An Appraisal Of Liquidity Problems In Commercial Bank In Nigeria (A Case Study Of First Bank Of Nig Plc)

Description

TABLE OF CONTENTS

Title page

Dedication

Approval page

Abstract

Preface

Acknowledgement

Table of contents

CHAPTER ONE

Introduction

• Background of study
• Statement of the problem
• Purpose / objective of the study
• Research questions
• Research hypotheses
• Significance of the study
• Scope limitations and delimitation’s
• Definitions of terms.

Reference

 

CHAPTER TWO

Review of related literature

• Operational concept in commercial bank in nigeria
• Liquidity ratio

Significance of liquidity ratio

Computation  of liquidity ratio

• Cash ratio
• Liquidity risk
• Liquidity requirement of commercial banks in nigeria liquidity problem of commercial banks in nigeria Pre-SFEM experience post –SFEM experience
• Policies include by the central banks of nigeria in solving liquidity problem of commercial bank in nigeria

Reference

CHAPTER THREE

RESEARCH DESIGN AND METHODOLOGY

• Research Design
• Area of study
• Population
• Sample and sampling techniques
• Instrument of data collection
• Method of data analysis

Reference

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

• Data presentation
• Analysis of data

Reference

CHAPTER FIVE

Finding recommendation and conclusion

• Summary of finding
• Recommendation
• Conclusion

Bibliography

 

 

CHAPTER ONE

 

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

Liquidity is the word that the banks use to descried their ability to satisfy demand for cash in each rang for deposit it can also be deficit as the capacity of the bank to meet promptly demand that it pays its obligation

A bank is considered to be liquid when it has sufficient cash and other liquid assets to gather with then ability to raises funds quickly from the source to enable it to meet its payment obligation and financial commitments in a timely manner. In addition there should be a sufficient liquidity before to meet all mostly financial emergencies.

How much liquidity to held and in what forms to hold it are a constant concern of bank management.  Banks are required to comply with legal reserve requirement.

In addition banks need liquidity to meet seasonal and unexpected loan demands and deposit fluctuation.  The majority of the traditions can be anticipate in advance and met from expected cash inflow from deposition repayment or earning.

Cash reserves also are needs to take advantages to unexpected profit opportunities.

Or for what might be farmed aggressive purposes when a business from which the banks has been  working secure as a customer finally presents a loan application or a particularly desirable  investment develops the banks must have funds available to seize these opportunities.  During periods of expanding economic actively banks are frequently presented with attractive loan situation which can only be met if banks maintain adequate liquidity.  To determine a banks need at a particular time is to fund the ration of loan to deposits.  The higher the ration is the lees willing banks will be in lending out and vice versa.

In Nigeria commercial banks activities are regulat3dstrictly by the banking act of 1969 as amended under the control of the central banks of Nigeria.  As a result of those regulations by the central banks the commercial banks are required to hold specific assists equal to a certain percentage of their deposits and certain abilities is liquid form.  This is known as the legal reserve requirement.     In the legal reserve requirements are liquidity ration requirements cash reserve requirement stabilization securities issued by the central bank and liquidity problem for the purpose of this study are looked at as the problem encountered by bank managers who are responsible for liquidity management when there is either excess liquidity squeeze in the banking system or in community banks

• STATEMENT OF THE STUDY OR PROBLEM IDENTIFICATION

There is n o gain saying the prior to the induction  of the structural adjustment  programme (SAP) of which  the second –tier foreign exchange market (SFEM) if the nucleus the commercial banks in Nigeria have  been walloping in excess liquidity.

Consequently they maintained excess liquidity rations and were in the habit of refusing deposits from the public.  These may be accountable to some deficiencies in the management policies of the central banks of Nigeria and the overall under-developed nature of the entire economic system.

However the structural adjustment programme   with SFEM as the chief feature changes the trend.  The situation became that of shortage or liquidity crunch as it is popularly called.

In any cases for the purpose of these treaties the liquidity problem 9f commercial banks have been identified from two perspectives.

One is that they had excess liquidity before the absent of SFEM.

The other is that shortage of liquidity has been telling hard on them since the existence of SFEM under SAP in other   words this treatise takes a PER-SFEM and POST-SFEM change on the liquidity problems of commercial banks.

With respect to the excess liquidity situation this study intends to fund out the effects of the excess liquidity in the banking system on the profitability of commercial banks it investigates whether or not the policies imposed on the moping up the excess liquidity in the banking in commercial banks effects loan and advance to their customers.

On the hand the shortage of liquidity perceptive  focus in its (shortage of liquidity) effect on the profit ability of the central banks whether or not the policies of the central banks can actually currents  the shortage of liquidity affects loan and advances to customers.

1.3     OBJECTIVE OF THE STUDY

Having identified the problem to which this study addressed itself, I shall in this work make a critical insight into the dual problem of excess and shortage of liquidity in commercial bank of the two situations on the followings.

1. To identify the causes of liquidity problem in the Nigeria commercial banks.
2. To assess the effect of liquidity problem in the Nigeria commercial banks.
3. To determine the rate of the incidence of liquidity problem in the Nigeria commercial banks,.
4. To identify the possible measure to prevent or resolve liquidity problem in the Nigeria commercial banks.
5. To identify the reaction to the various policies of the government through the C.B.N to correct the two anomalies.
6. To determine overall impact of these tow situation n loan and advance to customers of the commercial bans.

1.4     RESEARCH QUESTION

• What are the causes of liquidity problem I n your banks?
• What effect have your bank encountered as a result of liquidity problem?
  At what rate is the incidence of liquidity problem to your banks?
• How have your banks been able to resolve liquidity problem facing it?

1.5     RESEARCH HYPOTHESIS

1. i) Ho: fraud is not a major cause of liquidity problem in Nigeria commercial banks.
2. ii) Hi: fraud is a major cause of liquidity problem in Nigeria commercial banks.

• Ho: liquidity problem do not result to banks distress and failure.

1. Ho: the incidence of liquidity problem is not high in the Nigeria commercial banks.
2. H₁ the incidence of liquidity problem is high in the Nigeria commercial banks.

