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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