PROFITABILITY AND LIQUIDITY IN COMMERCIAL BANK
ABSTRACT
This piece is based on a subject that many people have criticized as being one that has recently seen substantial treatment. The banking sector has sometimes been subject to strict regulation to determine if there should be any dependability on the sector or whether it is just collecting money from customers today and experiencing financial difficulties the next day. The central bank of Nigeria (CBN) unveiled a significant reform effort in July 2004 with the aid of this program, with the goal of changing the nation’s financial environment. The major goal of the 13-point reform program at the time was to need a minimum of 25 billion in share holder money by December 31, 2005. Additionally, the CBN, the central bank of Nigeria, declared on January 1st, 2006, that 13 out of 89 banks will be liquidated since they fell short of the 25 billion capitalization goal. Afribank plc, the subject of my case study, is one of the 25 banking firms that emerged from the consolidation effort and were awarded new licenses to do business in Nigeria. This project aims to jog people’s recollections about the banking industry’s function and how it makes money. Additionally, it spent money on establishing a solid proof of the connection between profitability and Afribank Plc. The researcher went on to describe in detail what commercial banks do. The key components of its assets and liabilities, how they function best to maintain liquidity, and the risk of excessive liquidity. The researcher examined a financial report from the bank (Afribank Plc) and was able to demonstrate the growth pattern of the bank before making suggestions about the bank’s liabilities and future prospects.
CHAPTER ONE
INTRODUCTION
BACKGROUND OF STUDY
Since the nomination of (professor charles soludo) as the new Governor of the Central Bank of Nigeria on Tuesday, July 6, 2004—which marked the start of a revolution in the Nigerian banking industry—banking in Nigeria has seen quite significant changes. Prior to (Professor Charles Soludo’s appointment), the CBN said that although the banks were assessed as sound and adequate, the functioning of the banking sector was nothing to get excited about. While 25 were classified marginal and unsound, they showed signs of vulnerability such as low capitalization, weak and bad asset quality, poor profits, and management illiquidity. (Soludo) suggested a 13-point banking reform program with the following as its foundation in order to make things right and guarantee a strong banking system for Nigeria. – Capital base requirement of N25 billion by consolidation of Bank through merger and acquisition by December 31st 2005, etc. The fact that global scale has become a crucial component for success may have motivated the apex bank to establish a secure banking system. Additionally, a strengthened capital foundation gives a bank a competitive advantage, allowing it to purchase appropriate technology, hire top-notch staff, absorb costs, provide better services, and eventually improve its earnings. Although the bank consolidation exercise and the 25 billion minimum capitalization requirement are intended to establish a sound banking system that depositors can rely on, they do not always guarantee or address the observed poor corporate governance practices, excessive risk-taking, poor credit policies, and administration loans. Nigerian financial sector.
The nation has to restructure its banking system in order for its economy to take off. This is due to the fact that the banking system is essential to a nation’s economic growth and development. Prof. G. O. Nwankwo (1991) asserts that since banks supply the means of payment, their collapse might have catastrophic effects on the economy, particularly when financial institutions and markets serve as important mediators for the government’s macroeconomic activities.
Commercial banks function profitably while conducting banking transactions. Their primary motivation for operating is to maximize profits, and they strive to please their shareholders by consistently reporting significant profits in their financial reports. A substantial and prominent sector of the economy, banks are also a key component of the monetary system. Therefore, their administration and performance are of great and broad interest. Public trust in banks and the ability to assess their performance will both be boosted by the quality of their financial statements.
It is important to emphasize the history of banking in Nigeria so that we may have a clear grasp of the industry as a whole. Early colonial times in Nigeria are when modern commercial banking first emerged. African Banking Corporation, based in South Africa, was invited to open a branch office in Lagos in 1892 because the colonial government needed an institution in the shape of a commercial bank for the safety and transmission of funds due to the decline in the barter system of trade and the rise in financial transactions.
