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IMPACT OF
LIQUIDITY MANAGEMENT ON THE FINANCIAL PERFORMANCE OF DEPOSIT MONEY BANKS IN
NIGERIA
ABSTRACT
The study
examined the impact of liquidity management on the financial performance of
commercial banks in Nigeria. The study adopts the use of primary data from 5
commercial banks still operating within (2012-2016), which are Zenith Bank,
United Bank for Africa, Wema Bank, Access Bank and Union Bank.
The study
employed the survey design and the purposive sampling technique to select 450
staff across management, senior and junior level. A well-constructed
questionnaire, which was adjudged valid and reliable, was used for collection
of data from the respondents.
The data
obtained through the administration of the questionnaires was analyzed using
the Pearson correlation analysis.
The results
showed that there is positive and significant relationship between liquidity
ration and financial performance (r=0.772; p<0.05); a positive and significant
relationship exists between cash reserve ratio and financial performance
(r=.896; p<0.05); a positive and significant relationship exists between
loan to deposit ration and financial performance (r=0.772; p<0.05).
The study
concludes that there is a significant relationship between liquidity ratio,
cash reserve ration and loan to deposit and financial performance in commercial
bank of Nigeria.
The study
suggested that commercial banks should ensure that expenditure are properly
managed in a manner that it will raise the company’s liquidity performance
capacity; commercial banks should direct its expenditure towards the productive
departments as it would reduce the cost of doubt and risk; there is need for
efficient management of liquidity ratio, cash reserve ratio and loan to deposit
in such a way to stimulate the company to grow.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The recent
crisis in the world economic system has unveiled some inadequacies in the
liquidity management of financial institutions. Financial institutions like
banks are seen as the backbone of the financial system, providing capital for
infrastructure, innovation, employment generation and economic development
(Edem, 2017). The fundamental role played by banks in the economy does not only
affect the spending by individual consumers but also the general growth of the
industry. During the last crisis, many
banks ran out of liquidity. Some banks raised funds at a large discount in
order to meet up with high pressure of demand for urgent cash. Liquidity
markets were equally frozen. Many financial and non-financial institutions had
to revise their corporate governance policies to accommodate market and
liquidity risk exposures. Equity prices, foreign exchange rates, commodity
prices, interest rate and credit spread had negative impact on the performance
of banks as their returns on investment and net-worth fell tremendously. A lot
of assets were devalued and some banks hardly meet their obligations as and
when due or discharge at high cost. This influenced the bank’s capacity to
stimulate productive economy evidenced in gradual decline of gross domestic
product. This is why liquidity issues have always been a concern of all the
nation’s stakeholders, because no sector of the economy can survive without
sufficient funds.
The Central
Bank of Nigeria, over the years, precisely since 1958, has formulated sound
policy to resuscitate the Nigerian financial system for sustainable economic
growth. The policy which came in the form of re-capitalization, merger and
acquisition and consolidation aimed at strengthening the financial system with
little or no emphasis on the efficiency of liquidity management. For instance,
the event of 1980s, which characterized the unprecedented level of distress
reflected by large volume of non-performing loans, problem and default in
meeting depositors and inter-bank obligations called for the innovations in
banking industry in 1986 (Okaro & Nwakoby, 2016). This innovation and other banking reforms in
Nigeria have not produced desired results in stabilizing the banking industry
due to poor implementation or sudden termination of the reforms. Government
directive to withdraw deposits of governments and other public sector
institutions in 1989 from banks to Central Bank of Nigeria and several
historical distresses in the banking sector are examples of liquidity problems
facing the banking industry in Nigeria.
However,
financial regulators have made conscious efforts to ensure that banks hold more
liquid assets than before to help self-insure against potential liquidity
problems. For example, Basel II was recently revisited to provide for more
capital buffer to hedge bank flimsiness as well as a common measure of
operational risk (Ibe, 2013). The purpose of business organizations like bank
is to maximize profit. Striking a balance between liquidity and bank return is
of utmost importance. Many approaches have been developed over the years to
measure bank performance such as the use of accounting ratios like return on
investment, return on asset and net interest margin amongst others. The aim of
the study is to analyze the impact of liquidity management on banks’ financial
performance in Nigeria.
