Liquidity problems in commercial banking
(a case study of first of Nigeria plc
- Background of the study
- Statement of the problems
- Purpose or objective of study
- Scope or delimitation of the study
- Research questions
- Significance of the study
- Literature review
- Liquidity versus profitability
- Liquidity problem of commercial
- The Historical development of commercial banking in Nigeria
- Federal Government steps in revamping liquidity problems in commercial banks
- Summary of the related review literature
RESEARCH DESIGN AND METHODOLOGY
- Research design
- Area of study
- Population of the study
- Sample and sampling procedure
- Instrument for data collection
- Validity of the instrument
- Reliability of the instrument
- Method for data collection or administration of instrument
- Method of data analysis
- Summary of results /findings
DISCUSSION, IMPLICATION, RECOMMENDATION AND CONCLUSION
- Discussion of results
- Implications of the result
- Suggestions for further studies
- Limitation of the study
The ultimate goal of this study is to find out the effect excess liquidity has on the profitability of commercial banks, if the polices imposed by the central bank on the commercial has solved, the problems and of having excess liquidity in the commercial bank effect the relationship which exist between customers and banks.
To carry out this study, three questions were formulated.
In this study, a questionnaire was used to collect the relevant data from the staff of first bank plc Enugu main branch Enugu.
The findings revealed that on the liquidity of commercial banks in Nigeria. Under this is the historical development of commercial banks in Nigeria, the liquidity requirements and problems of banks in Nigeria as well as the steps the federal government has taken to revamp liquidity problems.
The method of data analysis, and the treats data presentation and result the excess liquidity problem in the Nigeria banking system resulted from the increased foreign exchange inflow from the oil sector.
1.1 BACKGROUND OF THE STUDY
“Liquidity of a bank means its capacity to meet promptly demanded to pay its obligation”. The most liquid of all assets of as commercial banks and the yardstick against which all assets can be measured on as liquidity scale is money (cash).
The combination of earnings and liquidity is especially relevant for commercial bank management. This is because the ultimate objective of a commercial bank is to make profit for its shareholders. To earn profits at all, the banker must maintain confidence and to maintains confidence he must maintain an adequate degree of liquidity in his assets. A bank is liquid if it holds cash assets (cash – in vault, cash reserve deposit with the central bank or cash balances with other banks) or if it holds less than their amount of cash assets; by also holds other assets (primary securities) that can be exchanged for cash assets without delay and without suffering undue loss of full market value or it has the ability to acquire cash assets through the creation of liabilities. A bank is liquid when it has sufficient cash and other liquid assets together with the ability to raise funds quickly from other source to enable it meet its payment obligations and financial commitments to its customers on time.
The amount of liquidity to hold and the forms in which to hold it are the constant concern of bank managers “Liquidity management involve the continuous estimate of and provision for a bank’s immediate short –term or seasonal as well as long term (cyclical and secular) cash requirements.
In Nigeria commercial banks activities are regulated strictly by the banking act of 1969 as amended under the central bank of Nigeria. As a result of these regulations by the central bank, the commercial banks are required to hold specific assets equal to a certain percentage of their deposits and certain other liabilities in liquid form. This is known as the legal reserve requirements. The legal reserve requirement is made up of liquidity ratio requirements, cash reserved requirements, stabilization securities issued by the central bank and special deposits.
In addition to maintaining the legal reserve requirements commercial banks also need liquidity to meet seasonal and unexpected loan demand and deposit fluctuations, and to take advantage of unexpected profit opportunities if hey are to survive in business. For instance, in the period of economic expansion, banks are frequently presented with attractive loan situation which can only be met if bank maintain adequate liquidity. To determine the liquidity a bank need at a particular time is to find the ratio of loans to deposit. The higher the ratio is, the less willing banks will be in leading out and vice verse.
For the purpose of this study, liquidity problems are looked at as the problems encountered by bank mangers who are responsible for liquidity management, when there is excess liquidity in the banking system or in commercial banks.
Since the end of the Nigerian civil war, the Nigeria financial system has been experiencing economic transformation which started as as result of the increasing inflow of foreign exchange receipt from the oil sector.
The government has excess liquidity and the banking system has little outlet for short term funds and yet are not ready to commit the bult of its short term resources to long term investments. Commercial banks are faced with excess liquidity problems, they have more funds than they can employ profitably.
