CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Liquidity management in financial context means ways with which assets can easily be convertible cash without loss and hence the bank’s ability to pay its depositors on demand (Anyanwu 1993.87).
Liquidity management also means the degree of convertibility to cash, and company must all times maintain a reasonable level of cash and near-cash assets to enable it pay its maturity and unforeseen obligations.
Also, liquidity management involves controlling the level of money supply in the economy in order to maintain monetary stability. It is judged by the case with which asset can be exchange for money. In other words liquidity is the ability to convert an asset to cash with minimum delay and minimum loss and also the ability of deposit out of cash on readily of deposit out of cash on readility marketable asset without, a bank exist to make profit and at the same time remain liquid.
Thus, liquidity and profitability are two consideration governing a banks investment and since they conflict. It is not easy to reconcile them. If a bank management is interested in profit this might lead them into investing in assets which are highly remunerative but which may not be easily converted to cash it may not earn much profit because safe investments are not remunerative. The secret of should banking consist in the maintenance of adequate reserves while at the same time make profit since to objective of the bank is to maximize his profit, wishing certain strict limitations since deposit banks deals with other peoples money (deposits) inform of demand and time deposited and these represent the obligation of the bank to pay whenever they are requested.
The bank should always allocate their fund in such a way that their portfolios should always contain an adequate level of liquid. Assets. This liquid asset are the most important balance shelf items which have the capacity to maintain the confidence of depositors which is the most valuable intangible asset to the deposit banking rustiness and the liquid assets include the following. Treasury certificate treasury bills call money, commercial paper or bill and bankers unit fund. Bank that maintains adequate reserves are likely to create year on loss of confidence.
Among the depositor over the safety of their deposits which might lead to deposit with drawl make provision of customers demand for loan and as well make sufficient profit for their share holder.
The ability of banks to meet their financial obligation is usually measured to examining their balance sheet and relating some or all of its current assets to some or all of its current liabilities. In the special cases as a deposit bank, ratio of loan to deposits is the most commonly used measure of bank liquidity for their own safety it governed among other three factors are:
Day to day fluctuation
The nature of secondary reserves and the character of reserve organization in the banking system.
Liquidity management aims at obscuring optimum interest income, determining the total amount of cash and marketable securities that bank would hold are any point in time undoubtedly banks have as their objective the desire to survive to make profit and to grow as well as improve their profitability in charging lower rules on loans including customers to borrow more and here by shifting asset out of securities in loan. In order to achieve these objectives a bank has to manage its Liquidity well to have an adequate cash at hand to meet its obligations at all times and as well make profit. The banks should equally know and believe that securities are more Liquid than loan because in withdrawal from deposits account it can sell some of its securities to raise fund.
From the forgoing, it becomes easily discernible that it is worthwhile to examine the subject of Liquidity management on deposits banks performance in Nigeria and assess and evaluate such and for the over all impact of Liquidity management on deposit bank performance.
1.2 STATEMENT OF THE PROBLEM
Proper management, no doubt; entails the achievement of the highest level of cooperate goals. Some of those goals include profit maximization, community responsibility or corporate image all expressed in the overall corporate goal of maximizing the share holders wealth. In the banking industry however the main focus has been has been on how to maximize profit while maintaining a high level of Liquidity in the system.
Obviously, the perceived role of liquidity as a hedge against high risk exposure that may arise from insolvency may have been one of the strongest reasons one for why in Nigeria. The central bank has continued to pay particular attention to the issue of bank capital base. The climax of this trend is the monetary authorities pronouncement of twenty five billion naira. (25bn) minimum capital base for all base for all commercial banks in Nigeria.
Infacts, the thinking is that a stowing capitals base will help to case the problem of liquidity on the banking industry. Since banks in pursuit of the profit maximization goals are exposed to high risk of insolvency where as idle cash runs counter to the profitability goals.
What than is the appropriate mix of profitability and liquidity for the banks? The resolution of this trade off between bank profitability and liquidity motives informed the decision to carry out this study. Consequently, the study evaluates the impact of liquidity management on deposit bank performance in Nigeria.
1.3 THE OBJECTIVE OF THE STUDY
The study on the evaluation of the impact of liquidity management on deposit banks performance in Nigeria would go a long way to help us outline the course and failure of deposit banks in Nigeria, especially it would help banks to reconcile the objectives of bank liquidity against its profitability, in the conduct of deposit banking operation.
The specific objective of the study includes the following.
a. To examine the liquidity ration of deposit banks which would help to maintain a cordial relationship between liquidity and profitability.
b. To evaluate and ascertain how banks cash reserves ratio help to solve the conflict between liquidity and profitability.
c. To use loan to deposit ration to determine and reconcile the conflict associated with liquidity and profitability.
Bank could be perfect liquid only if it held its assets in cash but then it would earn no profit or again, if the bank grants risky loan. It might increases its profits but it would also increase its potential for going bankruptcy.
1.4 SIGNIFICANCE OF THE STUDY
In our study to examine the positive and significant effects of liquidity management (against its profitability) on the deposit banks performance in Nigeria we would look into the following various significance thus.
a. The management staff of the bank would improve on their banking practice. An improvement on the banking operation would help the customer to have full confidence on banks
b. A good banking operation encourage customer to deposit or invest on the bank which bring more progress and confidence to the organization.
