1Ezeamama Martins
C
2Onwuliri
Okechukwu C. PhD
3Okoye Jonathan
Onyechi
1. Peaceland College of Education,
Enugu, Nigeria
2. National Board for Business and
Technical Education (NBTE) Kaduna, Nigeria,
3. Nnamdi Azikiwe University, Awka,
Nigeria
ABSTRACT
This study
sought to examine the challenges of Liquidity Management in Nigeria
Key:
Liquidity, Non-Performing Loan, Credit Administration
SECTION ‘A’
Background to
the Study:
The whole concept of banking is built upon
confidence in the liquidity of the bank. Liquidity management is critical in
the banking operations. Customers place their deposits with a bank, confident
that they can withdraw the deposit when they wish. If the ability of the bank
to pay out on demand is questioned, all its business may be lost overnight.
Generally speaking, liquidity refers broadly to the ability to trade
instruments quickly at prices that are reasonable in the light of the
underlying demand/supply conditions through depth, breath and resilience of the
market at the lowest possible execution cost. A perfectly liquid asset is
defined as one whose full present value can be realized, i.e. turned into
purchasing power over goods or services. Cash is perfectly liquid, and so for
practical purposes are demand deposits and other deposits transferable to third
parties by cheques and investments in short-term liquid government
securities. Adequate liquidity enables a
bank to meet cash withdrawal commitments when due, undertake new transactions
when desirable, and discharge other statutory obligations as they arise. Liquidity is the term that best describes the
ability of a bank to satisfy the demand for cash in exchange for deposits. The
most important aspect of liquidity function in banks is that it helps to
sustain the confidence of the depositors, who should not be given any cause to
doubt the safety, solvency and viability of the bank. A bank is considered
liquid when it has sufficient cash and other liquid assets to off-set its
obligations readily or assets to sell at short time notice, without loss in value.
Bank’s liquidity can also be measured by its
ability to raise funds quickly from the other sources such as money markets to
enable it honour maturing/payment obligations, and commitments without notice. Banks
are statutorily required to comply with the legal cash and liquidity ratios
reserve requirements so as to cope with the demands of its financial
obligations owed to its customers and other stakeholders.
However, the level of liquidity to hold and in
what forms to preserve them pose serious task to the bank management. The
majority of banking transactions can be anticipated in advance from the
expected cash flows, deposits and earnings from loan repayments. Banking
business is associated with elements of risks and for which no adequate provisions
are often made to accommodate any obvious shortfalls, arising from the defaults
on loan repayments.
It is for
this reason that this study seeks to examine the need for keeping adequate
liquidity to serve as a ‘buffer’ to cushion the effects of deposits
fluctuations and compensate for the gap during periods of emergency.
Basically,
liquidity management seeks to strike a delicate balance between the need to
maintain sufficient liquidity to meet depositors’ cash calls. Illiquidity
jeopardizes ability to service customers’ withdrawal demands while excess
liquidity erodes the earning capacity and profit performance of the banks. Liquidity Management therefore appears more
crucial than any other aspects of bank management like bank marketing, because
negative signals of illiquidity in a bank cannot be hidden for too long.
In Nigeria,
the activities of the commercial banks are subjected to the extensive
prudential regulations under Banks and Other Financial Institutions Act 1991
(BOFIA). The essence of these regulations is to maintain trust, stability and
public confidence in the banking system.
The commercial banks in Nigeria Nigeria
Given the
above explanations, it therefore becomes imperative that a commercial bank that
is profit –oriented should remain focused, prudent and pro-active in liquidity
management for a sustainable service delivery. In all, the crux of liquidity
management issues is for the banks’ management to strive at all times in
creating a right equilibrium and adequate liquidity level, suitable for a
healthy banking sector performance. The importance of liquidity therefore
transcends the individual institution, since any negative impact of liquidity
shortfall in First Bank, Access Bank and United Bank for Nigeria (UBA), under
research study may invoke systemic repercussion, causing harm to the whole
financial stability of a country.
Statement of
Problems:
The
importance of the banking sector in the growth of a nation’s economy cannot be
over-emphasized. It is therefore imperative for the authorities in the sector
to guard their financial system seriously against any anticipated liquidity
crisis. It is a common knowledge that all commercial banks continuously strive
towards high profitability to sustain its continued existence and maximize
shareholders wealth. Some of the problems identified by the research study
include:
· Exposure to excessive risk concentration on
investments which often result to capital erosion and liquidity trap.