1.6     SIGNIFICANCE OF THE STUDY

This research project is of particular relevance to the monetary and fiscal policy department of the   central banks of Nigeria various commercial and (to some extent) merchant banks in Nigeria.  It will also serve as a readable material for further researchers.

1.7     SCOPE AND LIMITATION OF DELIMITATION OF THE STUDY

This research project s designed to cove the project of PRE-SFEM and POST-SFEM era.   These two periods are to be used for comparative purpose.

Furthermore for easier collection data a bank particularly known was chosen from the white commercial banks of Nigeria limited.

I wish to express that I encountered great difficulties in collecting information through the questionnaire.

Another constraint was time that is then duration given within the semester is very short and again another is financial problem these problem also lingered me from covering more bank branches other than the one in this study.

1.8     DEFINITION OF TERMS

BANKS DEPOSIT: The amount outstanding to the credit of the customers of a bank Deposit becomes the property of the banker but must be refunded when ask for.

DEPOSIT ACCOUNT: An account with a banks withdrawals from which usually require period of notice be given and on which interest is paid

TIGHT MONEY: An alternative term for the money banks unites funds.  This was introduction in 1975 to mop up excess liquidity in the economy.  The need for this additional money market instrument arose because of the excess liquidity in the economy following the oil born and the government reluctance to increase its borrowings trough the issue of borrowing certification

BANKERS ACCEPTANCE: It is a draft has been accepted by the drawer bank. The changed into an acceptance y the stamping of the word acceptance across he face of the draft the signatures of a   bank officer who has been authorized to sign such document and draft description that rise to it.

TREASURY CERTIFICATE: Are issued for the purpose with maturity on one or two years.

TREASURY BILLS: Are short-term debt instrument (91days maturity ) issued by the central  bank of Nigeria to raise financial for the federal government.

MONEY AT CALL: This is money lent to the borrowing bank from over-night to about seven days and is repayable on call it is thereby as good as cash but unlike cash it earns some interest.

TIME DEPOSIT: A bank deposit that can only bee withdrawn of prior notice is given or after the expiry of a fixed time.

REFERENCE

Sayers R. S.(1960) Modern Banking London Oxford University Press  P 150.

Chandler L. V. (1986) The Economic of Money and Banking New York, Harper and Row Publisher Inc, p.151

Hanson J. L. (1974) A Dictionary of economic and commerce Great Britain:

Richard Clay the Chancre Press Lit Bun Gay Suffolk. p.30

CHAPTER TWO

REVIEW OF RELATED LITERATURE

OPERATIONAL CONCEPTS IN COMMERCIAL BANK IN NIGERIA

A lot has been written about liquidity problem in commercial banks in Nigeria.  But most of these works dwelt on the prevailing situation before the introduction of the structural adjustment program (SAP) and the second-tier foreign exchange market (SFEM) as their main feature.  Expectedly this leads to the liquidity problem in commercial banking in Nigeria not being exposed. This study intends to expose filling the liquidity problem of Nigeria commercial banks both before and after introduction of SFEM i.e. The PRE-SFEM and POST-SFEM period.

This is necessary due to the fact that before SAP period of which SFEM is the nucleus commercial banks in Nigeria is operated with liquidity due chiefly to the unprecedented revenue from oil.  But at the introduction of SFEM the situation was changed to the shortage of liquidity.

For the purpose of this study the period under review is from 1980 to 1986, 1986to 1989.  The period which of 1980 to 1986 represents the pre-SFEM period while 1986 to 1989 represents POST-SFEM period. In view of this section we should be acquainted with their following:

1. the term liquidity
2. liquidity and profitability
3. liquidity problems in commercial banks in PRE-SFEM and POST –SFEM experience of banks

• THE TERM LIQUIDITY

Liquidity can be define in money ways but according to Uzoaga (1981) liquidity in banking industry can be define as the banks capacity to meet promptly demand that it pays its obligation.  It can also be defined as stated banks balance, cash vault and those government securities which have not been collating for borrowing.

The above definition has common feature and the fact is that some assets are kept in anticipation of demand for withdrawal by their deposits.  The liquidity of an asset is the quality of that asset.  That  makes it easily convertible into cash with little or no risk of loss for example one Naira bill is 100% liquid because it is already money and can almost automatically exchange for  any other naira bill or it equivalent in coins but an old various or equality  stock is difficult to sell even at some substantial discount.  The former is said to be liquid but the latter are not.

Liquidity is one of the many problem with which a bank management struggles constantly.  The measure of liquidity needed by a bank over a period of time is determine by an accurate forecast of cash needs the expected level of liquid assets and cash receipts.

2. LIQUIDITY AND PROFITABILITY OF BANK

An individual commercial bank is reviewed as an economic unit whose aim is to maximize profit.  Bank hold portfolio of their assists and liabilities according to Adeanye (1987) the assets held by bank may be civilized into two broad classes called earning assets and non earning assets earning assets are made up of the balance sheet items called loan and investment.  Non- earring assists consist of fiscal assets the total reserve of the bank and non- interest earning deposit with the central bank.  Profits are generated by the earring assets (loan and investment) while liquidity is provided partly by non- earning assets like cash balances held in the bank vault and at the central bank and cash reserve.

 

EQUI8LIBRIUM, BETWEEN PROFITABILITY AND LIQUIDITY

Bank makes profit so as to be able to meet with substantial costs include and adequate return on their assets.  They are also accountable to their share holders who have interest in them future dividends and growth.

A banks profit fulfils servers other purposes like the profit constitute a buffer to absorb the shock of unexpected losses especially those arising  from bad debts provisions are made profit in respect of loans considered uncollectible of such doubtful value.  Due to the advert of oil revenue there was unprecedented rise the rate of growth of commercial banks deposit.  This gave rise to excess liquidity in the banking system as banks limited funds for the investment of their idle funs.

According to reed (1960) under tight money condition “banks should adjust their liabilities and capital funds management to meet their objectives of profitability and liquidity problem as having at all time sufficient funds to meet the demands for money that may be upon them.

