LIQUIDITY MANAGEMENT AND FINANCIAL PERFORMANCE OF THE NIGERIA INSURANCE INDUSTRY

ABSTRACT

The study explored the impact of cash management and financial performance on the insurance industry in Nigeria. The secondary data used in this study are obtained from textbooks, journals, magazines and newspapers. Our results demonstrate a positive relationship between cash management and profitability in the Nigerian insurance industry. Based on these insights, we recommend being cautious when extending credit lines to customers to avoid load management loss problems and improve the capacity of the financial system to improve asset quality

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND OF THE STUDY

Liquidity management is a concept that is receiving serious attention around the world, especially given the current financial and global economic conditions. Prominent corporate goals include the need to maximize profits, the need to maintain high levels of liquidity to ensure security, the need to achieve the highest owner net worth, and other corporate goals. included. In today’s business, the importance of cash management in impacting a company’s profitability cannot be overemphasized. An important part of working capital management is to maintain liquidity on a day-to-day basis, ensure smooth operations, and meet obligations (Eljelly, 2004). Liquidity plays an important role for a business to function well.

Liquidity means meeting obligations when due and balancing current assets and current liabilities. Jensen (1986) states that firms are stressed when liquidity levels are low and working capital is negative. This is because insufficient or excessive liquidity can affect the smooth running of an organization (Jaglani and Sandhar, 2013). Almeida et al. (2002) proposed a theory of a firm’s liquidity needs, based on the assumption that liquidity decisions depend on the firm’s access to capital markets and the importance of the firm’s future investments. The model predicts that financially constrained firms will save a positive portion of their incremental cash flows, while unconstrained firms will not. The cost of cash shortages is higher for businesses with higher investment supply, as losses are expected from missing out on valuable investment opportunities. Liquid companies benefit from low interest rates on available investments, discounts, and loans. Therefore, there is a relationship between cash holdings and investment opportunities, and thus financial performance. The difficulties experienced by some banks and other financial institutions during the financial crisis were due to flaws in the fundamental principles of liquidity management. In response, the Commission issued Principles for Sound Liquidity Risk Management and Control (the ‘Sound Principles’) in 2008 as the basis of its Liquidity Framework. Liquidity is the ability of a bank to fund capital appreciation and meet its obligations when due without incurring unacceptable losses (Basel Committee on Banking Supervision, 2013). An asset’s liquidity depends on potential stress scenarios, monetized volumes, and timeframes considered. Efficient and effective liquidity management is therefore essential for a company to survive and thrive. The Banking Act (2014) and CBK Prudential Guidelines (2013) require financial institutions to maintain a minimum level of liquid assets set by the Central Bank from time to time. Kenyan banks are required to hold twenty percent (20%) of the legal minimum amount of all deposits, accounts payable and short-term liabilities in cash. The liquidity ratio is determined by net liquidity and total current liabilities.

1.2     STATEMENT OF THE PROBLEM

During the recent financial crisis, when uncertainty drained funding sources, many financial institutions, especially banks, quickly found themselves short of funds to meet their maturing obligations ( Bordeaux, 2010). After the financial crisis, there was a general feeling that financial institutions were not fully aware of the importance of liquidity management and the impact of such risks on the firms themselves and the financial system as a whole. Liquid assets such as cash and government bonds generally have relatively low yields and holding them can impose an opportunity cost on financial institutions. In the absence of regulation, companies are expected to hold cash to the extent that helps maximize the company’s financial performance and profitability. In addition, politicians have the option, for example, to demand larger stocks of liquid funds, if this is seen as favorable to the stability of the financial system as a whole. The problem is to select or identify the sweet spot or level at which financial institutions can hold liquidity to optimize returns. This problem is exacerbated by the preoccupation of many institutions, especially financial institutions, with maximizing profits and performance, and a tendency to ignore the importance of liquidity management. Problems can also arise from the bank’s excessive urge to make staggering profits. These banks tend to be reckless in their use of resources, especially liquidity

1.3     OBJECTIVES OF THE STUDY  

The general objective of this study is to explore the liquidity management and financial performance of the insurance industry in Nigeria. Specific goals are:


1. Examine the liquidity position of the Nigerian insurance industry in detail.

2. To identify sources of illiquidity or factors affecting liquidity

 

Leave a Comment