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Liquidity Management In Nigeria Commercial Banks

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This research work is conducted as part of the requirement for the Higher National Diploma [HND] in Accounting. It examine the liquidity management of commercial banks in Nigeria with more emphasis on their investment, liquidity and profitability position in order to find out why commercial bank need to be more liquid then any other business organization. The entire work is divided into five chapters, chapter one is an introductory analysis of the topic, then the background of the study, significance, scope and limitation, the purpose and hypothesis. The second chapter dealt with the literature review and theoretical consideration. Here related past work were review and the theoretical consideration on the present study was also brought into focus. Then chapter three contains an explanation of how and where the needed information for the study obtained and the limitation encountered in the course of conducting the research. It also contains the method of investigation. Chapter four dealt with the presentation and analysis of data collected during the filed survey after which the postulated hypothesis were tested. Finally, chapter five contains the finding of analysis and also, conclusion and recommendations.



Title page                                                              i     

Approval page                                                        ii

Dedication                                                             iii

Acknowledgement                                                  iv

Abstract                                                                vi

Table of content                                                     vii

List of tables                                                          xi


1.1  Background of the study                                          1

1.2      Statement of the problem                                 3

1.3      Objective of the study                                      4

1.4      Statement of Hypothesis                                         6

1.5      Research Question                                           7

1.6      Significance of the study                                   7

1.7      Scope of the study                                           8

1.8      Limitation of the study                                     10

1.9      Definition of terms                                           10


2.1  Review of assets and liabilities management of commercial banks                                                                    14

2.2      Commercial loan theory                                    21

2.3      The shiftability theory                                       23

2.4      Credit tools used by banks in Nigeria to control commercial banks liquidity positions.                                     32

2.5      Factors to be considered in Assets Management   36

2.6      Investment decision – risk and returns               38

2.7      Assets of commercial banks                              40

2.8      Commercial banks investment purposes                     45

2.9      Important factors a barer should consider before holding cash                                                                  46

2.10  Allocation of commercial banks funds                 49


3.1  Research Design                                              70

3.2      Area of study                                                  70

3.3      Population of the study                                     71

3.4      Sample and sampling procedure                        71

3.5      Instrument for data collection                                  72

3.6  Validation of the instrument                              73

3.7      Reliability of the instrument                              73

3.8      Sources of Data                                               74

3.9      Techniques of analysis                                      75

3.10Reason for techniques employed                        76

 4.1 Presentation and Analysis of data                       77

4.2 Test of Hypothesis                                            77



5.1      Findings                                                         85

5.2      Conclusion                                                      87

5.3      Recommendation                                             89

References                                                      93

Appendix                                                        95

Questionnaire                                                  96




4.1.1 Do depositors make positive impact on first bank cash


4.1.2 Does the federal Government withdrawal of parastatals and

cooperation deposits with commercial bank have any  impact on first bank? …………..……………………………………………………….28

4.1.3 Do you find it difficult converting the instrument that

constitute first bank near cash assets?...........................29



1.1     Background of the Study

Liquidity is the study of how quickly and cheaply an asset can be converted into cash. It can also be seen as the ability to fund increase in assets and meet obligations as they become due.

       The management of liquidity is therefore among the most important activities conducted at banks. Overtime, there has been a declining ability to rely on core deposits and an increased reliance on wholesale funding. Recent technological and financial innovations have provided banks with new ways of funding their activities and managing their liquidity, but recent turmoil in global financial market has posed new challenges for liquidity management.

       Liquidity management ensure that the institution maintains sufficient cash and liquid assets to satisfy client demand for loans and savings withdrawals, and to pay the institutions expenses. It involves a daily analysis and detailed estimation of the size and timing of cash inflows and outflows over the coming days and weeks to minimize the risk that savers will be unable to access their deposits in the moments they demand them. In other to manage liquidity, an institution must have a management information system in place manual or computerized, that is sufficient to generate the information needed to make realistic growth and liquidity projections.

       A liquidity shortage, no matter how small, can cause great damages to a savings institution. It takes a long time to build customers relationships, a liquidity crisis can destroy those relationships instantly. In other to avoid a liquidity crisis, management needs to have a well-defined policy and established procedures for measuring, monitoring and managing liquidity.

       A savings institution should have a formal liquidity policy that was developed and written by the officials with the assistances of management. The policy should be reviewed and revised as needed, no less than annually. The policy should be flexible, so that managers may react quickly to any unforeseen events. A liquidity policy should specifically state: who is responsible for liquidity management, what is the general methodology of Liquidity management. How will liquidity be monitored or, in other words, what liquidity management tools will be used.  

1.2     Statement of the Problem

In this section, the researcher focused on the problems that makes commercial banks not holding cash at any point in time, and the constraints to banks in achieving their goals of liquidity and profitability, such as:

a.  Legal reserve requirement which is the legal reserve ratio through which the central bank of Nigeria (CBN) exercise consideration control over the cash or other reserves of the banks.

b.  Special deposits and stabilization securities is also another way through which the CBN can put the commercial banks into tight corner by directing them to open up a special account.

c.   Also the federal government directive of withdrawing all federal owned parastatals account from commercial banks is one of such constraints management. These directives causes ripples in its banking industry as such cause more discrepancies in the liquidity position of commercial banks and subsequently the rate of profitability.