· Assets mismatch on portfolio selection that attract
negative or no returns to the bank’s liquidity net.
· Poor credit administration, leading to problems of
Non-performing loans, bad debts, or classified debts which mostly end up as
irrecoverable.
· Poor ownership structure of some commercial banks
and appointment of mediocre to the board/management of banks.
· Poor Corporate Governance and regulatory lapses in
the discharge of bank’s oversight- sight functions.
· Massive workers retrenchment due to low profit
earnings and poor patronage in banking transactions.
Evidence in the
past revealed that most Nigerian commercial banks were driven into liquidity
problems, owing to exposure to excessive risks concentration and poor assets
mismatch in portfolio selection. Added
to this problem were the effects of other factors such as massive defaults on
loan repayments by borrowers, poor ownership structure of banks, appointment of
mediocres as board members who exert political influence on banking matters,
financial frauds through margin loans and insider-abuses, poor
supervisory/regulatory oversight and absence of strict corporate governance
practices. These factors pronounced negative consequences that pose serious
challenges to the liquidity management of banks. Given the above ugly scenario,
most commercial banks in Nigeria
Objectives of
the Study:
The main
objective of the research is to examine the effects of liquidity on the
selected commercial banks like Access bank, First bank and United Bank for
Africa, operating in Nigeria. The project will extensively verify the following
facts:
(1) To examine
the extent to which Non-performing loans influence Commercial banks’ liquidity.
(2) To
ascertain the extent to which fluctuations in commercial bank’s liquidity
levels affect its profitability.
3) To
establish the extent to which statutory reserve requirements influence
commercial bank’s liquidity position.
Research
Questions
In order
to achieve the above stated objectives, the following research questions have
been developed to guide the study.
(i) To what extent do Non-performing loans affect
commercial bank’s liquidity?
(ii) To what
extent does fluctuation in liquidity level affect Commercial bank’s
profitability?
(iii) To
what extent do changes in statutory reserve requirements influence commercial
bank’s liquidity position?
Hypotheses:
Considering
the problems and objectives highlighted above, the following hypotheses were
formulated for the purpose of this research study
Hypothesis I
Ho: Non-performing loan does not negatively affect
commercial bank’s Liquidity.
Non-performing loan significantly effect commercial
Bank’s Liquidity. Hypothesis II:
Ho: Changes in the liquidity levels of a
Commercial bank do not negatively affect its profitability.
Changes in the liquidity levels of a commercial bank
significantly affect its profitability.
Hypothesis III
Ho: Changes
in bank’s Statutory Reserve Requirements do not negatively affect its
liquidity.
Changes
in bank’s Statutory Reserve Requirements have significant effect on its
liquidity position.
Significance of the Study:
This study
is coming at a time when the banking sector is passing through a stage of
serious banking sector reforms as a result of the negative consequences
inflicted by the problems of illiquidity. The study will therefore be of
importance to various stakeholders in the banking sector, particularly the
operators of banks, depositors, fund borrowers, regulatory authorities and even
the general public at large.
The findings of the study will reveal some of
the factors responsible for the liquidity shortfalls such as:
· The study would educate funds borrowers on the
negative implications of loans repayment defaults as it affects commercial
bank’s liquidity.
· Banks’ policy makers would be better informed on
how best to exercise prudence in credit administration for the bank to operate
safely and profitably.
· It will bring to light the extent of unethical
sharp practices inherent in the banking sub-sector.
· To the academia, it would contribute meaningfully
as a reference material for further academic development.
It will help the bank’s management in adopting the
necessary measures, aimed at timely detection of any ugly scenario identified
in liquidity management. The study would educate funds borrowers on the
negative implications of defaults loan repayment, as it affects banks’
liquidity to cope with maturing obligations as they fall due. The research
study will also bring to light the extent of unethical sharp practices often
perpetrated by the staff and banks’ management as a result of poor corporate
governance. These shortcomings have been identified as fundamental to most
liquidity problems, plaguing Nigerian commercial banks. To the bank management
and policy-makers, the study will enlighten them on the need to always exercise
prudence in selecting efficient investment portfolio, so as to ensure safety,
solvency, and viability of the commercial bank in question. To the academia,
the research work would contribute meaningfully to academic development, as
students and researchers in tertiary institutions will find the reference work
valuable in expanding the frontiers of knowledge in the related areas of
investments and risks management.
