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The Impact Of Liquidity Management On Commercial Bank
Profitability
The Impact Of Liquidity Management On Commercial Bank
Profitability
ABSTRACT
This study examined The Impact of Liquidity Management on
Commercial Bank Profitability a case study of oceanic bank international plc.
Effurun, Delta State. This study revealed that commercial banks are faced with
two conflicting objectives namely: liquidity optimization and profitability
optimization to contend with. The researcher also showed that the problem of
these two conflicting objectives became too complex in modern banking subsector
which is characterized by competition. Based on this problem, the study of the
impact liquidity management will have on commercial bank’s profitability was
carried out to determine ways of resolving the problems associated these
conflicting objectives. As regards the methodology used in this study, the simple
percentage statistics was used in analyzing responses from questionnaire which
was administered to bank staff and executive of Oceanic bank international plc.
Finally recommendations were given by the researcher on how these problems will
be resolved.
CHAPTER ONE
1.0
INTRODUCTION
1.1 BACKGROUND OF
THE STUDY
In every
system, there are major components that are very important for the survival of
the system. This is also applicable to the financial system. The financial institution
have contributed immensely to the growth
of the entire financial system, as they offer an efficient institutional method
through which resources can be mobilized and directed from less productive uses
to more productive uses.
In performing
these financial role, the financial institutions has proved to be an effective
link between savers and borrowers, among the financial institutions that have
partake in these important financial role are the commercial banks. The
functions of the commercial banks have become the strong base for the two major
functions of the commercial banks namely deposit mobilization and credit
extension. Commercial banks have become a very important institution in the
financial system as it helps in facilitating the movement of financial assets
that are less desirable to the more desirable public who needed the financial
assets. In view of this role and activities commercial banks play in the
society, the commercial bank is selected as the main focus of this study.
An adequate
financial intermediation requires the attention and focus of the bank
management to the profitability and liquidity, which are the two conflicting
objectives of the commercial banks. These objectives are parallel in the sense
that an attempt for a bank to achieve higher profitability will gradually
destroy its liquidity and solvency position and vice versa. Practically,
profitability and liquidity are effective indicator of the corporate wealth and
performance of not only commercial bank but to all profit oriented venture.
These performance indicators are very important to the shareholders and
depositors who are major publics of a bank. As the shareholders expect the bank
to increase lending in order to give them maximum return in money invested
while the depositor expect the bank to keep much idle cash in order to meet
their demand. With profitability objective conflicting with that of liquidity,
and with the interest of the shareholders conflicting with that of the
depositors, there is the need for reconcile and harmonize these conflicting
positions through effective liquidity management so as to ensure the survival
and growth of the commercial banks.
1.2 STATEMENT OF
PROBLEM
Through
these financial roles, the commercial banks use the idle funds borrowed from
the lenders by investing such funds in other classes of financial assets
investment. These business activities of the bank is not done without problem
facing it, since these deposit which have been invested by the banks for profit
maximization can be demanded for at any time. When the bank is not able to meet
their financial obligations, the public begins to loss confidence and these
will cause lot of competition to the financial sector. With the high increase
of competition in the banking industry, every commercial bank should strive to
operate on profit and at the same time meet the financial demand of its
depositors by maintaining adequate liquidity. The problem then becomes how to
select the optimum point at which commercial bank can maintain its assets in
order to optimize these two objectives. These problems become more difficult as
a large number of banks are basically engaged with profit maximization and tend
to neglect the importance of liquidity management and these can lead to
technical and legal insolvency.
This
research work will also see to other problems such as the effect of excess
liquidity and the problem of estimating the proportion of the deposits that can
be demanded for at any specific time, selection of factors that will affect or
influence the bank liquidity level and finally problem of satisfying the two
major publics of the commercial bank simultaneously. With these solutions will
be prescribe and recommendations will be made where necessary.
1.3 OBJECTIVE OF
THE STUDY
The
competition environment of the financial institutions is to tense that any
commercial bank that aims to survive must be aware of the challenges of its
liquidity and profitability obligation as both variable can make or destroy its
future. This study is largely centered on liquidity objective and ensure its
ability to meet up the depositors demand thereby maximizing its value and there
is also uncertainties in the asset management of the commercial banks as the
new deposit does not correspond with the customers’ withdrawals, since demand
is made at short notice. Therefore this study is aimed at the following goals:
- To know how
liquidity management will handle these uncertainties and determine their effect
on profitability
- Discovering the
specific factors that are useful in improving profitability and liquidity
position of the commercial banks.