The research objective here is to look into the liquidity management in Nigeria with more emphasis on their investment liquidity and profitability positions.  The researcher will try to find out why commercial banks need to be more liquid than any other business organization, what methods/techniques banks employ to solve the liquidity profitability dilemma is the concern of this work.


This study will look at the effectiveness and management of their profile by employing and using various approaches, theories and instruments in solving their liquidity profitability problems.  The various commercial banks investment outlets leg loan and advances, investment in treasury kills, treasury certificates, call money, bankers unit fund, equity participation on small and medium scale firms, etc and the degree of the liquidity of such investment shall be examined.

At the same time, the researcher will take critical look at the assets profile management of commercial banks with a view to determining of there is a defined relationship between the rate of profitability and liquidity.


Finally, I wish to identify why Nigeria commercial banks are excessively liquid but at the same time make high profit.


2            H0:  The depositors are not making impact on first banks cash inflows.

3            Hi:   The depositors are making positive impact on first banks cash inflows.

4            H0:  There is no difficulty converting the instrument that constitute first banks near cash asset.

5            Hi:   There is difficulty converting the instrument that constitute first banks near cash asset.

6            H0:  The federal government withdrawal of parastatals and corporations deposits with commercial banks have no impact first banks.

7            Hi:   The federal government withdrawal of parastatals and corporations deposits with commercial banks have impact on first banks.

1.5  Research Question

1.          Do depositors make positive impact on First Bank Cash inflow?

2.          Do you find it difficult converting the instrument that constitute First Bank near cash assets.

3.          Does the federal government withdrawal of parastals and corporations deposit with commercial banks have any impact on first bank?

1.6  Significance of the Study

       The importance of liquidity management in the banking industry cannot be over emphasized. Since not much contribution was made on the topic, liquidity management, the researcher will carefully consider those factors relevant to efficient liquidity management for a successful achievement of the desired profitability. Readers of this study/work will be exposed as regards the impact of future study. The basis of this research work as a determinant of profitability.



In the study this nature which involves the analysis of commercial banks statements, qualification of their investment and degree of their data available and its type obviously limit the extent and scope of the analysis.

This study is concentrated in one selected commercial bank in Enugu Urban the researcher will examine how this commercial bank efficiently carry out their portfolio management in the following areas:

i.            Loans and advances

ii.           Investment in securities of treasury bills

iii.          Balance held with and for other banks internally and still meets their depositors and shareholders demand.

The lending pattern of Nigeria Commercial Banks to various sectors of the economy will be critically examined, the nature of this loans opportunity and an appraisal of the steps commercial banks take to recover their debts when customers default in their loan repayment agreement.

In this research, the management of commercial banks assets/liabilities will be discussed.  The review of some liquidity and profitability, theories will be carried on it, the management of the asset and liabilities which mean the sources of fund (liabilities and uses of fund (assets).  The sources from widely funds are acquired and the uses to which they are put can be found in the balance sheet of a bank.

The tools employed by the Central Bank of Nigeria (CBN) in controlling banks.  Liquidity position will be looked into, and the extent to which commercial banks adhere to the guidelines issued by the Central Bank of Nigeria (CBN).









This research work is limited to commercial banks; fund management and the components and portfolio management of their assets.

This study is carried out purely as an academic exercise and therefore could neither receive any financial package from governmental or financed by any private enterprise/organization.  The limited resources of the researcher constrained the study.

The researcher found it difficult to obtain official information and data relevant to the study from the banks due to banks oath of securely and fear.



1.    Portfolio:      It is a list of securities and investment loan stock, shares and bands, etc. held (owned) by a bank, individual or organization.

2.    Portfolio Management:      This goes with the management of security holding (investment portfolio) of a bank or business firm.  A portfolio may be managed by a committee or a portfolio management department or any other body.

3.    Liquidity:      It is the ability of banks to pay cash immediately when called upon to do so for all its demand liabilities.

4.    Liquidity Management:      It is the ability of the bank to manage the liquidity position so that neither the liquidity nor profitability will suffer.  It involves the provisions for the withdrawal of deposits, short-term cash cyclical and circular cash requirement of the apex financial institutions.

5.    Bank Deposits:    There are funds deposited in a bank.  It is divided into demand, savings and time deposits.

a.    Demand Deposits:      This is also known as checking account deposit payable on demand that is without prior notice.

b.    Saving Deposits:  This type of deposit is usually evidenced by a passbook under which the depositor/customer of the bank is required to notify the bank before withdrawal.  But it is not so in practice.

c.    Time Deposits:    This deposit cannot be withdrawn until after a specific period of time.

6.    Assets:   There are the entire properties of a bank and other investment in other profitable organization.

7.    Asset Management:    It is the allocation of fund, the basic objectives being maximization of profitability, solvency and regulatory constraints.

8.    Bank Run:    A run occurs in a bank when there is mismanagement of liquidity and profitability.

9.    Solvency:      The solvency of a bank or a firm is measured by its ability to turn its assets into cash to meet its deposit obligations.

10.  Treasury Bill:       These are ninety-one days short-term maturity debt instruments issued to raise finance for the federal government.

11.  Debentures:  These are long-term debt instrument or security insurable by banks in order to increase their capital base.  This represents a debt.

12.  Trading on Equity:      This is a situation whereby a firm earns more with borrowed fund than what it cost to borrow the fund.


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