The Impact of Liquidity Problem on the Nigerian Banking Industry

The Impact of Liquidity Problem on the Nigerian Banking Industry

ABSTRACT

This research work is aimed at identifying the impact of liquidity problems on the Nigerian banking sector with regards to their profit and previously made by the Government and the Apex Authority in finding the solution to the problem.

In carrying out his study, secondary Data was used extensively. This project work is divided into five chapters:

In chapter one, we have the Introduction, Background of the study, statement of the problem, purpose/objectives of the study, significance of the study, scope, and limitation, and definition of terms.

In chapter two, we have a literature review which is made up of liquidity versus profitability in Nigerian Bank, Equilibrium balance between profitability and liquidity ratio-which is further subdivided into; Significance of liquidity ratio, computation of liquidity ratio, cash ratio, liquidity risks, liquidity preference, liquidity measurement, rational for liquidity ratio measurement. Furthermore, factors are affecting the liquidity of Nigerian banks, the Federal Government’s steps towards solving the liquidity problems in Nigerian banks, and finally guidelines for the development of liquidity management policies in Nigerian banks.

Chapter three deals with research design and methodology and also secondary data, its sources, location, and method of collection.

Chapter four deals with the research findings.

Chapter five deals with recommendations and conclusions.

Lastly, there is the provision of a bibliography.

CHAPTER ONE

INTRODUCTION

Liquidity is crucial to the ongoing viability of any bank as liquidity can have dramatic and rapid effects on even well-capitalized banks.

When a crisis develops in a bank as a result of other problems such as deterioration in asset quality, the time available to the bank to address the problem will be determined by the liquidity therefore, the measurement and management of liquidity are amongst the most activities of banks.

BACKGROUND OF STUDY

The term liquidity means the ease with which an asset

can be turned to cash with certainty Orjih John (1996:152).

Liquidity in banks can be defined as the capacity of the bank to meet promptly its current obligations that are its customer’s demand.

A bank is considered to be liquid when it has sufficient cash and other short term financial instruments like treasury bills, treasury certificates, and call money in its portfolio together with the ability to raise funds quickly from other sources to enable it to meet its payment obligation and other financial commitments in a timely.

How much liquidity to hold and in what form constantly disturbs bank management. Banks are also required to comply with the cash reserve requirements (CRR) set by the Central Bank of Nigeria (CBN).

During periods of expanding economic activities banks are frequently faced with attractive loan situations, which can only be met if banks maintain adequate liquidity.

In Nigeria, Banking activities are registered strictly by the banking act of 1969 was amended under the control of the central bank of Nigeria. As a result of these regulations, the banks are required to hold specific assets equal to certain other liabilities in liquid form. This is known as the cash reserve requirement (CRR), liquidity ratio, and stabilization securities issued by the central bank.

STATEMENT OF PROBLEM

The most profitable activity of commercial banks is the lending of money by loan or overdraft but every time a bank increases its advances to customers it increases at the same time the amount that is likely to be withdrawn in cash. Most borrowers simply wish to be able to draw cheques up to the amount of their overdraft but some of them may want cash and in general, a certain proportion of loans will be taken in cash. This banker is torn between two conflicting motives: On the one hand, he would like to expand his loans to make more profit and on the other hand, he is anxious to hold sufficient cash so that he can at all times fulfill his obligations to pay cash on demand J.L Hanson (1970:37).

PURPOSE OF THE STUDY

The impact of liquidity problem:- This is the purpose of this study to look at problems encountered by bank managers responsible for liquidity management.

It will also focus on guidelines set by the CBN and other regulatory bodies for the development of liquidity management in Nigerian banks.

Finally, the impact of liquidity problems will be looked at on how it affects profitability, loans, and advances to customers of commercial banks and the Nigerian economy.

OBJECTIVES OF THE STUDY

The objective of this study on the impact of liquidity problems is to find out.

1. If the CBN has enough policies or guidelines put in place to help the banks fight this problem.

2. To find our banks for the correction of this problem.

3. The overall impact of liquidity problems on loans and advances to customers of commercial banks.

4. To find out the liquidity problems about customers’ deposits.

5. The profitability of commercial banks in Nigeria.

RESEARCH QUESTIONS

1. What is the impact of liquidity problems in the Nigerian banking industry?

By this we main how the effect of excess cash holding by banks in their vault affect their progress and equally how the non-holding of cash affect their transportation too. This effect could be negative in that making banks give out loans and banks.

2. How important is liquidity management?

Liquidity management is very essential in that liquidity transcends the individual bank, as a liquidity shortfall in a single institution can have system-wide repercussions. Consequently, the analysis of liquidity requires bank managements to measure, not only the liquidity positions of their banks, on an ongoing basis, but also to examine how finding requirements are likely to evolve under crisis scenarios.

3. What is the relationship between liquidity and profitability in the Nigerian banking industry?

Both are interwoven in a particular way in that in providing for liquidity one has to also check out ways of being profitable.

Liquidity is maintained by banks for the primary purpose of meeting depositors’ demand which will help these banks to have a good standing and reputation with the public. On the other hand, banks are set up to make a profit and their profitability portion is an index of measuring the performance of the bank. Which will also help them to meet up with their financial obligations. Orjih John (1996:152-154).

SIGNIFICANCE OF THE STUDY

The significance of this research work is aimed at getting relevant information and solutions to liquidity problems facing the banking sector in Nigeria.

The researcher hopes it will be of immense benefit to the following sectors.

i. The banking sector in Nigeria especially bank managers involved in liquidity management.

ii. The government sector.

iii. The monetary and fiscal policy department of the central bank of Nigeria.

iv. Finally for countries facing similar problems.

DEFINITION OF TERMS

LIQUIDITY

This is the ability of a bank to meet promptly, its current obligations. This simply means the capacity of the bank to meet its customer’s demand as and when due to liquidity problems.

In this case, a bank may be suffering from a shortage of cash in its vault to meet its current obligations liquidity ratio:

It is the cash requirement held by banks as directed by CBN. It is the ratio above which banks may not raise their loans and advances relative to their liquid assets.

This is cash deposited by the customer to the bank, which can be withdrawn at any time.

LOANS AND ADVANCES

These are by far the largest assets of the commercial banks. The lending system of the commercial banks can be in the form of loans and overdraft facilities. This is one of the major ways profit is made.

CASH

This is the number of notes and coins held in the strong room of all the head offices of banks and in other branches to meet customers’ demands for cash withdrawals. Cash reserve does not yield income. It is the most liquid of all the assets.

CALL MONEY

Money at all is the shortest maturity instrument and it is the next liquid item after cash. It is an arrangement whereby banks borrow money from one another on an overnight basis.

TREASURY BILL

These are short-term instruments issued by the central bank of Nigeria to raise finance for the federal government, its maturity is usually for 91 days.

TREASURY CERTIFICATE

These are short-term instruments issued by the government with a maturity period of one to two years.

MONETARY POLICY

Defined by the CBN as the combination of measures designed to regulate the value, supply of money in an economy in consonance with the expected level of economic activity.

FISCAL POLICY

Fiscal involves the use of government income and expenditure instruments to regulate the economy.

CASH RESERVE REQUIREMENTS

This is the proportion of banks’ total deposits liabilities (Demand, Savings, and Time Deposit), Certificate of deposit, promissory notes, and other items held in cash balance with CBN.