These tow emphasized on liquidity problem under tight money conditions (shortage of liquidity) as was witnessed in Nigeria during current change of April 1984.  And also when SFEM was introduced under SAP in 1986 the commercial banks found it difficult to meet.

Apart from the fact that commercial banks are having a shortage of liquidity the central  bank of Nigeria (C.B.N) earned as much as H1 7 billion in six weeks its SFEM operation .  Measures that contributed to this liquidity shortage were the lubrications of the foreign exchange market. (FEM) this action solely led to withdrawal of over N10 billion deposits held by the banks against letter of credit.  That last in the withdrawal of deposit of part stateless and other government agencies from commercial and merchant banks.  This caused ignorance in assets and liabilities profile of many banks.

 

 

 

2.2     LIQUIDITY RATION

Liquidity ratio can be defined as the percentage of total deposit liabilities which commercial banks are required by law to keep liquid.

Cash is an exchange of liquidity requirement which can be influential on fund management as soon as the commercial bank began lending out deposits.

This is so because they had to take rational decision on the prudent level of cash reserves necessary to meet the demand of depositors.  It is the central bank that control and fix liquidity ratio in a particular country liquidity ratio very from county both in structure and its contents.

 

SIGNIFICANCE OF THE LIQUIDITY RATIO

The original of liquidity ratio was to provide commercial bank with cash in some proportion to deposit so as to assure depositors of convertibility for there deposits in cash.

That is to say that it was designed to provide line of defiance for a bank in meeting with drawls of depositors either by land in cash or by cheque.  This requirement was though necessary in order to maintain the credibility of customers for inability to meet demand for cash world mean failure or at least lose of confidence in the liquidity ratio is its uses for regularly bank deposits and indirectly the volume of banks assists.

As the liquidity ration rise or falls so do commercial banks and loans and investment fluctuate the reverse directions.  Correspondingly the volume of economic activity can go creating more and more simply  by issuing cheques suppose the central banks prescribes a liquidity ratio of 10% this means that if the first bank plc for example was to receive a total initial deposit of N100 from  its customer then N10 represents 10% of the total deposit.  It is allowed to create (i.e. 90% of N100)

COMPUTATION OF LIQUIDITY RATIO

Nigeria by regulation there is a minimum specified liquidity ratio that must be maintained by banks according to Nwankwo (1980) in company the acceptable liquidity assets are.

• Cash
• Nigeria treasury bills
• Money at call held with other banks less money at all held for other banks
• Certificate of deposit
• Banker unit fund
• Government securities
• Balance held with internal banks current liability of a bank include:
• Current (demand) saving (pass-book) and bane deposit account.
• Excess  money held for internal banks
• excess money at call held for other banks
• Certificate of deposit issued for not more than 18 months to maturity.

Then liquidity ratio =   Total specified liquidity assets

Total current liabilities

Deposit made with the central banks in respect of shortfalls on loan to agriculture and residential building construction and cash holding for meeting cash reserves and deposits for letters of credit do not count for purpose of comparing liquidity ratio. Reserve requirement must be met no a monthly average basis so it may be under or cover the required level on anyone day.  When a banks reserves excess legal   requirement it may adjust its position by selling surplus to another bank in order to earn interest in these funds.

Similarly a bank that has not met its reserve requirement must take steps to cover the deficiency by increasing its deposit base.  In the event of a temporary shortage of liquidity cash, call money can be purchased from other banks.

These transactions are effected through banking officers of the central banks by debating and crediting the respective banks account.

 

• CASH RATIO

The central banks of Nigeria require banks to maintain a non- interest caring reserve against demand deposit.  The cash deposit is express as a ration of each banks total demand deposit liabilities.

Each commercial bank maintains a minimum amount of cash deposit with the C.B.N banking office in Lagos.  For this purpose banks are classified into classes. It should be noted that the classification is based on total deposit where as the ratio itself is a ratio of cash to total demand deposit.

For 1989 it is follows:

TABLE 1.1

CLASS	TOTAL DEPOSIT LIABILITY	RATIO
1	N1 billion more	9.0%
2	N500 billion or more but less than N1 billion	8.0%
3	N100 million more but lee than N500 million	7.0%
4	Less than N100 million	6.0%

Source: central bank of Nigeria Annual report and statement of account. 1989.

 

These reserves are carried in from of foreign deposits at C.B.N with effect from June 1979.  The cash assumed the responsibility for calculating debited with the responsibility for  calculating debited with  the appropriate percentage on a 11.0 – 9.0% which is immediately placed on a non-interest earning cash reserve account with is repeated every month   and the reserve is either increased  of  demand at the end of month.

When there is growth in demand deposit the bank’s current account at C.B.N is debited and the reserve account added with the difference in order to raise   the percentage to the appropriate level and vice vase when there is a drop in demand deposit.

This after then initial deposits subsequent debits or credits to the reserve account are insignificant.

LIQUIDITY RISK

This is the risk that makes funds not to be available to meet deposit withdrawals loan drawn-downs matinees of borrowing or other cash flows.  According to Abubakar (1985) banking liquidity is managed with the aim of meting the following objective:

1. Assuming credit customer that funds are available to meet their borrowing requirement
2. Assuming deposit customer hat funds are available to provide for their withdrawal of funds upon demand or at maturity
3. Maintaining access to liquid reserves sufficient to enable the bank to respond to potentially profitable credit or investment opportunities.
4. Diversifying source of funds in term of type of the investment and maturates
5. Maintaining the statuary liquidity ratio of 30%  and also ability to meet its commitment under varying economic and financial conditions

Liquidity is available on both the asset and liability sides of the balance sheet assets liquidity resides in

1. The ability to convert asset to cash and
2. The self liquidation of assets liquid which can be sold to other banks or securities and certain loans mating ways and inter bank placements provided liquidity as they are repaired.

