LIQUIDITY PROBLEMS IN COMMERCIAL BANKS

ABSTRACT

This research is titled “Liquidity problem in commercial banks” (A case study of first banks of Nigeria).
The key objective of this research work is to find out impact of liquidity problem in Nigerian commercial banks. The project is expected to contribute on efficient management of bank liquidity and academic contribution since it contributes to existing literature. 
The problem this research is set to solve is that over the years banks have continued to fail as a result of inadequate liquidity in commercial bank which rise as a result of poor management of cash and credit facilities given to customers. The researcher used library materials and field work to elicit information. 
The population of this study consist all the commercial banks in Nigeria but it is restricted to only first bank of Nigeria. In Aba and Owerri in the sample size of 35, this is guided by the knowledge of the bank. 
The researcher made use of simple tabulation, percentages and chi-square statistical method. The researcher tested the hypothesis and the following findings were made. 
In the finding it showed that credit facilities given to customers do not affect the liquidity of commercial banks and liquidity management in commercial banks help banks get out of liquidity problems. 
In recommendation, commercial banks should endeavour to maintain equilibrium between profitability and liquidity, also try and insure their bank with the national deposit corporation. Also the central bank should provide close monitor, and supervisions on the commercial bank, to see that proper liquidity is maintained. 

TABLE OF CONTENTS
Title Page 
Approval Page 
Certification Page 
Dedication 
Acknowledgement 
Abstract 
Table of Content

CHAPTER ONE
1.0 INTRODUCTION 
1.1 Background of the Study 
1.2 Statement of Problems 
1.3 Needs for the Study 
1.4 Objectively of the Study 
1.5 Research Question and Hypothesis 
1.6 Scope of the Study 
1.7 Assumptions of the Study 
1.8 Limitations of the Study 
1.9 Definitions of Terms

CHAPTER TWO
2.0 LITERATURE REVIEW 
2.1 Nature of Liquidity 
2.2 Roles and Importance of Liquidity 
2.3 Liquidity versus Profitability 
2.4 Equilibrium between Liquidity and Profitability 
2.5 Problems of Liquidity 
2.6 Management of Liquidity Problems 
2.7 Tool for Assessing Liquidity in Banks 
2.8 Computation of Liquidity Ratios 
2.9 Measurement of Bank Liquidity 
2.10 Statutory Requirements 
2.11 Stock Concept (Ratio) 
2.12 Cash Flow Approach 
2.13 Factors Affecting Liquidity of Commercial Banks 
2.14 Federal Governments Steps towards Solving Liquidity Problems in Commercial Banks

CHAPTER THREE
3.0 THEORETICAL FRAME WORK AND METHODOLOGY 
3.1 Introduction 
3.2 Theoretical Frame Work 
3.3 Nature of Data Sources 
3.4 The Methodology 
3.5 Data Selection and Analysis

CHAPTER FOUR
4.0 PRESENTATION AND DATA ANALYSIS 
4.1 Introduction 
4.2 Data Presentation, Classification and Calculations 
4.3 Analysis of Data according to Research Hypothesis 
4.4 Analysis of Data to Test Hypothesis 
4.5 Interpretation of Results

CHAPTER FIVE
5.0 SUMMARY, CONCLUSION AND RECOMMENDATION 
5.1 Introduction 
5.2 Summary of Findings 
5.3 Conclusion 
5.4 Recommendations 
5.5 Area of Further Study 
Bibliography 
Appendix 

