LIQUIDITY MANAGEMENT IN BANKS

(CASE STUDY UNION BANK PLC AND NISE COMMUNITY BANK)

By

OKORO LINDA OBIAGELI

Presented To

Department of Business Administration and Management

ABSTRACT

The study of liquidity management in banks with particular reference on Union Bank Plc.

Chapter one looked into the liquidity and profitability position in order to find out why banks needs to be move liquid than any other financial institutions as well as business Organization. The aim is to final a lasting solution to in eliminate fund shortages and inability of some banks to provide a required liquid when called upon on emergencies.

A significance number of literature relating to the subjects matter were reviewed and in all they agreed that liquidity management in most banks are as a result of fraud and other financial malpractices, it is also noted that some bad depths are as a result of giving loans without requesting for collateral.

Through in hypothesis test II and table 4:1:4 the data analysis and presentation shows that banks strictly select those that mind their vaults or treasury but it does not stop the funds and other malpractices.

The study recommended that banks should keep liquid in excess to solve the problem of inadequacies and delicacies and to close the gap of scarcity of fuels and such like problem and they should relate to other branches and cash centers when ever there is a signal of low centers when ever there is a signal of low liquid by the head of treasury.

It is also agreed that in spite of interest intent being made by banks that Nise community bank should go into foreign exchange services and other related services like treasury bills to promote them profitability.

Finally the researcher concluded that government should intervene in this case so as to authorize community banks in foreign advances and to put to a stop of regulations of CBN over keeping certain amount to eliminate fuel scarcity and such like problems.

TABLE OF CONTENTS

Cover page

Title page 

Approval page

Dedication

Acknowledgement 

Abstract

Table of content 

CHAPTER ONE - INTRODUCTION

11 Background of the study 

12 Statement of problem 

13 Purpose of the study 

14 Scope of study 

15 Research questions 

16 Research hypothesis 

17 Significance of the study

18 Definition of terms 

Reference 

CHAPTER TWO - REVIEW OF RELATED LITERATURES

21 The function of commercial and community banks

22 Commercial and community bank assets and theories of assets management 

23 Commercial and community banks investment MANAGEMENT 

24 The liquidity approach to commercial and community bank management 

25 Theories of bank liquidity management

26 Differences and similazities of liquidity management in commercial and community banks 

27 The history of union bank plc

28 The history of Nise community bank

Reference 

CHAPTER THREE - RESEARCH DESIGN AND METHODOLOGY

31 Research design - - - - - -

32 Area of the study - - - - - -

33 Population of the study - - - -

34 Sample and sampling procedure / techniques

35 Instrument for data collection 

36 Variation of the instruments

37 Reliability of the instruments 

38 Method of data collection 

39 Method of data analysis 

CHAPTER FOUR - RESENTATION AND ANALYSIS OF DATA

41 Presentation & analysis of data 

42 Testing of hypothesis 

43 Summary of result

Reference

CHAPTER FIVE - RESEARCH DISCUSSION, RECOMMENDATION AND CONCLUSION

51 Discussing of result / findings 

52 Conclusion 

53 Implication(s) of research finding 

54 Recommendation

55 Suggestion for further research 

56 LIMITATION OF STUDY

Reference 

Bibliography 

Appendices

CHAPTER ONE

10 INSTRODUCTION

11 BACKGROUND OF STUDY

A bank is set to be liquid when there is sufficient cast and cash transferable assets including investment in securities that are easily realizable at a short notice without loss to the bank, together with the ability to raise fund quickly from other sources to enable it to meet its payment obligations and financial commitment in a timely manner, but in community a bank security investment is not realizable since they appoint securities individually (ie not from an organization concern for provision of security) so security is excluded in liquid of community banks In addition, there should be sufficient liquidity buffer to meet almost all financial emergencies

Liquidity management of commercial banks is a very vital issue in the banking industry It is the ability of the bank to manage it liquidity position so that the liquidity and profitability will not suffer But for this to be effective, liquidity management must contribute to the achievement of the overall co-operate fund management objectives for attaining and maintaining a balance of profitability, solvency and liquidity

