Importance of Liquidity in Commercial Banks

Importance of Liquidity in Commercial Banks

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Abstract on Importance of Liquidity in Commercial Banks

Commercial banks in Nigeria have been facing a problem. These problem ranges from integrity factors location factor technological factor unstable management incompleteness of board members and unqualified personnel. Therefore this study was aimed at looking into these problems so as to ascertain the impact on commercial banks as well as suggesting the possible ways of eliminating these problems. The researcher used three commercial banks for effective analysis namely union bank of Nigeria united bank of African and Afric bank.In order to be arrive at a conclusion decision interviews literature review and personal observation were employed as the means of data collection. The three banks used were fund to be having almost the same basic problems even though some were bigger bank than others mismanagement politician instability and government interference in the daily affairs of banks were seen as problem to all commercial banks.By way conclusion suggestion on how these problems can be prevented in the future were made.  One of these suggestions is by including professional who are competent in the field of banking. Another is that government should minimize its interference in he activities of the commercial banks.

Chapter one on Importance of Liquidity in Commercial Banks

INTRODUCTION

 BACKGROUND OF THE STUDY

Liquidity is the word that bankers use to describe the ability to satisfy demand for cash in exchange for deposit.  A bank is considered to be liquid when it has in various forms and locations plus arrestment insecurities that  are easily available at a short notice without loss or much loss to the bank, it could be conventional to refers to a bank as being liquid when it has enough liquidity to meet any financial emergency, for instance, during a runoff, the bank have the question of how much liquidity to hold and in what form is of great concern to any prudent bank manager. Manager are also face with the requirements to comply with liquidity to meet seasonal and unexpected run on bank for cash be anticipated and met in advance from expected each in flow, deposit loan repayment or earnings.

In light of the above, the role of liquidity in our commercial banks becomes all to real its importance cannot therefore be over emphasized liquidity is needed to take advantage of unexpected favourable and profitable opportunity or for aggressive purpose. If a bank is needed of liquidity, it becomes difficult for it to take opportunities like this.  A bank might run into difficulties when a firm that they went to secure as a customer family presents a loan application or particular desirable investment development, it becomes difficult for them to do this, it is not sufficiently liquid.  Usually the bank approach is to identity two liquidity needs of banks, one is the need for immediate liquidity to ensure to continual day-to-day operations (e.g. liquidity to meet with drawal of deposits by customers, clients) and the other it the need to meet unforeseeable problems in financing the banks know future commitments the balance sheet relationship which is most relevant to this view of liquidity is that of deposit liability.
In order for the bank to distinguish between the following:
1.  Liquidity and assets, which are maturity uncertain (e.g. short deposit and overdraft)
2.  Liquidity and asset which are maturity certain (e.g. loan and deposits, which are for friend terms).
3.  Assets which have a friend maturity but by nature usually can be sold easily and safely e.g. treasury bills, extricate or deposits.

In Nigeria, commercial banks activities are regulated by banking act 1969 (as amended).  As a result a lot is required of the commercial bank like legal reserved requirement (cash ration liquidity ratio stabilization secrets issued by the central bank of Nigeria CBN for special deposit).  Liquidity problem for the purpose of this study are divided of looked at as problems for the purpose encountered by banks management.  Where there is either excess or shortage of liquidity on the banking system or is commercial banking system.  It will be noted that since the end of Nigeria Civil war, the Nigerian financial system has been experiencing economic transaction, which emanated from the inflow of foreign exchange via the oil sector.  Emphasis were gradually shifted from other sector like agriculture to oil, has performance in this sector entered prudent influence on the liquidity of the economy, the federal government was equally welcoming in liquidity so it had no use of certain borrowing instrument like treasury bills, treasury certificates and development stock.  As a result, banks vaults swelled uncontrollably.  This resulted in arm-chain banking by choosing which deposit to accept and which  not to the bank were walling  in excess liquidity and where was little out lets for short term resources and yet banks were not ready to long term investment.

Commercial banks were faced with excess liquidity problems.  They had more funds which could be profitable employ.  But is believed that the situation is reviewed.  Banks are now faced with the problem of liquidity and liquidity hidden for long. A bank may succeed in canceling low profitability or capital inadequacy for long, but a bank that becomes illiquid many not be able to conceal it for more than one day.  Once there is an increased demand for currency the problem of liquidity will surface.

STATEMENT OF PROBLEM

There is no doubt that 50% of bank failure in our country
today is as result of inadequate liquidity in our commercial banks.  Problem of inadequate in our commercial banks is of great concern.  No doubt the CBN governor brings out the new one billion naira capitalization base for all commercial banks.  In the course of writing this projects the researcher unfold some solution to the above mention problem.

SCOPE OF THE STUDY

There is no doubt that liquidity is the vital for effective
operation of any financial institution including banks.
But the researcher will conversetrate mainly on the vitality of liquidity in commercial banks only using first bank Enugu Urban as example.

OBJECTIVE OF THE STUDY

This study is intended to final casting solution to the dual
problem of  excess liquidity and shortage, there of confronting commercial banking the effect and restrictions of these two extremes on the following:

1.  Profitability in commercial banks

2.  Liquidity as well as the computation etc.

DIFINITION OF TERMS

The following definition terms are given to facilitate better understanding.

Liquidity Management: This is the act of storing enough funds and razing funds quickly from the market to satisfy depositors, Loan customers and other parties with a view to maintain public confidence.

Bank: A bank is a financial house established for the purpose of accepting deposits and lending out funds in addition to other services.

Central bank of Nigeria: This is the national apex and financial institution that regulates the banking system value supply and cost of finds in the economy.

Financial System: The aggregation of financial market arrangement institutions agent that inter-act with each other and other economic unit together with the set of rules and regulation that guide their interactions.

Nigerian Deposit Insurance Corporation (Ndic): This is the body which ensures that customer funds are insured in the commercial banks at liquidation they make sure the customer are paid bank their deposits.

Profitability Ratio: This a class of financial metrics that are used to asses a business ability to generate earning and compared to it expenses and other referent costs incurred during a specific period of time, for most of these ratios, having a higher value relative to a competitors ratio or the same ratio from a previous period is indicative that company is doing well.

Liquidity Assts Theory: This theory argues that banks should hold large sum of liquid assets to avert sudden payment request that might be received.

Call Money: They are banks excess reserves on daily or short-term basis with the correspondent banks.

Short-Term Government Securities: These are gifted securities with short-term maturity which are being bought and sold in active market.

Marginal Loans: This is a loan made by a brokerage house to a client that allows the customer to buy stocks on credit

Liquidity Ratio: This is a class of financial metrics that is used to determine a company ability to pay off its short term debts obligation. Generally the higher the value of the ratio, the larger the margin of safety that the company posses to over short-term debts.

Liquidity Portfolio: Liquidity is the ability for the bank to have sufficient capital in it account or cash deposited by individuals and portfolio is any collection of financial assets such as stock bonds and cash it may be held by individual investor and or managed by financial professional’s hedge financial institution, or a portfolio is a brief case for caring loses papers.

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