CHAPTER ONE

1.0 INTRODUCTION
Banking operation which can be traced back to the early colonial period has helped in economy growth and development of a country. 
In Nigeria, the existence of commercial banking started with the establishment of African Banking Corporation in 1892. The purpose of this was to distribute British currency in Lagos and other areas or district. In 1894, the British bank for West Africa was formed which took over the functions of the African Banking Corporation. In 1899, Bank of Nigeria later joined the British Bank of West Africa in 1912. In 1917, Barclays Bank was formed; these were the three first commercial banks to operate in Nigeria. First Bank of Nigeria Plc originated from British bank for West Africa the Union Bank of Nigeria Plc originated from British Bank for West Africa, the Union Bank of Nigeria originated from Barclays Bank.
Furthermore, indigenous commercial banks were incorporated to commence operation; the first among all was the industrial and commercial banks in 1927, which failed in 1930. Following were the indigenous commercial bank that followed suit. 
The National Bank of Nigeria 1933 Agbomagbe Bank, now Wema Bank Plc in 1946. 
After the first banking ordinances in 1952, many banks died off as a result of inability to meet up with the law. But the African Continental Bank and Agbomagbe bank were able to survive the ordinance.
Banking is an institution, which accept deposits of money and repays cash on demand. Though it provides many services to their customers, its main objective immediate needs with interest. (i.e.) the banks take from the surplus units and give to the deficit units.
For the bank to be able to meet the demand of their customers, they have to maintain good liquidity position. The liquidity of bank means the case to which a bank can convert it’s assets into cash. To maintain good liquidity position, banks have to keep adequate volume of non-earning assets the bank, which include. Cash, which is the most liquid assets of the bank, call money treasuring bill, short-term stock certificate of deposit and other short-term measuring instruments in its portfolio.
Rationale for maintaining liquid assets by banks in its portfolio include:
a. Meeting the reoccurring expenditure and profitable investment opportunities to come in future and also meeting the central bank’s liquidity prescriptions.
b. To meet the demands of the customers 
c. Maintaining public confidence. 
However, banks like other business are profit oriented, therefore banks should invest in caring assets. Banks could only invest on earning assets when there are enough deposits in the bank. Banks are said to be maintaining profitability position when their earning is high. It is believed that in cause of banks making profit or investing in earning assets bring about liquidity problems in banks. 
Therefore, equilibrium has to be maintain between liquidity and profitability though it’s always a conflicting concept.

1.1 BACKGROUND OF THE STUDY 
Pre independence period 
The bank traces its history to 1894 and the bank of British West Africa. It originally served the British Shipping and trading agencies in Nigeria. The found or, Alfred Lewis Jones, was a shipping magnate who originally had a monopoly on importing silver currency into West Africa through his Elder Dempster shipping company according to him without a bank economics were reduced to using barter and a wide variety of mediums of exchange, leading to unsound practices. A bank could provide a secure home for deposits and also a uniform medium of exchange. The bank primarily financed foreign trade, but did little lending to indigenous Nigerians who had little to offer as collateral for loans.
Post independence 
In 1957, Bank of British Africa changed its name to Bank of West Africa. After independence in 1960, the began to extend more credits to indigenous Nigerians. 
In 1965, standard bank of South Africa acquired Bank of West Africa and changed its acquisition name to standard Bank of West Africa. In 1969, standard Bank of West Africa incorporated it In Nigerian operations under the name standard bank of Nigeria. In 1971 it listed its shares on the floor of Nigerian stock exchange and placed 13% of its share capital with Nigerian investors. Then after the civil war the bank was control by indigenous directors hence it change its name to first bank of Nigeria. 
Presently the bank is one of the top banks in Africa and one of the largest financial groups in Nigeria. The current chairman is Umarn Metallab the bank is the largest retail lender in the nation, first bank has created a small market for some of its retail clients. 
At the end of August 2006 the bank had assets to totaling N650 billion Naira ($5 billion dollars). It was also the most highly capitalized stock on the Nigeria stock exchange and had about 10 billion outstanding shares. The bank auditors are Akintola Williams Deloitte and Touche (Chartered accountant). The firm has solid short and long ratings due to its low exposure to non-performing loans.

1.2 STATEMENT OF PROBLEMS 
Over the years, Nigeria commercial banks have been facing series of re-capitalization. These ranges from two million (N2000000) to five million (5000000) to 500 million (500.000, 000) and now it is twenty five billion (25,000,000.000).
In spite of these, banks have continued to fail in meeting their financial obligations as at when due. People are worried as to whether the liquidity problem in Nigeria banks can be solved. It is on this premise that this research work is carried out. This work is aimed at identifying the problems of liquidity in commercial banks. These problems include:
1. To what extent are banks faced with liquidity problems. 
2. Com adequate liquidity management help bank to get out of distress. 
3. To what extent to the loan and advances given out to customers affect the liquidity of commercial banks.
The problems of bad debts and fraud, which have continued to plague the commercial banks liquidity position, problem of excess investment on non-earning assets that affects the profitability and liquidity of commercial banks. In any case this research will attempt to solve the above problems.