1.2 Statement of Problem
Liquidity
management and bank performance are key factors that determine the development,
sustainability, survival, growth and performance of a banking industry and the
ability to handle the trade-off between liquidity management and performance is
a source of concern for bank managers. For instance, banks make loans that
cannot be sold quickly at a high price and also issue demand deposits that
allows depositors to withdraw at any time. Such a mismatch of liquidity, in
which a bank’s liabilities are more liquid than its assets, causes problems for
banks when too many depositors attempt to withdraw at once as it affects the
liquidity position of banks. Many banks invest in safe and high-yielding
illiquidity assets but are tied up in loans. Some banks despite having a lot of
assets, the sudden withdrawals and the lack of liquid funds lead to a huge loss
as a result of taking out emergent loans. This was identified as the major
causes of bank failures and nationalization in 2008 (Barrel & Davis, 2008),
alongside with inability to make adequate profit. As the ingredient of
measuring the “growing concern” banks for these reasons are developing, various
policies to stop runs and strategies to improve the liquidity position are
usually neglected in times of favorable business conditions, yet the issue
remains unsolved. The attempts by bank managers to increase returns tend to have
negative impact on liquidity which might be dangerous to the banks as this can
lead to loss of bank’s patronage, goodwill, decline in bank’s credit standing
and might lead to forced liquidation of bank’s asset on one hand, and
maintaining excess liquidity to satisfy customers’ demands might affect the
returns on the other hand.
Mistakes in
the planning and implementation of liquidity can affect banks operations and
might exhibit long-term effect on the economy. Profitability does not translate
to liquidity in all cases (Edem, 2017). A bank may be profitable without
necessarily being liquid. So liquidity should be managed in order to obtain an
optimal level, that is, a level that avoids excess liquidity which may mean
lack of business idea by management (Owolabi, Obiakor & Okwu, 2011). At the
same time, liquidity level should not fall below minimum requirement as it will
lead to the inability of the organization to meet short-term obligations that
are due.
1.3 Objectives of the Study
The broad
objective of the study is to examine the impact of liquidity management on the
financial performance of deposit money banks in Nigeria. The specific
objectives of the study are:
To assess the impact of liquidity ratio on
the financial performance of deposit money banks in Nigeria.
To investigate the impact of cash reserve
ratio on the financial performance of deposit money banks in Nigeria.
To explore the impact of loan-to-deposit
ratio on the financial performance of deposit money banks in Nigeria.
1.4 Research Questions
The study
attempts to provide answers to the following research questions:
To what extent has liquidity ratio affected
the financial performance of deposit money banks in Nigeria?
To what extent has cash reserve ratio
affected the financial performance of deposit money banks in Nigeria?
To what extent has loan to deposit ratio
affected the financial performance of deposit money banks in Nigeria?
1.5 Research Hypotheses
Based on the
research objectives, the following hypotheses are developed to guide the study.
The hypotheses are stated in their null forms.
H01: Liquidity ratio has no significant
impact on the financial performance of deposit money banks in Nigeria.
H02: Cash reserve ratio has no significant
impact on the financial performance of deposit money banks in Nigeria.
H03: Loan to deposit ratio has no
significant impact on the financial performance of deposit money banks in
Nigeria.
1.6 Significance of the Study
The study is
beneficial to the banking community, monetary authorities and future
researchers. The study helps the banking community to determine the appropriate
level of liquidity that should be held to ensure the smoothing running of their
operations. The study equally informs the banking industry to ascertain the
optimal amount of liquidity needed to settle short-term obligations whenever
they arise. To the monetary authorities,
the study will help the Central Bank of Nigeria to see the need to formulate
sound monetary policies with respect to monetary policy ratio; cash reserve
ratio and liquidity ratio, in order to enhance the performance of the banking
community for sustainable economic development. To future researchers, the
study served as a body of reserved knowledge that can be consulted for further
investigations on liquidity management and bank performance.
1.7 Scope of the Study
The study
examines the impact of liquidity management on the financial performance of
deposit money banks in Nigeria. The study concentrated on five banks namely
Zenith Bank, United Bank for Africa, Wema Bank, Access Bank and Union Bank. In
addition, the study covered a-five year period spanning between 2012 and 2016.
1.8 Definition of Key Terms
Liquid:
According to Business Dictionary, liquidity refers to the extent to which an
organization has cash to meet immediate and short-term obligations or assets
that can be quickly converted to do this.
Liquidity Management:
This refers to the ability of an organization to convert their assets to cash
to meet short-term obligations.
Financial
Performance: This refers to the ability of an organization to achieve its
desired objectives. The common objectives of an organization are to maximize
profit and wealth of shareholders. Certain accounting ratios such as return on
investment, return on shareholder’s fund, return on equity, return on asset and
earnings per share are usually used to measure financial performance of
organizations.
Bank: This
refers to an institution that accepts deposits from customers, provides loans
to customers/clients and acts in compliance with the directives given by the
Central Bank of Nigeria.
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