Limitations
of the study:
Generally,
academic research in developing economies like Nigeria faces environmental
problems.
In course of
this study, the major constraint encountered by the researcher was the
inability to have unimpeded access to the selected banks for information and
data collection from the Financial Statements Reports relative to the study.
Other limiting factor was the bureaucratic process for access to Central Bank
of Nigeria (CBN) library that remained foreclosed to non- staff. The removal of government’s fuel subsidy
which increased the cost of transportation hampered the researcher’s mobility
to achieve wider research coverage earlier anticipated. The limited time-frame allowed for this
research work also posed a serious challenge to the researcher’s efforts.
Scope of the
Study:
This study was restricted to the period of
2000-2009 and carried out in the selected commercial banks situated in Enugu
metropolis.
SECTION ‘B’
REVIEW OF RELATED LITERATURE
Conceptual
Framework:
The capacity of a bank to achieve a reasonable
measure of its solvency in redeeming its conflicting obligations and remain
competitively resilient in its operations depends on its liquidity position. Managerial
efficiency of a bank can be measured by assessing the ability of management in
utilizing the available resources. It is pertinent to observe that there is a
difference between efficiency and profitability. Management can be quite efficient without
making profit. Liquidity constitutes the primary line of defence of banks
against the anticipated and unanticipated funds withdrawal demands of
customers. However, it should be noted too, that extreme caution must be
exercised, not to keep excess liquidity or idle cash balances unnecessarily in
a bid to striving at managerial efficiency. The inherent danger is that the
profitability potentials of the bank may be consequently jeopardized.
Maintaining an adequate level of liquidity in the
entire banking system is very important because the manifestation of a liquidity
crisis in a single bank can have a negative repercussion which may pronounce
doom to the whole banking system through the risk of contagion effects.
Theoretical Framework
The studies
carried out in the past revealed that most commercial banks were thrown into
financial crisis, resulting to threat of insolvency, distress owing to the
problems of illiquidity. This virtually crippled banking sector performance in
the discharge of banks obligations to the stakeholders. In realization of this,
the Central Bank of Nigeria (CBN) has through its prudential reforms and
oversight functions, made it mandatory for all the licensed banks to comply
with the statutory cash and liquidity ratios and other regulatory requirements
to ensure adequate liquidity balances to enable the commercial banks to meet
the challenges of deposit liabilities and other obligations.
Significantly,
prudential reforms and increased oversight function by the banks’ regulatory
authorities are primarily aimed at sustaining public confidence and minimize
the threat of insolvency, distress or failure that has presently characterized
the operations of the banking sector. It is therefore, on the above theoretical
framework and direction that the entire literature will be based.
The importance of
liquidity management in any organization is based on the nature of the business
and its operations. Liquidity Management pattern varies from one organization
to another because of the differences in the definition of assets and the
economy under which it is applied.
Liquidity
constitutes the primary line of defence of banks against the anticipated and
unanticipated funds withdrawal demands of customers. The maintenance of
adequate liquidity therefore represents a virtue which bank regulators
endeavour to cultivate and instill on the banking system. There is a short, as
well as the long – term dimensions to the liquidity concerns of banks.
Short-term liquidity depends on the maintenance of adequate level of cash and
liquid assets, relative to customers withdrawal needs. In the long –term, bank’s liquidity is a
measure of its solvency in redeeming its conflicting obligations from the value
of its realizable assets (monetized assets). In doing so, banks must structure
their asset portfolio so that the pattern of asset returns can support the
short-term obligations that they issue.