The African Banking Corporation was the first modern commercial bank to establish a branch office in Lagos as a result, but the trade downturn that plagued Lagos in that year rendered its continued survival uncertain. The Bank of British for West Africa assumed control of its operations in 1894. Later, Standard Bank for West African Ltd. became the company’s name. This pioneering foreign bank has established the Standard Bank of Nigeria Ltd. in Nigeria in accordance with the company’s legislation of 1968. First Bank of Nigeria Limited Liability Company was the new name given to the bank in 1978. (PLC). Another one, Barclays Bank (Dominion Colonies abroad), entered the Nigerian banking industry in 1917. The bank changed its name to Barclays Bank of Nigeria Limited under the Companies Act of 1968 as well. And in 1978, it changed its name to Union Bank of Nigeria, a public limited business today.
On the other hand, the Federal government entered the banking industry in 1974 when it mandated a 40% stake in the “Big three” foreign banks. United Bank of Africa, Barclays Bank of Nigeria, and The Standard Bank of Nigeria (now First Bank). Later, in 1976, the Federal Government expanded its ownership stake to 60%. All of them are attempts to monitor the operations of these institutions. More legislation related to a sound banking operation have been enacted since the C.B.N. Decree No. 24 of 1991 and the other financial institutions Decree No. 25 of 1991 came into existence. Banks that have failed (debt recovery) and other financial misconduct Decree No. 18, 1994: Foreign exchange (monitoring and other restrictions) Decree No. 17 1995; and Money Laundering Decree No. 3 1995.
3 HYPOTHESIS AND QUESTION FOR RESEARCH
1. Is there fierce rivalry amongst banks?
2. Are there three instances of inconsistent policy issuance?
3. How successful and efficient is the management?
4. Does the financial sector engage in dishonest practices?
5. What contributes to the industry’s high levels of bad debt and prudent lending?
6. Is the banking sector subject to stringent regulation?
7. What kind of jobs are available in the banking sector.
HYPOTHESIS
the idea that profitability and liquidity are inversely correlated; as one grows, the other declines; and that profitability dictates liquidity. The situation is often the opposite in Nigeria, however. These principles serve as the foundation for both the null hypothesis (HO) and my alternative hypothesis (Hi).
Ho: A bank’s asset liquidity and portfolio profitability are mutually exclusive.
What is attainable in a banking operation in the latter chapter is the previously described notion (ie chapter 4) In order to determine whether hypothesis is true of Nigerian commercial banks in general and Afribank in particular, I will carefully examine this allegation. And the required suggestions will be provided.
1.4 STUDY PURPOSE
The study’s objectives are as follows:
1. To examine if commercial banks’ earnings and liquidity are equitable.
2. To develop a remedy for these uncontrollable policy problems
3. To devise a method of preventing the misuse of commercial bank money.
4. To provide suggestions for reducing fraud in the financial sector.
5. To establish if the liquidity and profitability have a clear link (direct, inverse, or no relationship).
6. To determine the effectiveness of the bank (Afribank), which produces enormous results.
7. Is profit dependent on worker productivity or managerial effectiveness?
8. To learn the bank’s procedure for hiring employees (Afribank)
1.5 IMPORTANCE OF THE STUDY
My goal in doing this research is to contribute little to the already overly-screeched situation. The primary importance, to put it another way, is to inform, emphasize, and bring into sharp focus the fundamental and contradictory elements of commercial bank fund management and current banking operations. Regarding the profitability of commercial banks in Nigeria, I found that there was almost little information or data available. Most authors attempt to focus on the operation’s liquidity, but I want to compare commercial banks’ levels of liquidity to their profitability and then highlight how they are related. Based on this information, the team plans to conduct a more thorough analysis of profitability and liquidity in this area of commercial banking activities.
1.6 SCOPE OF STUDY LIMITATIONS
If this investigation is to be conducted in all of Nigeria’s commercial banks, its scope must be quite broad. However, the quantity of data available and its nature plainly restrict the length and depth of research in this sort of study, which entails examining the bank statements or its annual report on its operations. Due to the prevalent attitude of information hoarding among bank management and personnel, the information and statistics that are now accessible are essentially secondary, and the final number as published by the bank is almost unachievable. It was for security reasons, they said.
It serves little use to reiterate the well-known fact that banks sometimes utilize.
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