LIQUIDITY MANAGEMENT AND FINANCIAL PERFORMANCE OF THE NIGERIA INSURANCE INDUSTRY
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LIQUIDITY MANAGEMENT AND FINANCIAL PERFORMANCE OF THE NIGERIA INSURANCE INDUSTRY
ABSTRACT
This study looked at the impact of liquidity management on financial performance in the Nigerian insurance business. Secondary data for this study were collected from textbooks, journals, magazines, and newspapers.
Our findings show that liquidity management has a positive association with the profitability of the Nigerian insurance market. Based on these findings, we recommend that businesses be cautious when giving credit to clients/customers in order to avoid load loss management issues, and that financial system competence be improved to increase asset quality.
Chapter one
INTRODUCTION
1.1 Background of the Study
Liquidity management is a concept that is garnering a lot of attention around the world, especially given the current financial situation and state of the global economy.
Some of the most noticeable corporate goals include the requirement to maximise profit, maintain a high level of liquidity to ensure safety, and achieve the maximum level of owner net worth while also achieving other corporate objectives.
The significance of liquidity management for corporate success in today’s business cannot be overstated. The most important aspect of working capital management is maintaining liquidity on a daily basis to guarantee that it runs smoothly and meets its obligations (Eljelly, 2004). Liquidity is critical to the success of a business.
Liquidity requires meeting obligations as they become due and maintaining a balance between current assets and current liabilities. According to Jensen (1986), companies are pressured when they have low liquidity and negative working capital.
This is because either little cash or excess liquidity can be detrimental to the organization’s smooth operations (Janglani and Sandhar, 2013). Almeida et al. (2002) offered a theory of corporate liquidity demand based on the notion that liquidity decisions are influenced by firms’ access to capital markets and the relevance of future investment.
The model predicts that financially limited enterprises will save a positive proportion of incremental cash flows, but unconstrained firms will not. The cost of a cash shortfall is higher for enterprises with a bigger investment opportunity set because of the predicted losses from passing up excellent investment possibilities.
A liquid corporation takes advantage of available investment opportunities, cash discounts, and cheaper borrowing interest rates. As a result, there is a correlation between cash holdings and investment opportunities, as well as financial performance.
Some banks and other financial institutions faced difficulties during the financial crisis as a result of a failure to follow basic liquidity management standards. In 2008, the Committee issued Principles for Sound Liquidity Risk Management and Supervision (“Sound Principles”) as the core of its liquidity framework.
Liquidity is a bank’s ability to support asset growth and meet commitments as they become due without incurring unacceptable losses (Basel Committee on Banking Supervision, 2013). The liquidity of an asset is determined by the underlying stress circumstance, the volume to be monetized, and the timescale under consideration.
As a result, efficient and effective liquidity management is critical for ensuring organisations’ existence and profitability. The Banking Act (2014) and the CBK Prudential Guideline (2013) require institutions to maintain a minimum holding of liquid assets as determined by the Central Bank from time to time.
Kenyan banks must keep a statutory minimum of 20% of all deposit liabilities, maturing and short-term liabilities in liquid assets. The liquidity ratio is calculated by combining net liquid assets and total short-term liabilities.
1.2 Statement of the Problem
As uncertainty caused funding sources to evaporate during the previous financial crises, many financial organisations, particularly banks, suddenly found themselves short on funds to meet their obligations as they were due (Bordeleau, 2010).
In the aftermath of the crisis, there was a widespread belief that the institutions had underestimated the importance of liquidity management and the ramifications of such risk for the enterprises themselves as well as the larger financial system.
Liquid assets, such as cash and government securities, have a poor yield and might impose an opportunity cost in a financial institution. In the absence of regulation, it is acceptable to expect corporations to keep liquid assets to the extent that they contribute to the firm’s financial performance and profitability.
Beyond that, policymakers can mandate bigger holdings of liquid assets, for example, if it is deemed beneficial to the overall stability of the financial system. The issue therefore becomes how to choose or determine the optimal position or level at which a financial institution can keep its liquid assets in order to maximise its return.
This issue gets increasingly acute as a growing number of institutions, particularly financial institutions, are preoccupied with profit and performance maximisation, and as a result, they tend to overlook the necessity of liquidity management.
Problems might also arise as a result of a bank’s insatiable desire to maximise profits. In doing so, these institutions have a tendency to be careless with resource utilisation and, in particular, liquidity management.
The end outcome is usually loss of substance and, as a result, loss accumulation, which can lead to bank failure. The presence of marginal loans in the banking sector highlights the importance of national governments’ preoccupation with banks throughout history.
This demonstrates the priority placed on liquidity and its management by these governments, and any deviation from its ratio or insufficiency in its management invariably bodes trouble for the banks involved.
The long-term repercussions of insufficient liquidity management can also be investigated. Apart from profit decreases. Other disadvantages for a bank include a loss of confidence in the bank’s ability to meet both short-term and long-term obligations
a lack of trust on the part of depositors and other customers equally, and a corresponding decrease in the level of operations.
A recent example of Nigerian bank hardship caused by poor liquidity management and loan loss buildup (marginal loans). These issues highlight the importance of conducting a research on liquidity management and financial performance in Nigeria’s insurance market.
1.3 Objectives of the Study
The overall goal of this study is to look into liquidity management and the financial performance of the Nigerian insurance market. The precise aims include:
1. To thoroughly assess the liquidity status of the Nigerian insurance industry.
2. Determine the causes of illiquidity or factors that influence liquidity management.
3. To investigate how the Nigerian insurance industry may modify its liquidity and control management in the Nigerian financial climate.
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