Liquidity
management issues in Nigerian commercial banks have been a matter of serious
concern and challenge to bank management over the years. Some watchful commentators on events in the
banking scene often accuse the banks of stifling the economy by inefficient
allocation of their highly liquid assets, while others expressed the view that
assets mismatch, excessive and risky lending activities, poor regulatory
oversight and absence of corporate governance were part of the notorious
factors responsible for most banks’ liquidity problems. It is on this score
that some explanations have been put forward to describe liquidity simply as a
‘firm’s cash position and its ability to meet maturing obligations
Many
doctrines have provided the basis for the arguments, aimed at establishing the
theories in the management of bank liquidity. The theory of bank liquidity is
predicted on two approaches. The first approach of the doctrine which is assets
– based, emphasizes that bank liquidity
should concentrate on the composition of quality assets that can easily attract
high market value.
Empirical
Review:
Liquidity
and profitability are issues of deep concern to every commercial bank in
Nigeria and other nations of the world. Several eminent scholars have expressed
opinions on the subject of liquidity management in different scenarios and its
effects on the operations of commercial banks.
The
profitability of firm depends on several factors such as government policy,
political activities, and competitive position of the firm in the industry. It
is therefore not necessarily appropriate to assess managerial efficiency solely
and absolutely in terms of success rate. Essentially, managerial efficiency is
measured by performance and expense control ratios. An owner of a property or cash deposited and
placed on trust in a bank, credit instruments or other payables has the right to demand it
when he decides to have it back.
There, the
real test of management efficiency in this regard is the promptitude in
satisfying depositors, without recourse to external relief for cash bail-out.
To achieve that, it becomes imperative that bank’s management may choose to
maintain a higher level of Cash-to-Deposit ratio in the bank’s vault which will
be immediately available to settle bank’s liabilities and other commitments
without unnecessary panicking for rescue.
In the
context of finance in general and banking in particular, liquidity management
is a test of the ease with which assets can be converted into cash at minimal
time (Lebell and Schultz, 2004). The
management of liquidity risk in banks presents two opposing views. Primarily,
inadequate level of liquidity may lead to the need to attract additional sources
of funds at higher costs. This will reduce the profitability of the bank;
thereby ultimately reduce the threat of insolvency (Danilla, 2002). The
weakness of a bank, particularly in areas of liquidity management rests on poor
assets quality and capital erosion. A bank may find itself on the road to
illiquidity, on account of huge debt over – hang on non-performing loans,
compounded with the problems of bad management. When a commercial bank is
compelled to access accommodation at the Expanded Discount Window (EDW) on a
regular basis, it becomes a clear manifestation that liquidity challenges of
the bank have become daunting. Most Nigerian banks are prone to excessive
liquidity risk and continue to display signs of failure due to huge
concentration or exposure to certain sectors, weakness in risk management and
corporate governance (Sanusi, 2009). Liquidity management seeks to strike a
delicate balance between the need to maintain sufficient liquidity to meet
depositors’ cash calls and the imperative of avoiding the danger of
compromising the earnings capacity by sitting on glut or excess liquidity
(Okafor, 2011).
According to Gruben (2003), illiquidity
jeopardizes the ability to service customers’ withdrawal demands while excess
liquidity on its part, reduces the potentials of anticipated profit earnings of
the bank concerned. He posited further that the crux of liquidity management
issues is the ability to satisfy demand for cash in exchange for deposits. A
quick collapse is precipitated by crisis of confidence, when a bank runs out of
liquid assets and cannot make good on its obligations owed to depositors. In
the face of this daunting challenge, it really does not necessarily matter if
the net assets position is strong.
In Nigeria,
a bank is presumed illiquid whenever its liquidity ratio falls below the
statutorily liquidity ratio prescribed for the period (CBN Prudential
Guidelines, 2010). The importance of liquidity management in banks has really
assumed a wider dimension in recent times, in response to the structural
changes in funds management techniques. In Nigeria, the direct measures aimed
at liquidity control of individual banks are through the imposition of
prudential liquidity management ratios on banks (CBN, 2010).
It was noted that the strategy of financing
liquidity risk represents a key aspect of liquidity management, particularly on
deposits and loans/advances. Debts and diversified funding sources usually
indicate that a bank has a well developed liquidity management approach. Banks
holding stable and high values of deposits portfolio are prone to crisis during
periods of liquidity shocks than those without such pool of deposits.
According
to Levan(2009),an assessment of the structure, types and conditions of deposits
is the starting point for matching liquidity probabilities with the demands of
the conflicting groups in the banking environment.