 

2.5     LIQUIDITY REQUIREMENT OF COMMERCIAL BANK IN NIGERIA

The ideal of liquidity requirement arises as follows:

The banker needs to have some funds as cash or secondary reserves to meet withdrawals of depositors.  The deposit liquidity of bank which have very as high turn-over ratios require more liquid assets to we kept by the manager to meet the high frequency of withdrawals.  It turns out from experience that demand deposits are withdrawal for more frequency than equivalent time deposits in providing for liquidity.  Banks management must recognize the money movement in the economy like seasonal irregular cyclical and secular movements.

Seasonal movement is directly related to the changing season by repeating themselves every year.  The precise seasonal pattern may change with the passage of time for example retail sales normally rise in December because of the Christmas season. Irregular movement is often difficult to

Predict in term of their occurrence or severity.  Since they do not establish patterns they do however affect the level of deposit and demand of loans.  Example of irregular movement were a labour strike the effect of some natural catastrophe such as earthquake a flood a war scare or some unusual economic or political development.

Cyclical movements are the alternating booms and burst which characterize free market economic especially in the west.  Cyclical movement is more difficult to relic than seasonal movement.  During the contraction period of a business cycle loan demand declines because of slumping business and deposit say shrink because of falling income (consider retrenchment) in self reliant or mature.  Economics the monetary authority adopts monetary policies which tends to offset then contraction of deposits in the banking system during an economic slump.  During the prosperity phase loan demand increases and so do deposits but not always at the same fate.

In some periods of prosperity disinter mediation   of deposits occur presenting serious liquidity problem for many commercial banks.  This scenario is experienced in the well develop market economic of the west.  Liquidity requirement became influential on fund management as soon as the commercial banks began lending out deposits.  This is because   from then they hid to take rational prudent level of cash reserves necessary to meet the demand of deposit.

All the commercial banks in Nigeria are required by law to keep specified liquid assets which shall be expresses as a ratio of deposit liabilities.  This is known as liquidity ratio of commercial banks assets which they are legally required to keep in liquid form.

The liquidity of an asset is the quality of the assets that make it easily convertible into cash with or no risk of loss.

The items of portfolio of assets have varying degree of liquidity. The most liquid asset being cash and other reserve assets these assets might be arranged along a continuous from most to leas.  Liquid assets cash being most liquid asset and the case which other assets can be converted into cash (though sale to collection) provided the standard of liquidity.  Among the least liquidity of assets are bank premises.  A bank’s loans are also among the least liquid assets.

Regular amortization of the principal sum through monthly payments can provide considerable liquidity to a loan portfolio but it would be difficult to liquidity the entire portfolio  it is to be noted that the fixing and control of liquidity ratio in Nigeria is the responsibility of the  central banks of Nigeria (C.B.N).  The determination of the liquidity requirement of the banks rests with the banks management of the bank asset.  The allocation of bane funds to various assets classification is contained by regulations and laws towards the need to earn sufficient income.

The central problem of assets management is to balance need for liquidity with the desire for projects.

However liquidity appears to be push without incurring under exposition to liquidity risk so a bank must strike a balance  between adequate liquidity and its reducing  effect on profits and high profitability with the consequent worsening the liquidity position   liquidity  is one the many problems with in advance economic. The perversity of the Nigeria situation arises from the general problem of under development and immaturity.

There is no profit formular for determining banks liquidity needs; the amount of variation that occurs in deposit and the demand for loans.

LIQUIDITY PROBLEM OF COMMERCIAL BANKS IN NIGERIA

As it has been explained in chapter one a general consideration of liquidity problem of commercial banks is demand appropriate here since the bank share similar experience during period of liquidity as is presently the case.  Liquidity in its most elementary definition is the availability of liquid resources to meet currents demand liquidity problem arise  either as a result of the banking system having excess reserves or little reserves to meet demands. The liquidity problem that will be discussed here are those associated with both excess reserves and little reserves- excess liquidity and shortage of liquidity.  The former is designed “PRE-SFEM” and the latter “: POST –SFEM” experience in this treatise.

PRE-SFEM EXPERIENCE.

Some factors have been identifies as the causes of excess liquidity which commercial banks in Nigeria experienced prior to the introduction of SFEM.

These factors are:

1. Increased inflow of foreign exchange from oil sector.
2. Due to the unsophisticated and rudimentary nature of our money market there were markets for short- term investment for commercial banks.
3. These banks refuse to entrust their bulk of their resolves to long tern investment these check the private sector and carries less to finance agriculture production which attracts lower interest and fairly generous maturates.
4. One of the reasons for the importance of liquidity ratio in Nigeria relates to items included in the liquidity list.

This C.B.N definition of liquid assets includes  such income earning assists as treasury bills inland bill, money at call and other re-discount able items. The implication of these shapeless list is that deposit  created by these banks from a part deposit created by these banks from a part of the  liquidity ratio these banks go no creating deposits while concurrently satisfying the liquidity  ratio effectively for  monetary control since  the liquidity  ration effectively for monetary control since the liquidate ration seems to be determined by the logical follow up to the foreign  currency domiciliary  accounts which was some time ago to enable people keep hard currency in the country .

SFEM  in the conjunction with the regulator of the economy design  different rates at which  foreign exchange transaction were design where by most  transaction.

Takes lace on the second-tier.  The limit of liquidity in banking  sector comes in the wake of  structural adjustment program of which SFEM is the nucleus .SFEM  has been properly deigned a way to step up the exchange rate for Naira which will structural re-adjusting the enteric economy and the shortage of  liquidity was the product of the following :

1. The C.B.N embarked on a massive mopping up of liquidity on the economy of all Naira deposit made by importers   for trade transaction whose settlement were still subject to negotiation between the country and exporters wise recalled suddenly in August 1986 which  involved N3.3 billon.  Also more mopping up occurred in October the same year when C.B.N  recalled the reaming part of such  “free”  fluids in the banking sector and there has already made a drastic impact on these banks portfolio
2. Over N10 billion deposit held by banks against letter of credit were liberalized the foreign exchange markets.
3. The conciliation of foreign grantees for Naira denominated loans by the banks were required to call back such loans or have their equivalents automatically debited in their C.B.N accounts.
4. The withdrawal of deposit of parastatals and other government agencies from commercial and merchant banks this resulted in the withdrawal of over N5 billion from the system causes in congruence in the assets and liabilities projects of money banks.

