed all commercial banks to increase their minimum capital from N2 billion
to N25 billion by December 2005 with this new directive, the banks will have
enough equity capital for its transactions thereby leasing the rampant eases of
distressed banks in the economy.
1.2
STATEMENT OF PROBLEM
Commercial
banks as we know have a role to pay in the economy, which is seen by investors
and lenders of money as an in evitable function or activity necessary for the
development of the economy. It is a well know fact that commercial banks are
profit oriented and to commercial bank management this has been a never-ending
“tug of war”.
This war is
pitched between liquidity and safety on one hand and earnings and profitability
on the other hand. Prof. Nwankwo G. O (1988) P 8-10 “commercial bank is like a
servant serving two masters at the same time”
The
liquidity of a bank, hence its safety is necessary because of the nature of its
liabilities. A high proportion of the commercial banks liabilities are made up
of demand deposit (current accounts deposits and savings deposits) with all
these in view we see that the banks have enormous responsibility they encounter
problems that tends to stop their existence.
The
following are factors that constitute current threats I challenges to the
commercial banks.
1. There is
a high cutthroat competition among banks.
2. There is
lack of consistence and severe policies
3. Lack of
appropriate management techniques and laxity on the banks
4. A lot of
fraud and fraudulent practices gong on in the industry
5. There is
high level of bad (indigenous lending.
6.
Recruitment of staff based on personnel connection instead on merit.
7. The
banking industry is highly regulated to a point of conflicts on the regulation
1.3 RESEARCH
QUESTION AND HYPOTHESIS
1. Is there
high cutthroat competition amongst banks?
2. Are three
lacks of consistency in issuing policies?
3. Is the
management efficient and effective
4. Are there
fraudulent practices in the banking industry?
5. What
gives rise to high bad debt/injudicious lending in the industry?
6. Is the
banking industry highly and closely regulated?
7. What
method of employment is obtainable in the banking industry.
HYPOTHESIS
The belief
that the liquidity and profitability related, as one rises the other falls,
liquidity determines profitability of an asset. But in Nigeria the reverse
tends to be the case. The null hypothesis (HO) and my alternative hypothesis
(Hi) are formed on these bases.
Ho:
Liquidity of assets of a bank is inversely related to the profitability of the
banks portfolio.
The above
mentioned hypothesis is what is obtainable in a banking operation in the later
chapter (ie chapter 4) I shall look closely to this assertion with the aim of
finding out which hypothesis is true of Nigerian commercial banks in general
and Afribank in particular. And the necessary recommendations will be made.
1.4 PURPOSES
OF STUDY
The
following are the purposes of the study
1. To look
into the equitability of commercial bank profitability and liquidity
2. To find a
solution to these uncontrolled issues of policies
3. To find a
way of checking mismanagement of commercial bank funds
4. To
proffer suggestion on ways of minimizing fraud in the banking industry
5. To
determine if there is a definite relationship (direct or inverse or no
relationship) between the liquidity and profitability.
6. To find
out the performance level of the bank (Afribank) which yields a huge.
7. Profit is
it based on management efficiency or staff?
8. To find
out the method of recruitment of staff at the bank (Afribank)
1.5
SIGNIFICANCES OF STUDY
My intention
in carrying out this study is to make little contribution to the already
over-screeched issue. The major significance so to say is to educate, highlight
and bring to focus the basic and conflicting rudiment of commercial bank fund
management and the banking operation in existence. I noticed a near absence of
information or facts on figures about the profitability of commercial banks in
Nigeria. Most writers try to concentrate on the liquidity of the operation but
I want to compare the liquidity level of commercial banks as against its
profitability and then bring out their relationship. Based on this knowledge
the intends to make a more balanced study on this aspect of commercial banking
operations, via profitability and liquidity.
1.6 SCOPE OF
LIMITATIONS OF STUDY
The scope of
this study is very wide if it has to be carried out in all commercial banks in
Nigeria. But, in this type of study, which involves analysing the bank
statements or its annual report on its activities, the amount of data available
and its type obviously limit the extent of and the throughout of analysis.
Information and data available are basically secondary and in fact final figure
as reported by the bank is near impossible because of the general attitude of
hoarding information by banks management and staff. They said, it was for
security purpose.
There is no
gain saying in stating the obvious fact that banks sometime use.
PROFITABILITY:
Is the measure of the level of income which a bank earns from its operations,
residue earnings, after charging interest paid out, total expense, taxes etc.
VIS-À-VIS:
This is Latin word, which is used in comparison between two relative factors.
That is, how one factor affects the other in relation to the output or outflow?
BANK RUN: Is
a situation where the knowledge of an impending liquidity arises, typically
ignited when some banks failed, it causes frightened depositors in others banks
to reach in to withdraw the deposits.
EQUITY
CAPITAL: This is the required capital, which is expected of every bank to have
before commencing banking transactions. It also called the authorised capital.
WINDOW
DRESSING: This is an idiomatic expression, which means that banks, normally,
give false financial report about their banks, thereby stating huge profit when
in actual fact, the made little or no profit.
SHARE
CAPITAL: Share capital shows the contribution in the form of total per value of
share held by the owner share holders of the bank. Share capital most of which
are ordinary shares, are issued out to the public who then subscribe and pay
the money value of the shares allotted to them.
SHARE
PREMIUM: Is the margin placed about the nominal value of a share due to the
attractiveness of the shares to the buying public.
RESERVES
Represents
amounts set aside for some purposes. Statutory re-services are the amount of
money that is stipulated by law to be set aside out of profits. There are also
revenues, profits. There are also revenues and capital reserves, profit and
loss account.
LONG-TERM
LIABILITIES
Debentures
or loan capital are medium or long-term focus to bank the banks credit
expansion.
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