COMMERCIAL BANKS LIQUIDITY PROBLEM AN EMPIRICAL ANALYSIS (A CASE STUDY OF FIRST BANK AND UNION BANK PLC)
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COMMERCIAL BANKS
LIQUIDITY PROBLEM AN EMPIRICAL ANALYSIS
(A CASE STUDY OF
FIRST BANK AND UNION BANK PLC)
TABLE OF CONTENT
TITLE PAGE
APPROVAL
DEDICATION
ACKNOWLEDGEMENT
LIST OF TABLE
TABLE OF CONTENTS
ABSTRACT
CHAPTER ONE
1.0
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
1.2
STATEMENT OF PROBLEM
1.3
OBJECTIVE OF STUDY
1.4
RESEARCH HYPOTHESIS
1.5
SIGNIFICAN-CE OF THE STUDY
1.6
SIGNIFICANCE OF THE STUDY
1.7
SCOPE AND LIMITATION OF THE STUDY
1.8
BACKGROUND OF THE FIRM STUDY
1.9
DEFINITION OF TERMS
CHAPTER TWO
2.0
REVIEW OF RELATED LITERATURE
2.1
OPERATIONAL CONCEPTS IN NIGERIA COMMERCIAL BANKS.
2.2
LIQUIDITY RATIO
2.3
SIGNIFICANCE OF LIQUIDITY RATIO
2.4
COMPUTATION OF LIQUIDITY RATIO
2.5
CASH RATIO
2.6
LIQUIDITY RISKS
2.7
LIQUIDITY MEASUREMENT
2.8
DETERMINING LIQUIDITY NEEDS
2.9
RATIONAL FOR LIQUIDITY RATIO REQUIREMENTS
2.10
FACTORS AFFECTING LIQUIDITY OF COMMERCIAL BANKS
2.11
LIQUIDITY PROBLEMS OF COMMERCIAL BANKS
2.12
CAUSES OF LIQUIDITY PROBLEMS IN COMMERCIAL BANK
2.13
FEDERAL GOVERNMENT STEPS TOWARDS SOLVING LIQUIDITY PROBLEM IN COMMERCIAL BANK
2.14
APPRAISAL OF THE GOVERNMENT STEPS TOWARDS SOLVING LIQUIDITY PROBLEMS IN
COMMERCIAL BANK
2.15
SUMMARY
CHAPTER THREE
3.0
RESEARCH METHODOLOGY
3.1 RESEARCH
DESIGN
3.2
AREA OF THE STUDY
3.3
POPULATION OF STUDY
3.4
SAMPLE AND SAMPLING PROCEDURE
3.5
INSTRUMENT FOR DATA COLLECTION
3.6
VALIDITY OF THE INSTRUMENT
3.7
RELIABILITY OF THE STUDY
3.8
METHOD OF ADMINISTRATION OF THE INSTRUMENT
3.9
METHOD OF DATA ANALYSIS
CHAPTER FOUR
4.0
DATA PRESENTATION
4.1 TESTING OF
HYPOTHESIS
4.2
ANALYSIS AND INTERPRETATION OF RESPONSES
CHAPTER FIVE
5.0
DISCUSSION IMPLICATION RECOMMENDATION
5.1 DISCUSSION
OF RESULTS
5.2
CONCLUSION
5.3
IMPLICATION OF THE STUDY
5.4
RECOMMENDATIONS
5.5
SUGGESTION FOR FURTHER STUDY
5.6
LIMITATION OF THE STUDY
APPENDIX
BIBLIOGRAPHY/REFERENCE
CHAPTER
ONE
1.0
INTRODUCTION
1.1 BACKGROUND
OF THE STUDY
Liquidity
of banks is “the case with which banks assets could easily be converted into
cash”. The liquid asset include cash in bank vaults, and other government
securities that have not been used as collateral for loans. The most liquid of
all these assets is cash.
These are many reasons why a bank
should have reasonable liquid assets in its assets portfolio. These includes
amongst others to babble the bank to meet prompt demands from deposits and to
ensure that the bank main trained public confidence and also beadle to utilize
profitable opportunities that may come out in future.
However, it should be mentioned that
banks like most other business are profit oriented. They operate in order to make
profit for their shareholders. The profits could duly be realized only if there
is adequate deposits from bank customers. The deposits will not come unless the
depositors could be assured of the safety of their deposits and for the safety
of the deposit to be assured, these has to be enough liquidity in the bank.
Conversely, a bank operates in order to
make profit for her shareholders. It is a known fact that action designed to
make profit in banks may bring about bank distress and vice versa. Therefore,
equilibrium has to be sought between the two. These taken extreme cases, have
been the constant concerns of bank management.
Liquidity management involves provision
for depositor drawals and short term cash requirements. It also involves the
provisions to meet legal reserves requirements and for the cyclical and secure
cash requirement.
In Nigeria, the activities of the
banking Act of 1969 as amended under the control of Central bank of Nigeria.
The essence of these regulations was to maintain trust and confidence in
banking system as well as to achieve specific economic objectives. Thus in the
period of mounting excess liquidity as was the case in the 1970s the banks were
expected to hold some of their deposits in liquid form.