The obligation of maximum liquidity owed by surplus units can only be achieved by holding all ingestible funds as cash since it has maximum profitability, the bank must invest all funds in loan and overdraft which is considered the average fielding and most liquid of all assets of the banks

Banks plays an important role in the economy particularly in monetary and credit aspects of the economy but face a lot of restrictions Irrespective of the facts that banks are the most highly and closely regulated of all business, union bank still have to operate within the confines of the law (CBN) and solve problems of liquidity and profitability dilemma in the economy

Despite all these constants and dual role of liquidity Profitability and otherwise, there is vertically no work in the liquidity management in Nigeria commercial banks and community banks Though the regulations of CBN is not affecting community banks much but they still have little work on the liquidity management In the light of this, the researcher has decided to discuss this topic based on the analysis of data collected, the researcher will suggest some solutions to the problems of liquidity management

Union bank assets management is a never-ending tug of war This war is pitched between efficiency liquidity management on one hand and profitability at the other hand In community banks like Nise community bank some notorious community banks have found little solution on management of assets

As liquidity and profitability and two inherent goals in commercial banks, banks managers continued experiencing the conflict of trying to provide efficient mechanism of addressing their banks liquid and safety necessary from the nature of their liabilities

A high proportion of commercial banks liabilities are made up demand deposits (current account deposits, saving deposit, fixed deposits and funds from other sources like loan interest changers, overdraft, treasury bills, treasury certificate travelers cheque, services changes Semites of valuable items of customers changes

Necessarily, union bank need to keep only liquid asset, earn, it is less risky and less it is likely to field adequate returns As such the higher the less risky assets the more union bank is exposed to experience a "backrub" or crisis" At this rate, banks will probably not be able to cover all its cost and also make profit for the owner

Union bank and Nise community bank as business oriented firms with their share holders interested on profitability should satisfy it shareholders while community banks not only satisfy their share holders also ensure development and establishment of private sections (small scale business) A bank might be temped to forget liquidity and pursue profitability by investing only on high yielding less liquid assets that are profitable at the expense of liquidity which is dangerous It is always necessary to balance liquidity and profitability in order to have efficient bank management

The ratio or percentage of idle cash balance banks are to gold at an point in time and in what form to hold it is very necessary, that they should bear in mind the importance of satisfactory levels of profit There are many constraints to banks in achieving of their goals liquidity and profitability such as legal reserved requirement and they should maintain adequate liquidity to meet unforeseen and seasonal loan demand and fluctuations of deposits, cash reserves are also needed to take advantage of unexpected profitability investment opportunities

In effect, union banks and community banks are constrained and have to walk on a "tight rope" That is the never - ending tug of war or dilemma policy of commercial banks sometimes inconsistency of monetary policy as administered by the central bank of Nigeria CBN elevates banks problems

12 STATEMENT OF PROBLEMS

Despite some techniques in liquidity management in financial institution, there is no doubt that a lot of ills are base thing financial institutions existence in Nigeria especially in the area of liquidity management and profitability management

Regulations do not guarantee that they will reserve bank failures and serious banking crises No matter how effective and thorough the regulation mechanism the problem of liquidity and profitability management may still occur as history has shown it even with high policy and regulation which usually accompany the movement of liquidity and problems of keeping idle cash that yields no income it is to prevent impact of such problems from threatening the system last resort function on the central bank exist in protect the aggregate deposit of the system and prevent the collapse of single institution from stabilizing the entire financial system Also problems due exist due to hand care of some policies like high interest rates and rift among flow financial institutions

13 OBJECTIVE OF THE STUDY

The objective of this research is look into the liquidity management of union bank and Nise community bank with more emphasis on commercial banks investment, liquidity and profitability position The researcher will try to find out why commercial banks and community banks need to be move liquid than any other business organization and financial institution, to fined out what methods techniques banks should employ to solve problems

It will also look at the effectiveness and management of their portfolio by employing and using various approaches, theories, instruments methods to solve this liquidity / profitability problems