2.6     POLICIES  INTRODUCTION BY THE C.B.N IN SOLVING LIQUIDITY PROBLEM COMMERCIAL BANKS IN  NIGERIAN

The government though the C.B.N introduced some measure to aid.  These banks their problem of adequate liquidity because this can cause problem of adequate liquidity because this can cause problem of adequate short-term investment outlets for surplus  cash reserves of the banks such measure are as follows:

1. Banks are required to hold a minimum amount of specified assets which shall be known a ratio of deposit liquidates. This is the liquidity ratio of the bank which was 30% for all banks which is meant to reduce banks liquidity.
2. The C.B.N excludes some asset such as stabilization securities special deposit and amount of cash held by a bank to met cash reserve requirement from the computation of statutory ratio of these banks.
3. The C.B.N at different times included adjustment of interest rate structure reduction of  loans of treating obligation  and various occasion of moral suasion.

I        Internal debt service of government which would encourage liquidity in banking system economy, and in general;

Ii       Tax relief: reduction for both persons and  firm tax which may result increases in bank liquidity if their tax savings are deposit with banks. E.g. company income tax was reduced from 45% to 40%

REFERENCE

Adekanye Femi (1987). The Element of Banking in Nigeria Graham Bhrn Publishers. p. 2.

 

Uzoaga W. O. (1981) Money and Banking Nigeria Enugu Fourth Dimension Publishing Co Ltd.

 

Alhaji Abubakar Dalic  (1985) “Challenge of Banking in the 80” Business Concord Lagos Concord Press of Nigeria Ltd P.8.

 

Reed C.W. (1960). Commercial Bank Liquidity Problem Oxford University Press New York.

 

Nwankwo Abraham (1980). Liquidity Requirement and Fund Management By Commercial Banks Business Times Lagos Daily Times of Nigeria Ltd

 

 CHAPTER THREE

 

RESEARCH DESIGN AND METHODOLOGY

3.1     RESEARCH DESIGN

In order to obtain relevant and accurate data or information the researcher decided to adopt the primary and secondary source of data. In addition the population of study is associated with commercial banks but the researcher has decided to limit his study in first banks plc because of time and financial constrain.  The researcher also made use of simple random sampling which gives every unit in the population an equal chance of being drawn into the sample.  Hence in the case of area of study this was limited to Enugu metropolis and the researcher presented and analyzed his data by the means of tables and converted into percentage (frequency of occurrence) as well as employing chi- square technique.

  3.2   AREA OF STUDY

In respect to the area of study the researcher restricted his study within Enugu metropolis.  This is as a result of time factor financial constraints and all other problem that researcher is facing in the process of trying to cover the entries nation.

3.3     POPULATION

There are many commercial banks in Nigeria today.  Due to time constraints the study is restricted to first banks of Nigeria plc precisely Okpara Avenue Branch Enugu.

Total population

Top managers     10

Middle managers 6

Lower staff          14

Total                   30

The total population size is 30

3.4     SAMPLE AND SAMPLING TECHNIQUES

The researcher made use of the simple random sampling among the staff of the banks during the distribution of the questionnaires.

The sample size (n) of this study was determined using the formula.

N   = n

1 + N (E) ²

 

Where n = sample size

n = population size

e² = margin of error (5%) assumed

n    = 30

1+30 (0.05)²

 

 

n = 30

1+30 (0.0025)

 

n = 30

1+30 1+0.075

n    = 30

1.075

n =28

 

3.5     INSTRUMENT OF DATA COLLECTION

Data collection was based on both primary and secondary source of data in the case of primary source or data it involves oral interview as well as the use of questionnaire to supplement information not included in the text-books and all other secondary source of data.  The secondary data is through the use of text book seminar projects journals annual report of the bank as well as the control bank of Nigeria economic and financial review.

 

3.6     METHOD OF DATA PRESENTATION

In order to arrange and present the data collected through the questionnaire in a way that it will be meaningful and understandable by the users the researcher made use of tabular method in presenting the data

 

3.7     METHOD OF DATA ANALYSIS

For the purpose of this study chi- square (x²) would be employed; that is the hypothesis formulated by the researcher was tested by the means of chi-square model.  The formula for chi-square is as thus.

X2 = E (^OF  – ^EF)

EF

Where x² = chi-square

^Of  = observed frequency

Ef = expected frequency

REFERENCES

Orjih   J.  (1999)  Business research Methodology Enugu. Meteson publicity company p. 84

Ozo J, Odo p. Ani J and Ugwu J (199) introduction to research writing for business and financial student. Enugu sunny enterprises p.222

 

Ozo J. U. (2001) marketing research Enugu Enzoi Books P. 304

CHAPTER FOUR

 DATA PRESENTATION AND  ANALYSIS

4.1     DATA PRESENTATION – (QUESTIONNAIRE ADMINISTRATION)

In this chapter the responses made by respondents to the question listed in the questionnaire are analyzed.  The analysis are aimed at identifying the percentage of the sample size who responded their positively or negatively to each question.

Also they are aimed at determining the reasons for such responses and how they could be utilized as tools for solving the problems based in this study. A total of 28 questionnaires were collected.

Each question was reproduced and followed by a   table where necessary showing the statistics of the respondent interpretation of the result.  Also bar chart and histogram will be used to present the data. Also chi- square will also employed for test and analysis of hypothesis.

 RESEARCH QUESTION ONE

What are the causes of liquidity problems in your bank?

Table 4.1a

OPTIONS	RESPONDENTS	PERCENTAGE (%)
Government security	–	–
motivation	–	–
Poor management	–	–
Inability to meet	–	–
Promptly demand	28	100
All of the above	28	100
Total	56	100

 

There are many causes of liquidity problems banking industry.  Therefore all the five options were   accepted by the 28 respondents to be the causes of liquidity problem in the bank.