This is known as legal reserve
requirements and cash stabilization securities issued by the Central bank, the
liquidity ratio requirement and special deposits.
The rationale for the use of these
instruments was to mop up the excess liquidity in the economy to great extent, is
also expected to enhance bank in the banking system.
The problem of bank liquidity
management was brought about as a result of continuous inflows of income from
the oil sector in the 1960s. Since the introduction of the second tier foreign
exchange market which resulted in the mopping – up of more than N56 million
from the economy, the situation has automatically changed, so the era of excess
liquidity has gone.
Banks have devised new methods to
attract deposits from their customers hence the new devices of marketing
financial services and other innovations in the banking sector. Some questions
which this research intends to address includes:-
How does central bank policies on
commercial banks solve excessive liquidity problems in the banking system and
the national economy?
1.2
STATEMENT OF THE PROBLEM
This
research is intended to identify problems of selected commercial banks prior to
the introduction of the second tier foreign exchange market and under the
second tier foreign exchange market operation. Bank liquidity either in excess
or shortage constitutes operational and management problems. Positive responses
of bank liquidity to monetary policies may resolve such liquidity problems in
the economy.
In Nigeria, regulatory and monetary policies
appears to be ineffective hence the recent distress problems associated with
some banks. However, the nature and extent by which commercial banks liquidity
problems responds to monetary aggregates is not known. This informed the need
to re-examine the bank liquidity problems, with the over all objective of
investigating the nature and extent of these problems.
1.3
OBJECTIVE OF THE PROBLEM
The
broad objective of this problem is to examine liquidity problems and their
policy implication both in the banking industry and Nigeria economy.
Specifically the objectives are to:-
a)
Identifying bank liquidity problems wither in excess or shortage which
constitutes operational and management problem.
b)
Identifying the overall impact of these problems on loans and advances to
customers of the commercial banks.
c)
Identifying the nature and extent by which commercial banks liquidity problems
responds to monetary aggregates.
1.4
RESEARCH QUESTION
Some
questions which this research intends to address includes:-
a)
How does excess and shortage liquidity affects commercial banks/customers
relationship?
b)
How effective and efficient are central bank policies?
c)
Does excess and shortage liquidity problems in the banking system affects
commercial banks profit?
d)
What are the overall impact of those problems on loans and advances to
customers of the commercial banks?
e)
Does the nature and extent by which commercial banks liquidity problems reports
to monetary aggregates negative or positive?
f)
Does bank liquidity problems either excess or shortage constitute operational
and management problems?
g)
The response of bank liquidity to monetary aggregates were analyzed using
ordinary least square (OLS) regression and analysis of variance (ANOVA).
1.5
HYPOTHESIS
HO: Commercial banks
liquidity responses to monetary aggregates is not positive.
1.6
SIGNIFICANCE OF THE STUDY
Following
the downturn in the economies future of this country over the years, commercial
banks behaviours is difficult to predict and their loan to deposit ratio
appears to show a gross inefficiency and lack of depositors protection this
study is therefore, intended to provide these banks without sound banking
policies which will protect depositors fund and ensure viability and
efficiency.
The
study also intended to ensure adequate managerial economic growth and development
which will be encouraged as a result of improving banking operations and
management.
Therefore,
the research intended to have an empirical base either to correct all the
sources about the poor impression people have of the banks liquidity and to
advice banks on how to improve their services by ensuring that liquidity
problems does not affect loans and advances made to their customers.
1.8
BACKGROUND OF THE FIRM STUDIES
Availability
of research materials.
The
researcher encountered some problems in getting the material necessary for the
study. A lot of the researcher’s time and money was used up in buying Journals
of the firm and test books dealing on the subject. And equally on visiting many
libraries within Enugu and outside Enugu
Corporation
from the management and workers of both banks (first bank and union bank plc).
The
researcher found it very difficult to get permission and co-operation from the
management and workers of the firms who though that the researcher was trying
to carry out an industrial espionage on the company or expose the internal
operations of the firm to other firms or her competitors, it took researcher
some reasonable time to convince the management that the study was strictly an
academic exercise.
1.9
DEFINITION OF TERMS.
The
following terms used in this study should be taken to mean the following:-
FOREIGN
EXCHANGE MARKET (FEM)
The
foreign exchange market is an arrangement which exists to assist buyers and
sellers of foreign exchange to enter into contract of buying and selling.
LIQUIDITY
RATIO
This
is the percentage of bank deposits that the banks should hold in the form of
cash or eligible liquid assets in the tills of the bank.
MORAL
SUASION
It
is a democratic instrument of monetary control. It involves the use of
persuasion and appeal by the central bank to the commercial banks to comply
with the central bank guidelines.
OPEN
MARKET OPERATIONS (OMO)
This
method involves the sale and purchase of securities, bills, bonds, and
government securities by the central bank.
ORDINARILY
LEAST SQUARE (OLS)
This
is instrument used by central bank to analyse response of banks liquidity to
monetary aggregates
ANALYSIS
OF VARIANCE (ANOVA)
It
is also instrument used by bank to analyses response of banks liquidity to
monetary aggregates.
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