At the same time critical loot will be their at the assets portfolio management of union bank and Nise community banks with a view of determining if there is a defined relationship between the rate of profitability and liquidity

Finally I wish to identify, differences and similarities in their banks and community banks options and Nigeria commercial banks are excessively liquid but make high profit at the same time

14 SCOPE OF STUDY

In analysis the commercial and community banks statement qualification and their investments and degree of their liquidity I will like to concentrate on one of the commercial banks:- Lagos and any town's community bank

The research will examine how this commercial and community banks carryout there portfolio management in the following areas

i Loan and advances

ii Investment in securities eg treasury bill

iii Balance held with and for other banks

iv Operation of several accounts

15 RESEARCH QUESTION

1 Banks still earn income in spite that they pay interest on deposits of customers (savings & fixed deposits)

2 Your bank strictly select people that will mind the vaults or treasury

3 Your banks have excess in any amount that is been kept in vaults

4 There is no need for your bank to invest the profits earned?

5 The liquidity of assets of banks are positively related to the profitability of the banks portfolio

6 Banks earn income in COT, and foreign exchanges

16 RESEARCH HYPOTHESIS

Ho: Banks still earn income in spite that they pay interest on deposits

Hi: Banks does not earn income since that they pay interest on deposit

Ho: Banks strictly select people that will wind the vaults or treasury

Hi: Banks does not select people that mind the vaults or treasury

Ho: Banks always have excess in any amount that will be kept in vaults

Hi: Banks does not have excess in any amount that will be kept in vaults

Ho: There is no need for your bank to invest the projects earned

Hi: There is need for banks to invest the project earned

Ho: The liquidity of assets of banks are positively related to the profitability of banks portfolio

Hi: The liquidity of assets is inversely related to the profitability of banks portfolio management

Ho: Banks earn income in COT Foreign exchanges and treasury / bills

Hi: Banks does not earn income in COT And foreign exchanges

17 SIGINIFICANT OF THE STUDY

The important of liquidity management in banking industry cannot be over emphasized since not much contribution was made on the topic, liquidity management the research will carefully consider those factors relevant to efficient liquidity management for a successful achievement of the desired profitability

The result that will be obtained from the study will benefit management commercial bank community banks, non - bank financial institutions business enterprises, students of a accounting students of management and administration banking / financial and other related courses

Readers of this work will be exposed as regards the impact of future of study The basis of this research work is the positive of liquidity of Nigeria commercial and community banks as a determinant of profitability

18 DEFINITION OF TERMS

1 PORTFOLIO - It is a list of securities and investment loan stock, shares and bands etc held carried by a bank individual or organization

2 PORTFOLIO MANAGEMENT - It is the management of security holding of a bank or business firm A portfolio may be managed by a committee or a portfolio management department or by any over body

3 liquidity - it is the ability of banks to pay cash immediately when called upon to do so for all of its demand liabilities

4 LIQUIDITY MANAGEMENT - It is the ability of the bank to manage the liquidity position so that neither the liquidity is the profitability will suffer It involvers the provision for the withdrawal of deposit Short time cash cyclical and secular cash requirement of the specks - financial institutions

5 BANK DEPOSIT - It is divided into demand saving and time deposited

(a) Demand deposit - This is also know as checking account deposit payable on demand that is without prior notice of withdrawal like current account

(b) Savings deposit - This type of deposit is usually evidenced by a voucher in pass book form which the deposit / customer of the bank in required to notify the bank before withdrawal

(c) Time deposit - This deposit cannot be with drawn until after a specific period of time

6 ASSETS - These are the entire properties of a bank and other investment in other profitable organization

7 VAULTS - It is known as treasury / where liquidize kept

8 ASSETS MANAGEMENT - It is the allocation of funds The basic objective being maximization of fatigability solvency and regulatory constraints

9 BANK RUN - A run occurs in a bank when there is mismanagement of liquidity and profitability

10 TRADING ON EQUITY - This is a situation where a firm earns more with borrowed fund than that which is cost to borrow the fund