IMPACT OF LIQUIDITY MANAGEMENT ON THE FINANCIAL PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA

IMPACT OF LIQUIDITY MANAGEMENT ON THE FINANCIAL PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA

Abstract

The study examined the impact of liquidity management on the financial performance of commercial banks in Nigeria. The study adopts the use of primary data from 5 commercial banks still operating within (2012-2016), which are Zenith Bank, United Bank for Africa, Wema Bank, Access Bank and Union Bank.

The study employed the survey design and the purposive sampling technique to select 450 staff across management, senior and junior level. A well-constructed questionnaire, which was adjudged valid and reliable, was used for collection of data from the respondents.

The data obtained through the administration of the questionnaires was analyzed using the Pearson correlation analysis.

The results showed that there is positive and significant relationship between liquidity ration and financial performance (r=0.772; p<0.05); a positive and significant relationship exists between cash reserve ratio and financial performance (r=.896; p<0.05); a positive and significant relationship exists between loan to deposit ration and financial performance (r=0.772; p<0.05).

The study concludes that there is a significant relationship between liquidity ratio, cash reserve ration and loan to deposit and financial performance in commercial bank of Nigeria.

The study suggested that commercial banks should ensure that expenditure are properly managed in a manner that it will raise the company’s liquidity performance capacity; commercial banks should direct its expenditure towards the productive departments as it would reduce the cost of doubt and risk; there is need for efficient management of liquidity ratio, cash reserve ratio and loan to deposit in such a way to stimulate the company to grow.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The recent crisis in the world economic system has unveiled some inadequacies in the liquidity management of financial institutions. Financial institutions like banks are seen as the backbone of the financial system, providing capital for infrastructure, innovation, employment generation and economic development (Edem, 2017). Banks’ fundamental role in the economy affects not only individual consumer spending, but the growth of the industry as a whole. During the last crisis many banks ran out of liquidity. Some banks borrowed at steep discounts to meet the pressure of high demand for urgent cash. Liquid markets also froze. Many financial and non-financial institutions have had to revise their corporate governance guidelines to reflect market and liquidity risks. Equity prices, exchange rates, commodity prices, interest rates and credit spreads all weighed on banks’ performance, leading to sharp declines in investment returns and net worth. Many assets have been devalued, and some banks are struggling to meet their obligations on time or at great cost to forgive them. This affected banks’ ability to stimulate a productive economy and was reflected in a gradual decline in gross domestic product. For this reason, liquidity issues have always been a concern for all stakeholders in the country, as no economic sector can survive without sufficient liquidity.

1.2 Problem

Liquidity management and bank performance are key determinants of the development, sustainability, survival, growth and performance of the banking industry, and the ability to manage the trade-offs between liquidity management and performance is critical for banks. This is a management concern. For example, banks make loans that are expensive and cannot be sold quickly, and also issue demand deposits that depositors can withdraw at any time. Such a liquidity mismatch, where a bank’s liabilities are more liquid than its assets, affects the bank’s liquidity position and causes problems for the bank when too many depositors try to withdraw at once. . Many banks invest in safe, high-yielding, illiquid assets that are tied to credit. For some banks, even though they have a lot of assets, sudden withdrawals and lack of liquidity lead to huge losses due to emergency borrowing. This was the main cause of bank failures and nationalizations in 2008, which also proved to be incapable of making reasonable profits (Barrel & Davis, 2008). For these reasons, banks have emerged as part of the “rising concern” measure, and in times of economic strength have seen a range of actions to end execution and to improve their liquidity positions. Strategies are usually ignored, leaving the question unresolved. Attempts by bankers to raise yields usually have a negative impact on liquidity. This can be dangerous for banks as it can lead to loss of bank support, loss of credit, lower bank creditworthiness and even forced liquidation of the bank. On the other hand, maintaining excess liquidity to meet customer demand can hurt your bottom line.

Failure to plan and implement liquidity can disrupt banking operations and have long-term effects on the economy. Profitability does not imply liquidity in all cases (Edem, 2017). Banks can make profits without necessarily having liquidity. Liquidity should therefore be managed to reach an optimal level. H. A level that avoids excessive liquidity and can lead to a lack of business acumen by management (Owolabi, Obiakor & Okwu, 2011). At the same time, liquidity levels must not fall below minimum requirements. This prevents the organization from meeting short-term obligations that have come due.

1.3 Purpose of the survey

The general purpose of this study is to examine the impact of liquidity management on the financial performance of Nigerian deposit-taking banks. The specific objectives of this research are to:

An assessment of the impact of liquidity ratios on the financial performance of Nigerian depository banks. We study the impact of the cash reserve ratio on the financial performance of Nigerian depository banks.
We study the impact of the loan-to-deposit ratio on the financial performance of deposit-taking banks in Nigeria.
1.4 Research question

This study seeks to provide answers to the following research questions:

To what extent have liquidity ratios impacted the financial performance of Nigerian depository banks?
To what extent has the cash reserve ratio impacted the financial performance of Nigerian depository banks?
To what extent has the loan-to-deposit ratio impacted the financial performance of Nigerian deposit-taking banks? 1.5 Research hypothesis

Based on the purpose of the investigation, the following hypotheses are made to guide the investigation.

1.6 Validity of research

This research will benefit the banking industry, monetary authorities, and future researchers. The study helps the banking industry determine the appropriate level of liquidity that should be maintained to ensure smooth operations. The study also informs the banking industry to determine the optimal amount of liquidity needed to meet short-term debt whenever it arises. For monetary authorities, the study by the Central Bank of Nigeria helps them recognize the need to formulate sound monetary policy in terms of currency ratios. Cash reserve ratio and liquidity ratio to improve the performance of the banking community for sustainable economic development. For future researchers, this study served as a reserved repository of knowledge that could be used to further investigate liquidity management and bank performance. 1.7 Scope of investigation

This study examines the impact of liquidity management on the financial performance of deposit-taking banks in Nigeria. The study focuses on his five banks: Zenith Bank, United Bank for Africa, Wema Bank, Access Bank and Union Bank. Furthermore, this research he conducted over a five-year period from 2012 to 2016.

1.8 Definition of key terms

liquid:
According to the Business Dictionary, liquidity refers to the extent to which an organization has cash to meet immediate and short-term obligations, or assets that can be quickly converted to meet them.

Liquidity management:
It refers to an organization’s ability to convert assets into cash to meet short-term obligations. Financial performance:
It refers to an organization’s ability to achieve its intended goals. The common goal of the organization is to maximize profits and shareholder wealth. Certain accounting metrics such as return on assets, return on assets, return on equity, return on assets, and earnings per share are commonly used to measure an organization’s financial performance.

Bank:
It refers to an institution that accepts deposits from clients, makes loans to clients/customers and acts in accordance with the guidelines of the Central Bank of Nigeria.