RESEARCH QUESTION TWO

What effect has your bank encountered as a result liquidate problem?

Table 4.1b

OPTIONS	RESPONDENTS	PERCENTAGE (%)
Seasonal movement	20	83
Cyclical movement	80	17
total	28	100

In respect to the above table it entails that 20 respondents agreed that seasonal movement is encountered as a result of liquidity problem, while 8 agreed that cyclical movement effects liquidity problem.

BAR      CHART

	X   – AXIS

RESEARCH QUESTION THREE

At what rate is the incidence of liquidity problem to your bank?

Table 4.1c

OPTIONS	RESPONDENTS	PERCENTAGE (%)
Fund management	5	.8
Balance held with internal banks	2	6
Government securities	1	3
All of the above	20	83
total	28	100

From the above table 5 respondent 2 respondents and I respondent agreed that the incidence of liquidity problem are fund management balance held with internal banks and government securities respectively.  Also 20 respondents agreed that the forms of fraud are the three (3) above

RESEARCH QUESTION FOUR

How has your bank been able to resolve liquidity problem facing it?

Table 4.1d

OPTIONS	RESPONDENTS	PERCENTAGE (%)
30% of liquidity ratio for all banks	7	22
C.B.N exclude some asset e.g. special deposit stabilization securities	2	11
Tax Relief	5	28
All of the above	14	39
total	28	100

 

• ANALYSIS OF DATA

TEST OF HYPOTHESIS

RESEARCH HYPOTHESIS

H0   = fraud is not a major cause of liquidity problem in Nigeria commercial banks

Hi   =fraud is a major cause of liquidity problem in Nigeria commercial banks.

Using chi- squared as a test technique                              E

STEP I:  putting the response on a table we recall question 12 on the questionnaire which are related to hypothesis   (11) above analysis of question for hypothesis (11)

RESPONSE	FREQUENCY
Agreed	20
Disagreed	8
Total	28

 

Step11:

Determination of the value of x²

X² = E (0- E)²

E

response	0	f	0-E	(0-E)2	(0-6)2
Agreed	20	14	6	36	2.6
disagreed	8	14	-6	36	2.6
Total	28				5.2

 

Calculated x² = E (n –E)²

E

= (20 – 14 )² +  (5.2 – 14)²

• 14

 

• + (-8.8)²

14                   14

 

36          +    77.4

• 14

= 2.6  + 5.5  = 12.6

STEP 111: Determining  the degree of freedom

D +   = (r-1)              (c –1)

i.e.      =  (2-1)   (2-1)     = 2

Level of significance = 0.05

x2ceitical  =3. 841

Compare the two values

x² critical  = 3.841

x²  calculated  = 5.2

x² calculated   x² critical

Decision inference:

reject H0  since the calculated x²

Greater than the critical value names which by implication entails that lack of staff

Motivation  is the major cause of liquidity problem in commercial banks in this country.

RESEARCH HYPOTHESIS TWO

H0  = liquidity problem do not result to bank distress and failure

H1   = liquidity problem result to banks distress and  failure.

Using chi- square as a test technique

X²    = E (0-E) 2

E

Where

X²    = chi- square

E =sum of

O = Observed frequency

E = expected frequency

RESPONSE	FREQUENCY
Agreed	22
Disagreed	6
Total	28

Assumption

Level of significance 5%

Expected data 14% for each option

Degree of freedom  (R  – 1)  (C-1)  where R= Rows

(2 –1) (2-1)  c = column

= 1×1  = 1

Decision rule:

Accept Ho  if the calculated value of x²  is less than the critical value otherwise reject H0 at level of significance  and degree of freedom

CHI   – SQUARE TABLE

response	O	E	(0-E)	(0-E)2	(0-E)2
Agreed	22	14	-8	64	2.6
disagreed	6	14	-8	64	4.6
Total	28				9.2

 

CALCULATEDX²   =   E  (0-E)²

                                                                      ^E

= (22- 14 ) ²     + (6-14)²

• 14

 

(  8    )²     + (  -8  )²

• ¹⁴

                   ^{4.6   X       4.6     =   9.2}

 

Deterring the critical value of x2

From the critical value of x2 table

Degree of freedom the critical value is

3.841.

Compare the two values

x²  critical  = 3.841

x²  calculated  = 9.2

x² calculated  < x² critical.

Decision

Reject  H0 since the calculated x²  is  greater than the critical x  which by implication entails that use of seasonal movement in reducing the liquidity problem in bank

RESEARCH HYPOTHESIS THREE

H0  = bank distress and  failure are not the major effect of liquidity problems in  bank.

H1  = bank distress and failure are the  major effect of liquidity problems in bank .l

Using chi-square as a test technique

X2   = E (0-E)2

                 E

Step 1 putting the response on  a  table

We recall question:

RESPONSE	FREQUENCY
Agreed	20
Disagreed	8
Total	28

 

 

Step 11 :

Determination  of the value of x²

 

 

X²      = E (0-E)2

                                                             E

 

 

response	O	E	(0-E)	(0-E)2	(0-E)2
Agreed	20	14	-6	36	2.6
disagreed	8	14	-6	36	2.6
Total	28				5.21

 

Calculated x2  =   E  (0- E)2

                                  E

= (20 – 14)2   + (8  – 14)2

• 14

( 6  )2     +    (-6  )2

• 14

 

36        X   36

• 14

2.6    X 2.6   = 5.2

 

 

Step 11: determining degree of freedom

Df   =  (r –1)    (c-1)

I.e. (2-1 )   (2- 1)     =  1

Level of significance   = 0.05

X²   critical   = 3.841

X²  calculated   = 5.2

X² calculated >   x² critical

Decision

Reject H0 and Accept H1. Since the calculated x² is greater than  the  critical value.

 

 

REFERENCE:

Ozo, Odo, Ani  J. and Ngwu t. (1999). Introduction to project  writing for business and financial  studies Enugu  Sunny Enterprises pp. 188- 189.