In effect,
the bank management will take into account, the different factors such as
investment maturities to determine if the bank is liquid enough, judging from
the cash –flows under different conditions.
The subject of corporate governance has assumed a
global significance, having been found to be crucial for sustainable corporate
performance. Perhaps the threat of collapse of a number of corporate
establishments like the erstwhile Nigerian Telecommunications Ltd, including
banks like Union Banks,
Inter-continental Bank PLC which were
believed to be at the frontline in business performance, brought to light the
need for greater transparency and accountability in corporate management. Specifically,
corporate governance is a system that ensures that directors and managers of
enterprises execute their functions within a framework of accountability and
transparency. Basically, the objectives of corporate governance are to ensure
transparency, accountability, adequate disclosure and effectiveness of
reporting system.
This will
promote investors confidence in the business enterprise. For the banking
industry, adherence to the culture of corporate governance has become
imperative to promote public confidence which constitutes the cornerstone of
banking business. It provides stakeholders with the necessary information for
evaluating the performance of the banks. In an effort to ensure that only
prudent management team is always put in place for a sound financial system,
Central Bank of Nigeria (CBN) issued circular No BSD/DO/Vol. I/01/2001 to all
banks on the pre-qualification for appointment to board and top management
positions in Nigerian banks for the purpose of fostering Corporate Governance
in banks.
According
to Soludo (2010), some of the corporate governance abuses by banks’
management/Board which have negatively pronounced doom to Nigerian banks’
liquidity management include Fraudulent
sharp practices, Weak internal control, Domineering
influence of bank executives on the issues of abuses to lending limits and
credit administration, Disagreements and management squabbles and conflict of
interest, poor risk management resulting to non-performing loans, on-
compliance with operational procedures, laws and Regulatory guidelines,
Technical incompetence, poor leadership and administrative lapses and Ineffective Management Information system
(MIS)
These are obvious
weaknesses which should be addressed holistically in order to enthrone best
acceptable practices on corporate governance. The recent consolidation exercise
done in the Nigeria’s banking sector has succeeded in putting in place
broad-based membership of directors in various banks, thus eliminating the
previous practice where clannishness and family interest were seen as the
overriding factor that influenced most banks’ ownership structure, especially
in Nigeria. It can be seen from the foregoing that the application of corporate
governance in Nigeria is akin to the application of banking regulation. Despite
all these, it is disheartening to observe that the problem of corporate
governance is still alive in bank’s management.
In fact,
the current liquidity crisis, resulting to threat of insolvency, distress or
imminent collapse of many commercial banks which led to the CBN dismissal of
some banks’ Executive directors is clear indication of poor corporate
governance and therefore considered, as an unhealthy cankerworm in the sector.
Omachonu
(2009) stated that “the nature of crimes in the Nigerian banking
industry has been as a result of
absence of corporate governance, lack of transparency in operations. These have
manifested in most banks illiquidity problems, leaving their core
responsibilities for quick gains by way of round tripping. This has led in managements of some
banks
colluding with the
board members to defraud and freely give margin loans to themselves without
collaterals.
The consequences
of these operational lapses and institutional weaknesses resulted to pronounced
negative repercussion on liquidity of most commercial banks.
In effect,
the affected banks begin to show visible signs of inability to meet the demand
of deposit liabilities and other commitments owed to various conflicting
interest groupings in the industry. In his speech, the Governor of Nigerian
Central Bank (Sanusi Lamido:2012) sharply attributed the liquidity shortfalls
in commercial banks to non-adherence to corporate governance such as domineering
Influence of Chief Executive Officers. The publication in the Nigerian Business
Day (2009), expressed it this way:
We suspected that the CBN fell short of its supervisory
responsibility when we look at
the depth of the liquidity
crisis in banks. The reaction of
CBN in arresting the
menace by deploying the deputy
governor in charge
of financial surveillance lends
credence to our opinion
that integrity was compromised in
banking supervision
on the part of CBN (Business Day,
2009).
In
managing liquidity risk, Gruben (2010) noted that some of actions a bank should
take to ensure that a strong risk management framework exists for appropriate
liquidity control include entail that:
Ø Banks must be able to identify, monitor and control
their exposure across their business lines, currencies and legal entities at
the same time.
Ø Banks must diversify their sources of funding and
explain what strategies it hopes to raise funds from these sources at short
notices, when confronted with bad liquidity scenario.