As has already been mention commercial banks in Nigeria maintain liquidity to either meet legal reserve requirements or to meet unexpected demand for loans and deposit fluctuations.
But as a result of these the problems of excess liquidity in the Nigeria banking system, the instrument of the legal reserve requirements are used as measures to mop up the excess liquidity, and many more instruments have been added. This in effect, has resulted to commercial banks having most of their assets in liquid form since they are obliged to follow strictly the regulation of the central bank.
1.2 STATEMENT OF THE PROBLEMS
For purpose of this study the problems identified are classified into three which are:
- The effect of excess liquidity in the banking system on the profitability of commercial banks.
- Whether the policies imposed on commercial bank by the central bank have been able to solve these problems of excess liquidity and.
- The effect of having excess liquidity in the commercial banks on the banks relationship with their customers.
- Purpose of the study
In presenting the statement of objectives the problems identified as shown in the last page will be addressed to facilitate easy flow of ideas such as:
- To determine the effect of excess liquidity in the banking system on the profitability of commercial banks.
- to ascertain whether the policies imposed on commercial banks by the central bank have been able to solve the problem of excess liquidity.
- To find out the effect of having excess liquidity in the commercial banks on the banks relationship with their customers.
1.4 RESEARCH QUESTIONS
- To what extent does excess liquidity in the banking system effect the profitability of commercial banks?
- To what extent does the policies imposed on commercial bank by the central bank is able to solve these problems of excess liquidity.
- What effect does excess liquidity in the commercial banks have on the relationship with their customers?
- Ho: There will be no significant difference between the mean perception of commercial banks on the effect of excess liquidity on the profitability of the banking system.
Hi: There will be no significant difference between the mean perception of commercial banks on the effect of excess liquidity on the profitability of the banking system.
- Ho: There will be no significant difference between the mean perception of commercial banks on how policies imposed on commercial banks by the central banks is able to solve these problems of excess liquidity.
Hi: There will be no significant difference between the mean perception of commercial banks on how policies imposed on commercial banks by the central banks is able to solve these problems of excess liquidity.
- Ho: There will be no significant difference between the mean perception of commercial bank about the effect of excess liquidity on the relationship between commercial banks and their customer
Hi: There will be no significant difference between the mean perception of commercial bank about the effect of excess liquidity on the relationship between commercial banks and their customer
1.6 SCOPE OR DELIMITATION OF THE STUDY:
This study is designed to find out the effect of excess liquidity in the banking system on the profitability of commercial banks. The effect on profit is brought about by commercial banks having most of their assets in liquid from, the more liquid as firm is the less profitable it become, the more profitable a firm, the lower its liquidity position, therefore a balance is necessary for the continued existence of the bank the balance has to be struck by maintaining adequate level of earning assets and also sufficient volume of non-earning assets in the banks portfolio.
This study also goes to investigate whether or not the policies imposed on commercial banks by the central have been able to solve these problems of excess liquidity. Where the monetary policy demand high liquidity requirements, the banks have to invest less in earning assets and make less profit. A reduction in the liquidity requirements will make the banks to lend more and make profit.
It also emphasizes on the effect of having excess liquidity in the commercial banks on the banks relationship with their customers. Banks are expected to keep adequate level of non-earning assets to meet the depositors demand and to maintain public confidence.
1.7 significance / rational of the study
The significance of this study can only be made possible if the bank managers maintained adequate level of earnings assets and sufficient volume of non-earning assets in the banks portfolio. This is turn will help to.
- Reduce excess liquidity in the banking system so as to yield more profit.
- Reduce high liquidity requirements which usually increases liquidity position of the central bank in an effort to meet such monetary.
1.8 DEFINITION OF TERMS: LIQUIDITY
Liquidity: Is the state of owning things of value that can easily be exchange for cash, financial institutions must maintain sufficient liquidity to meet the demands of depositors requirements of the monetary control authorities.
- Education the customers to understand the implications of these policies imposed on borrowers, like advance deposits for letters of credit in order to maintain proper bank / customer relationship.
- Make the central banks relax some of those polices which the implementation causes a persistent excess liquidity in the banking system.
- Encourage the commercial banks to invest in liquid assets as well as in less liquid asset which will help balance liquidity and profitability since less liquid assets yield more profit than very liquid assets.
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