- To examine the
cost of liquidity and illiquidity levels on the performance of commercial banks
and length at which this liquidity can be used as competitive instruments.
- To take a
critical view of the adopted liquidity measures of the commercial banks and
attempt to see how it has been achieved.
- Finding out the
effect of changes in liquidity levels on profitability.
- Aimed at
discovering the credit and portfolio policies of the commercial banks
- Finally it will
attempt to identify the basic causes of liquidity problems in Nigeria
commercial banks and to recommend appropriate measures to solve such problems.
1.4 RESEARCH
QUESTIONS
Based on
the study the following research questions are asked:
- What factors can
be useful in improving profitability and liquidity position?
- How can
liquidity management lead to profitability?
- What will be the
effect of changes liquidity levels on profitability?
- Is there any
relationship between liquidity level and profitability level?
1.5 HYPOTHESIS
From the
statement of problem, objective of study and research questions of the study,
the following hypothesis are formulated:
i.
Null Hypothesis (Ho): There is no significant relationship between
liquidity level and deposit level.
Alternative Hypothesis (HI): There is a significant
relationship between liquidity level and deposit level.
ii.
Null Hypothesis (HO): The amount of loans and advances granted to
customers does not significantly determine the profit level.
Alternative Hypothesis (HI): The amount of loans and advances
granted to customers significantly determine the profit level.
iii.
Null Hypothesis (HO): There is no significant relationship between
liquidity and profitability.
Alternative Hypothesis (HI): There is a significant
relationship between liquidity and profitability.
iv. Null
Hypothesis (HO): Commercial banks in Nigeria do not keep the minimum liquidity
ratio required by the CBN.
Alternative Hypothesis (HI): Commercial Banks in Nigeria keep
the minimum liquidity ratio required by CBN.
1.6 SCOPE OF
STUDY
This study
on the impact of liquidity management on commercial bank profitability is
carried out to check the possibility of liquidity management bringing a huge
range of profitability to the commercial bank. It uses Oceanic Bank
International Plc Effurun Delta State as its scope and it is carryout within
2007 to 2010 that’s a time frame of 4 years.
1.7 THE
SIGNIFICANCE OF THE STUDY
For the
fact that commercial banks operate on liquidity and profitability motives in
the mind to satisfy their major publics, the shareholders and depositors, the
need arise for them to bring into agreement these two motives with the aim of
satisfying these two public concurrently. With this the commercial bank need
effective and efficient liquidity management approaches and principles that
will help them realize these motives. The result gotten form this study will
reveal the level of attachment of the commercial banks to the monetary policies
(liquidity ratios) established by the government and these will help the
government to set appropriate liquidity ratio’s and cash ratio’s that will not
be harmful to the operation and survival of the commercial banks. It will also
help banks operators to evaluate how effective liquidity management and credit
policy guidelines will affect profitability level and also the impact bank
credit will play on bank’s liquidity and finally minimize the effect of
illiquidity and help in providing effective liquidity formulations.
1.8 LIMITATIONS
OF STUDY
Like every research work, this study is
faced with a large number of challenges, starting from bank executives
unwillingness to disclose necessary document and information needed for this
study since they felt this information or document are confidential to them and
that disclosing them might be detrimental to their business. This study is
supposed to cover all commercial banks in Nigeria as they operate a unique
policy in view of it threats and opportunities. However, the study is limited
to just one particular bank due to insufficient time and lack of finance.
Basically, the school activities as such have been a great challenge to this
research, since these activities have occupied most time needed for this
research. Nevertheless with all these challenges the researcher tried to
conduct the research which is reliable.
1.9 Definition of
Terms
a) Liquidity:
Ability with which asset can be easily converted into cash. It also determines
a firm ability to meet its short-term obligation.
b) Liquidity
Management: The planning and control
necessary to ensure that organisation maintain enough liquid assets so as to
meet its obligations to customers.
c.
Profitability: Profit is the ultimate measure of overall performance
that is the excess of income over cost.
d. Commercial
Bank: The business of receiving money, from outside source as deposits,
irrespective of payment of interest and granting of money loan and acceptance
of credit or purchase and sells of securities for the account of others or
incurring of obligations to acquire claims in respect of loans prior to
maturity.
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