Wanda E. C.   (2000)  intermediate statistics Enugu   JTC  publishers. pp 129- 130.

Orjih J.  (1999)  Business research methodology Enugu: Meteson publicity company pp. 202 – 204

CHAPTER FIVE

 FINDINGS RECOMMENDATION AND . CONCLUSION

5.1            Summary of findings

The study revealed that there are two types of  liquidity- problems.  The problem of excess  liquidity and the problem of liquidity shortage or liquidity crunch.

The problems of excess liquidity and shortage of liquidity are usually attributed to the monetary authorities whose legal goal is  to maintain an equilibrium level in  the economy.  To them excess liquidity indicates  a rise in money supply which is not desirable in the economy for fear of inflationary pressure while liquidity crouch may be characterized   by inflation which affects their businesses adversely.

To them excess liquidity might signify unrestrained credit expansion excess profit  and guarantees growth.

On the other side of the coin cash rescues their profit and  is therefore a serious set back

The major problem is therefore a situation of liquidity shortage which reduces their profitability.  That is if the shortage is as a result of very  low liquidity base  that inhibits business expansion on the other hand if the shortage of liquidity is as a  result of  high investment of bank fund in long-term investment  (  loans and advances)  and other illegal assets this amounts to very high profitability  though very illegal situation.  All the same this is still a problem because under such situation  the banks can not stifle the  customers demand from time- to time  withdrawals.

Also they will not have enough cash foreign  exchange transactions . The summary of findings appears as follows:   s

PRE- SFEM

I        excess liquidity in commercial banks affect their profitability.

Ii       The policies imposed on the commercial banks  by the central bank could not actually mop up  to the excess liquidity in the banking system.

Iii      Excess liquidity in commercial banks:  Increases loans and advance to their customers.

iv       Shortage of liquidity in commercial banks reduce the profitability of commercial banks

V       The polices imposed on the commercial banks by the central bank cannot improve the shortage of liquidity position of commercial banks.

Vi      shortage of liquidity in commercial banks reduces loans and advance to their customer

 

5.2     AN APPRAISAL OF LIQUIDITY PROBLEMS (RECOMMENDATION)

Having recognized the Littleton excess liquidity problem   (pre – SFEM) and the existing shortage of liquidity problem (Post – SFEM) of commercial banks in Nigeria as treated in the treatise it may now be appropriate to make recommendation that may if adopted will alleviate the obvious  problems so  that commercial banks can boldly  assist to themselves in tacking their future roles and responsibilities.

The recommendations made have mostly related to the shortage of liquidity situation since that is the prevailing situation in banking system of which banks are part of.

The following recommendations are therefore provides:

A       TO THE MONETARY AUTHORITIES

The monetary authority should also endeavor to solve the problem of excess liquidity which  some polices to achieve desirable economic goal by raising  liquidity crunch.

Therefore the following recommendation is provided  to help the  monetary authorities  combat the problem of excess liquidity which  still manifests under the Post-SFEM era.

1        EFFECTIVE SUPERVISION

The central bank makes effective policies for forward combating excess liquidity but it   fails to effective them by not effectively supervising  these  to see that they are operating in consonance with its monetary policies.

2. GOOD TIMING

The effectiveness of monetary policies largely depends on their  timing.  Government should  impose tight monetary policy when it sees  that the economy is overcharge with increased  money supply and also this should be introduced  at the beginning of any fiscal year and not haphazardly.   This should be made possible when the monetary authority carries out adequate research on the behavior of the economy to avoid the incidence of frequent adjustment

3. DISCRIMINATORY MONETARY POLICIES AGAINST THE BANK

The big banks are known for throwing monetary reserves and are not affected when uniform monetary policies are introduced to  all the commercial banks.  The central banks should therefore introduce discriminatory monetary policies to these banks  to adequately take care of their excess liquidity.  In addition the C.B.N should monitor their activities since these banks can discount their foreign bills or borrow from foreign branches (or afflatus) sometime unofficially to bank their liquidity requirement.

In the case of the preventing liquidity problem  liquidity crunch the monetary authority should apply the following measures to alleviate the problems

1. DEPOSIT WITH COMMERCIAL BANKS:

As  a result of the severity of the shortage of liquidity in the banking system and the need  for the economy to be reflected it may be advisable for the central bank t lodge deposit with the commercial banks.

The deposit would of course be subject to interest payments.  This will go a long way in extricating bank from their shortage of liquidity problem

2. REDUCTION OF LIQUIDITY RATIO

It  may also be wise to lower the liquidity  when it is  realized this requirement has only kept most asses of the banks in.  liquidity from this  reducing their profitability.  Besides it is evident that banks will be having difficulties coping with the present ratio of 30% as a result of the shortage liquidity prevalent in the banking system.

3. There is a nagging need for the removal of some income earning assists in the computation of the liquidity ratio. The central banks definition of liquidity assets includes such income earning assets as  treasury bills inland bills money at call and other rescindable items.

It has been  pointed earlier in these treaties  that the inclusion of these income earning assets in the computation of the liquidity ratio makes the liquidity ratio too wide to permit effective use hence reducing its potency it is therefore desirable to remove such assets in the liquidity ratio computation in order to enhance its effectiveness.

4. INCREASE INTEREST RATES-:

The Minster budget and  economic planning announced an interest rate  structure with a ceiling of 12.5% interest rate.  On bank lending and a minimum of 12.5% on saving  deposits in 1988.  Time deposit was also to attract a minimum interest rate of 12%.  The range of 12 to 14 percent or the about for deposits is considered  too low if the rate of inflation and investment  returns are taken into consideration.

While one would not support an outright floatation the ceiling on lending rate should have been increased to say 20% as a reflection of realistic cost  of capital in the economy. More so, when it is realized that credit attracts as much as 30% in the in organized financial markets scattered all over the country.  Banks are expected to take a cue  from the consequent high lending rate to fix deposit rate that could reasonable stimulate financial saving and foreign capital inflow. With enhanced disposable income as  announced by the minister and the case of remitting dividends local mobilized and inflow of foreign  capital will be greatly mobilized through higher interest rate structure.

