LIQUIDITY MANAGEMENT PRACTICE AT FIRST BANK OF NIGERIA
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LIQUIDITY MANAGEMENT PRACTICE AT FIRST BANK OF NIGERIA
ABSTRACT
Liquidity denotes the ability to most efficiently absorb a decline in deposits and fund an increase in the loan portfolio, i.e. to match the customer’s loan request, fund commitment, and line of credit.
A bank has liquidity when it can provide adequate funds in a timely and cost-effective manner. The cost of getting liquidity is determined by market conditions as well as the level of risk reflected in the balance sheet.
Those concerned in the management of the source and usage of fund fund deposits in commercial banks have been elevated to some extent.
A detailed investigation will be conducted to demonstrate how the bank has managed its liquidity and profitably. Secondary and primary data were obtained and analysed for this cause.
The major source was the administration of a questionnaire and an oral interview, while the secondary source included book, journal, and newspaper literature evaluations.
A rigorous and statistical examination of the data available to access commercial bank assets and liabilities management in Nigeria, their efficiency, and gaps in the emerging economy was conducted. The research concludes and recommends based on the findings of the analysis.
INTRODUCTION TO CHAPTER ONE
BACKGROUND OF THE STUDY
A bank is deemed liquid when it has assets and investments in security that can be relied on at short notice without causing a loss to the bank,
as well as the ability to raise funds from other sources to satisfy its payment obligations and financial commitments on time. Furthermore, there should be a financial commitment buffer to cover practically all financial emergencies.
A commercial bank’s liquidity management is a critical issue in the banking business. It is the bank’s ability to manage its liquidity position so that neither liquidity nor profitability suffer.
To be effective, liquidity management must contribute to the overall cooperative fund management objectives of achieving and maintaining a balance of profitability, solvency, and liquidity.
The most liquidity due by excess unite can only be archived by holding enviable fund as cash because it has the highest profitability. All funds must be invested on loan and must average the highest yielding and most liquid asset in the bank.
Banks face numerous restrictions due to the important role they play in the economy, particularly in the monetary and credit aspects of the economy. Despite the fact that banks are the most highly and closely regulated of all businesses,
they must still operate within the confines of the law and solve the problem of liquidity and profitability in the economy. Apart from the limits and the dual role of liquidity and profitability in Nigerian commercial banks,
there is hardly no effort on liquidity management. In light of this, the researcher has decided to discuss this topic based on the data analysis. The researcher will provide some solutions to the country’s liquidity management challenge.
STATEMENT OF THE PROBLEMS
Asset management in commercial banks is a never-ending battle. This conflict is fought between efficient liquidity management on the one hand and profitability on the other.
Because liquidity and profitability are two intrinsic aims in commercial banking, bank managers will continue to face the dilemma of trying to create an effective mechanism for addressing their bank’s liquidity and hence their safety from the nature of their liabilities.
Demand deposits (current account fund deposits), saving deposits, fixed deposits, and funds from other sources account for a large share of commercial bank liabilities. Demand deposits are bank liabilities that are due and payable on demand.
Commercial banks must hold only liquid assets in order to meet a significant volume of withdrawals. Liquid assets earn little or no return on investment. It is less risky and less likely to produce appropriate profits. As a result, the higher the riskier asset, the more vulnerable banks are to a bank run or crisis.
At such rate, it will most likely be unable to recover all of its costs while simultaneously making a profit for the owners. But look at this. Commercial banks are business-oriented organisations with shareholders who are concerned with profits.
In order to satisfy its shareholders, a bank may try to ignore liquidity and focus on profitability by investing in high-yielding, less liquid assets that are profitable at the expense of liquidity, which is risky. In order to have efficient bank management, it is always vital to balance liquidity and profitability.
The ratio or percentage of idle cash balance in the commercial bank that must be held at any moment in time and in what shape must be held is critical. They should keep in mind the importance of a suitable degree of profit while doing so.
Many limits exist for banks in achieving their goal of liquidity and profitability, such as legal reserve requirements, and they must maintain adequate liquidity to satisfy unplanned and seasonal loan demand and deposit changes. Cash reserves are also required to capitalise on unexpectedly profitable investment opportunities.
Banks are effectively confined and must walk on a tightrope. There is a never-ending fight or, as I like to call it, problem policy commercial bank management in emerging countries.
The Nigerian situation is exacerbated by the inconsistency of the central bank of Nigeria’s monetary policy. Is the reluctance of monetary coups to detach.
You’ll just go up one morning and hear on the radio via circular No XY2 that the Central Bank of Nigeria has released a monetary circular No modifying the private whether upward or downward.
One such restraint is the federal government decree prohibiting withdrawals from all federal parastatals’ accounts at commercial banks. The stock sparked a heated market in the banking business.
Although all of this stock is required to produce the desired control of money in the economy, it tends to cause banks management nightmares. This instruction produces ripples in the banking industry, causing more disparity in the commercial bank’s liquidity situation and, as a result, the rate of profitability.
PURPOSE OF THE STUDY
The study’s aims are as follows:
To examine the liquidity management of Nigerian banks, with a focus on their investment liquidity and profitability.
To discover why banks require more liquidity than any other corporate organisation,
To address the banks’ liquidity and profitability issues. Examine the portfolio’s effectiveness and management by adopting and employing various approaches, theories, and instruments in tackling their liquidity profitability challenges.
To investigate the bank’s investment channel (e.g., loans and advances in treasury bills). Banker combine funds, bankers certificates called money, equity participation in small and medium-sized businesses, and so on) and the degree of liquidity of such establishments will be investigated.
To examine the asset portfolio management of banks in order to discover whether there is a relationship between the rate of profitability and liquidity.
To determine why Nigerian banks are overly liquid while making a high profit.
IMPORTANCE OF THE STUDY
Liquidity management is critical in the banking business and cannot be overstated. Because no additional contributions were made to the area of liquidity management,
the researcher will carefully investigate those pertinent to effective liquidity management for the successful accomplishment of the targeted profitability.
It is intended that the study’s findings will help management and non-bank financial institutions, as well as business enterprises and students of financial accounting, banking and finance, and other related courses.
Readers of this study/work will be exposed to the results of future research. The basis of this research is the Nigerian commercial bank’s liquidity position as a factor of profitability.
DEFINITION OF TERM
Portfolio: This is a list of security and investment loan stock, shares, and lands that a bank, individual, or organisation holds/owns.
Portfolio management is synonymous with the management of a security holding (a bank’s or a business’s investment portfolio). A portfolio can be managed by a committee, a portfolio management department, or any other body.
Liquidity is a bank’s capacity to pay cash instantly when called upon for all of its demand liability.
Liquidity management refers to a bank’s capacity to manage its liquidity position so that neither liquidity nor profits suffer. It evolves the provision for deposit withdrawal, short-term cash requirements, and cash cyclical and humorous cash requirements.
Bank deposits are funds that have been placed in a bank. It is separated into two categories: demand savings and time deposits.
Demand deposit: This is also known as a checking account deposit that is payable on demand and does not require advance notice of withdrawal.
Savings deposit: This sort of deposit is normally evidenced by a previous book, and the depositor customer of the bank is obligated to notify the bank before withdrawal, but this is not always the case.
Assets are a bank’s complete property and other investments in profitable organisations.
Asset management is the distribution of funds with the primary goal of maximising profitability, solvency, and regulatory limitations.
A bank run occurs when there is mismanagement of liquidity and profitability in a bank.
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