1.3 NEED FOR THE STUDY
This work will help banks in no small measure to formulate policies that will help them to strike a balance between profitability and liquidity. 
Merchant banks and other related banks with similar problems will equally benefit from this work. Also it will also help banks to channel their assets in the form of loan and advances to areas of high profitabilitys, credit worthy and honest customer. 
Furthermore, this work will help the government and monetary authorities towards the formulation and implementation of their monetary and fiscal policies and also this research will serve as a reference point to other researchers.

1.4 OBJECTIVES OF THE STUDY
This research is set out to:
a. Find out the effects of various liquidity problems of commercial banks on their profitability.
b. To find the effects of loans and advances to 
Customers and their effects on the liquidity of banks and loans policies.
c. To find out the effects of liquidity problem in relation to deposit from customers.

1.5 RESEARCH QUESTION /HYPOHESIS 
RESEARCH QUESTION
1. What are the effects of liquidity problem in commercial banks? As regards their profitability and customers relations?
2. What extent can the loan and advances give out to customer’s affect the bank’s liquidity?
3. To what extent has investment in non-earning assets affects the bank’s liquidity?
RESEARCH HYPOTHESIS
For further proceeds, the hypotheses below have been formulated. 
H0: Liquidity problem in banking system do not affects profitability of commercial banks.
Hi: Liquidity problem in the banking system affects the profitability of commercial banks. 
H0: Credit facilities granted to customs do not affect the banks.
Hi: Credit facility granted to customers affect the liquidity of commercial banks.
H0: Liquidity management in commercial banks does not help banks to get out distress problems.
Hi: Liquidity management in commercial banks helps bank to get out of liquidity problems.

1.6 SCOPE OF STUDY
The sources of this work are restricted geographically to Owerri and Aba that is to say that the data in this work regarding liquidity problems and management are from Owerri and Aba branches.
This research work which is based on the experiences of excess and inadequate liquidity in our commercial bank which is to be considered.

1.7 ASSUMPTIONS OF THE STUDY
There are some assumptions made in this work which will guide the writer based on the problem as for the purpose of this study, the following assumptions were made:
1. Liquidity in banking systems affects profitability of the bank.
2. Adequate management of liquidity and profitability position enhances efficiency and effectiveness in banking system.
3. Excess profitability position in a banking system affects liquidity position of banks. 
4. Equilibrium between profitability and liquidity position reduces problem in banking system.

1.8 LIMITATIONS OF THE STUDY
In the course of carrying out this study, the researcher was confronted with many kinds of constraints. 
To collect this data at different branch locations, photocopying of materials that serve as reference this entails huge financial commitments, the finance is not only the problems, but also the time involved is insufficient for the researcher to carry out the study. Also the non-co-operative attitude portrayed by some staff who felt that their bank secretes are begin exposed forms another limiting factor, further, the non-availability of current information from textbooks also serve as one the limiting factor.

1.9 DEFINITIONS OF TERMS 
Money at Call: This is overnight loan granted to banks for the purpose of meeting liquidity pressure on borrowing banks. 
Bank Deposits: These are amount outstanding to the credit of the customers of a bank. Bank pays back these deposits on demand.
Bankers Acceptance: These are commercial documents which banks have accepted responsibility to pay in case debtors default.
Treasury Bills: This is a government security: it is a short-term instrument issued with a maturity of 91 days. This is issued by the central bank to control the amount of money in circulation and it used to raise finance for the government. 
Bank Fraud: This is a conscious or deliberate effort aimed of obtaining unlawful financial advantage at the detriment of another person who is the rightful owners of the fund.
Equity/debt Swap: This is an arrangement used for solving debt problems. The bond holder exchanges their debt instruments for equity holding, this converts the creditors to equity holders (share holders).
Liquidity Risk: This is when bank finds it difficult to meet it’s commitments when due and to undertake new transactions when desirable. 
Credit Risk: This is the risk on the interest or the principal or both on loan and security will not be paid as agreed.
Liquidity: This is the speed with which an assets can be converted into cash.