LIQUIDITY PROBLEM IN COMMERCIAL BANKS

By

ENEKWECHI LILLIAN NKEMDILIM

Presented To

Department of Accountancy

TABLE OF CONTENTS

TITLE PAGE

APPROVAL PAGE

DEDICATION

ACKNOWLEDGEMENT

TABLE OF CONTENT

CHAPTER ONE

1.1 INTRODUCTION

1.2 DEFINITION OF TERMS

1.3 SIGNIFICANCE OF THE STUDY

1.4 OBJECTIVES OF THE STUDY

1.5 SCOPE LIMITATION OF STUDY

CHAPTER TWO

2.1 WHAT IS LIQUIDITY

2.2 LIQUIDITY RISKS

2.3 LIQUIDITY VERSUS PROFITABILITY IN COMMERCIAL BANKING

2.4 SIGNIFICANCE OF LIQUITY RATIO

2.5 RATIONAL FOR LIQUIDITY RATIO REQUIREMENT

2.6 ACTORS AFFECTING LIQUIDITY IN COMMERCIAL BANK

2.7 FEDERAL GOVERNMENT STEPS TOWARDS SOLVING LIQUIDITY PROBLEMS IN COMMERCIAL BANKING

CHAPTER THREE

3.1 SUMMARY OF FINDINGS

3.2 CONCLUSION

3.3 RECOMMENDATION

BIBLIOGRAPHY

CHAPTER ONE

1.1 BACKGROUND OF THE STUDY

Liquidity banks means, "The ease with which banks assets could be converted into cash". The liquid assets include cash in the banks vault with the Central banks and to their government securities that have not been used as those assets is cash.

There are many reasons why a bank should have reasonable liquid assets in it assets portfolio, these include to be due to meet prompt demands for deposit withdrawals, that is the banks must maintain confidence and also be able to utilize profitable opportunities that may come out in future.

However, it should be noted that bank like most other business are profit oriented, operating to make profit for these share holders.

These profit could be realized only if there is enough depositors. The deposit will not come unless the depositors could be assured of the safely of their deposits to be assured. There has to be enough liquidity in the banks.

It is a known fact that action designed to make profit brings about illiquidity in the bank and versa.

Therefore, equilibrium has to be sought between the two these two extreme cases have been the constant concern of bank management.

Liquidity management involves provision for depositors withdrawals, short term cash requirement and cyclical and circular cash requirements. It also involves provisions to met with legal reserve requirements.

In Nigeria, the activities of the commercial banks are regulated by the banking act of 1970 as amended under the control of Central bank of Nigeria. The essence of these regulations were to maintain trust and confidence in banking systems as well as to achieve a special economic objective thus, in the period of mounting excess liquidity as was the case in the 1970's, bank were expected to hold some of their assets equal to a certain percentage of their deposits in liquid for this is known as legal reserve requirement. The components of legal reserve requirements are, cash establishment securities issued by the Central banks.

The rational for the use of those instruments was to map out the excess liquidity in the economy and also to stop the inflationary trends in the economy.

The excess liquidity in the banking sector give rise to inefficiencies in banks operation. Bank staff were no longer polite since they had little outlets to invest money, banks have devised new method of attracting deposits from their customers thus, the recent innovations in the banking sector.

1.2 SIGNIFICANCE OF THE STUDY

This research will also help the monetary authorities in no

small way towards the formulation and the implementation of their monetary and fiscal policy. Merchant Banks in Nigeria and in deeds other related countries with similar problems will equally also serve as a reference point to their researchers.

1.3 OBJECTIVES OF THE STUDY

1. Identify Federal Government policies about commercial banks Liquidity position;

2. To identify Commercial Banks Liquidity problems during the period 1988 - 1990;

3. To find out the effect of the various liquidity of Commercial Banks on their profitability;

4. To examine the extent to which banks liquidity problem have affected their loan policy;

5. To find out the effect of liquidity problems in relation to deposits from customers;

6. To identify problems of Commercial Banks with particular reference I.B.W.A;

7. To examine Federal Government steps towards solving liquidity problems in Commercial Banks;

1.4 SCOPE AND LIMITAITON OF THE STUDY

This research work which is based on the experiences of the

Commercial Banks is for easier collection of data, two banks are chosen from the whole Commercial Banks in the country.

These two banks are selected from both jointly owned with forewing equity banks. These banks are the African Continental Bank Plc, and The International bank for West Africa Ltd. (IBWA) respectively. The aim behind choosing these banks is for accurate representation of the capital situation in all the banks both those financed within and those that can get foreign aid.

Concepts like banks interest inflation rates treasury bills and certificate rates money creation by banks were thoroughly reviewed but not subjected to experificial study in this work.

1.5 DIFINITION OF TERMS

BANK DEPOSITS

This is the amount outstanding to the credit of is the customers of the bank but must be paid back when demanded. Deposits are not held in trust but are borrowed from customers. This type of deposit include the deposit.

DEPOSIT ACCOUNT

This is an account with the bank, withdrawal from which usually require a period of notice to be given, and on which interest is paid.

This type of deposit account includes time and saving although in Nigeria, the operation is different in that, it is operated just like cheque accounts.

TIGHT MONEY

An alternative term for dear money

BANKERS ACCEPTANCE

This is a draft that ahs been accepted by drawer bank. The draft is changed into acceptance by the stamping of the word. "Accepted" across the face of the draft, the signature of a bank officer who has been authorized to sign such documents and brief description of the transaction that lead to it.

BANKERS UNIT FUND

This was introduced into the market in September 1985, it is a scheme under which banks and other financial institutions can ivest past of their access liquidity resources. This instrument was designed to channels commercial and merchant banks and other financial institutions. Surplus funds into federal government stock through the issue of treasury bills and treasury certificates.

TREASURY BILLS

These are short term instrument normally issued within the maturity dated of 91 days. This instrument is issued by the Central banks of Nigeria to finance for the Federal Government.

MONEY AT CALL

This is the money lent to the borrowing bank from overnight to about seven days and payable on call. It is thereby as good as each but unlike cash, it earns some interest.

TIME DEPOSITS

A bank deposit which can only be withdrawn if prior notice is given or after expiry of a fixed time.