5. ADJUST MONETARY POLICY

It  may be very necessary to adjust the  restrictive monetary and credit guideline for the year if banks are to get out of their problem.  That the growth rate of money supply would be limited to 15% may not in its self moderate inflationary pressure.  More so,  when it is realized that Nigeria’s inflation is not demand pull but largely a cost-push and in structural one.

The minister of  bank finance also disclosed that the growth in aggregate bank credit will be limited to 8.1% during the year.  While the  rate of expansion to both government  and private sectors will be limited to 2.5% and 10%respectively.

While these respectively monetary guidelines previously are considered with the need for provident demand management and efficient resource allocations hey may however stiff production in the small and medium scale industries where the demand for bank credits  rate of money supply need not  to be limited to 1.5% something greater than will be appreciated.  Besides bank credit should be increased  too by some reasonable percentage.

 

B       TO  THE COMMERCIAL BANKS

The commercial banks should also take the following steps in combating their present liquidity problem shortage of liquidity.

1        BANK  ACCOUNT:

As an effort to attract  deposits banks should adjust their requirement in order  to encourage opening of more accounts.  Opening of any from of bank account should be completed within a few minutes.  The condition reference and  minimum earning  level should be eliminated as these discourage prospective depositors.  This will go a long way in helping them “get out off the wood”.

2. DIVERSIFICATION OF SERVICES:

There inevitable need for banks to spend into other area of financial activities as a means of earning more specialized service than they place currently do as example is what is  currently taking place in west Germany  where banks offer non-banking financial service.  The trend is gaining wide acceptance in several  banking activities act as issuing houses stack underwriter income tax and insurance advisers, mortgage negotiators and so on

3. RURAL BANKING:

In  order effectively mobilized   rural savings more rural banks should be established.  This become increasing necessary when it is realized that banking service are not available to some rural dwellers whose saving could be better utilized by the note that more rural banks were opened in 1989.  It should be continued.

4. INTENSITY EFFORTS TO ATTRACT DEPOSITS:

This could be taking various forms.  Recently big public enterprises are being lobbied by banks for deposit in an attempt to escape the current shortage of liquidity in the banking system. Prominent among the money making government business  concerns are the Nigeria ports Authority (NPA) and Nigerian telecommunication  limited (NITEL) These establishment have in recent past become buoyant  as a result of their renowned derive for   “ revenue”.  The banks lobby  stiffed towards  the end of January 1987 when government  firms entered the second-tier foreign exchange  market (SFEM)  there is doubt in the commercial banks make  allowances for and implement the above recommendation.  They will be better against in steering the economy towards the right   path of the much desired growth and development

The era of excess liquidity of deposit by bankers are still very fresh in our memories.  The  implications of this need to mobilize saving  in the economy cannot be over emphasized for some time Nigeria banks made quick wealth from interest income or money market instruments a situation that gave the impression that banking is a gold mine where cheep  wealth is created with little sweet who  will blame the bankers for being prudent as business forms is utilizing the excess funds in such less risky venture? Rather than doing that one should blame the development macro-economic policies which created the funds for the banks use in the first instance.

The introduction  of SAP pared may for the prudent management which has been considered a necessity for SAP. More than N3.5 billion was withdrawn from the banking system by August 1986.  The  banks could not believe it was they cough napping.  It appeared  to them as if the C.B.N was not serious. However the signal   has been given that the lonely moon was over.

Then came the second-tier foreign exchange market (SFEM) which has further led to a drain about N3 billion from the banking system within just eleven weeks.  And before  we know it, the excess liquidity era when bankers arrogantly tell their deposits off has gone secret  of survival in  the future is for each bank to be efficient in  its dealing with customers and its public.

Banks must also explore some of the ears they had litter to been neglecting.  Now is the time to prepare for the future and it is my contention that most banks are already   aware of these new challenges  and are making the right moves to remain  in business profitably while serving the nation.  Only the banks which serve their customer with courtesy and efficiency will thaw in the emerging senior’s dynamic banking era.

5.3     CONCLUSION

The importance of the banking system to economic stability and development necessitates effectively administered banking  laws and regulations which will serve as  operating restraints on the banks.  These are particularly predrilled on the functional  relationship between such laws and banking  practices on the behaviors of a national’s monetary supply. And it is well. Known that money supply  (whichever ) way is defined affect the behavior of aggravate demand which it turn affects the economic stability and development.

There is no inadequate in our quest for economy stability and development

 

BIBLIOGRAPHY

Adekanye Femi, (1987) The Element of  banking in Nigeria Graham Bhin publisher.

Alhaji Abubakar Dalic (1985) “challenge f banking in the 80” business concord Lagos concord press of Nigeria Ltd

Akuezuilo E.O.(1993) Research methodology and statistic Nigeria Nuel cent (Nig) publishers.

Chandler L. V. (1986) The Economic of money and banking new York Harper and row publishers inc.

Cases, Tom (1980) Statistical methods in management London castle Ltd

Central Bank of Nigeria (1985) “Annual Report and statement of Account”

Hamson J. L. (1974) A Dictionary of Economic and commerce Great Britain.

Nwandu, E. C. (2000)Intermediate Statistics Enugu. JTC publisher

Nwankwo Abraham (1980) “ liquidity Requirement and fund management by commercial banks” Business times Lagos Daily Times of Nigeria Ltd

Reed C. W. (1960) Commercial bank liquidity problem oxford university press New York

Raymond Brocking ton (1993) financial management London. D. P. Publication Ltd.

Sayers R. S. (1960) Modern Banking London  oxford university press.

Uzoaga W. O. (1981) Money and Banking in Nigeria  Enugu fourth Dimension Publishing co-Ltd.

Orjih  J. (1999) Business Research Methodology Enugu. Meteson publicity Company.

Ozo J., Odo P. Ani J   and  Ugwu T. (1999) introduced  to Research writing for Business  and Financial Student Enugu sunny Enterprises.

Ozo J. U. (2001)  Marketing Research. Enugu Enizol Books.