Ø Banks collaterals must be actively managed and care
should be taken to separate assets which are already tied–up (encumbered) and
those that are free (Floating).
Ø Regular stress tests such as excessive, irregular
and unusual cash withdrawals by customers (Cash-Run) or frequent accounts
closure must be undertaken, using different scenarios. This is very important
as to enable the bank determine if it can keep its liquidity requirements and
usage within the set limits.
Ø Banks are required to maintain a buffer of
unencumbered, high quality assets to meet emergency situations. These assets
must be free from any barriers to their use.
Ø A bank must as a matter of necessity, have a formal
emergency liquidity plan with clear lines of responsibility and which must be
tested regularly.
SUMMARY OF LITERATURE REVIEW
Public
confidence is the cornerstone of successful banking activities. The dictum that ‘prevention is better than
cure’ is apt. Anyone who has entrusted his asset to another has the right to
ask for it when needed. In this regard the banker therefore has the absolute
duty to honour its obligations or commitments to other stakeholders in the
society at large.
In order to achieve this feat and remain
competitively resilient and viable as one of the major players in the global
arena, it therefore becomes imperative that banks should as a matter of
necessity maintain adequate liquidity to
inspire public confidence and sustain effective banking operations.
SECTION ‘C’
RESEARCH METHODOLOGY
This study is essentially an analytical
approach which applies the use of Pearson’s
Correlation Coefficient and
parametric statistical paired t-test
statistical techniques to examine the
extent the variables identified by the study pose challenges on Liquidity
management in Nigerian commercial banks. This chapter explained the research
methodology adopted which include the area of the study, population, sample
size and sampling techniques, method of data collection, data presentation and
analysis of the hypotheses earlier postulated.
Research Design
A Research
design is a planned sequence of activities that will guide the researcher in
his investigation and analysis on the subject matter. This study involves the
collection of data from a given banks’ population in obtaining, analyzing and
interpreting data, relating to the stated hypotheses.
Population of
the Study
This study
is an institutional study, based entirely on the operations of three selected
commercial banks, namely, First Bank, Access Bank and United Bank for Africa
(UBA).These institutions being studied are quoted in the capital markets, quite
experienced on liquidity management issues and also offer publicly published
audited Annual Financial Statement Reports that are verifiable.
Determination of Sample Size
The
typical research work has a defined research population from where the sample
size is drawn. Since this is an institutional research study, the sample size
was limited to three carefully selected commercial banks (Access bank, First
Bank and United Bank for Africa
Sampling
Technique
The study adopts the t-test statistical
methods. This is because of the
difficulty in extending the study on the entire commercial banks in
Nigeria. Random sampling technique was
adopted to select three banks out of the whole banks in Enugu metropolis.
The data
obtained will enable the researcher make inferential decision on the study. For
this particular work, the annual Financial Report and Statement of Accounts for
the three banks (FBN and Access bank and United Bank for Africa (UBA) were used
for the study.
Instrument
for Data Collection
Data are the
basic raw materials for statistical investigation and research analysis. The
main source of data collection for this research is secondary data, drawn
mainly from the published Annual Financial Statements Reports of the selected
banks, journals, researched publications, periodicals, as well as the CBN
Annual Reports and other related literature. No questionnaire administration is
required. However, the views of some stakeholders in the banking systems
operations were sought through unstructured interviews.
Validity of
the Instrument
The
measuring instrument used (Bank Annual Report and Account from 2000-2009) have
both face validity and content validity.
The researcher relied mainly on its research validity, authenticated by
the Annual Financial Reports obtained from the bank specifically under research
study. .
Reliability
of the Instrument:
The instruments (Banks Annual Report and Accounts)
for the study is said to be reliable because of its consistency in
results. In addition, it was
statistically subjected to reliability test, thus exposed to the views of
different experts who also affirm its reliability by ⅔
majority. Bank annual report and account
is a standard and reliable document that contains all the financial statement
of a bank for the fiscal year. It was
found to be at least 95% confidence level.
SECTION
D
Data
Presentation and Analysis
The section deals with data presentation and
analysis, based on the research questions and hypothesis earlier established
for the study. The data for this study will be analyzed and presented, based on
the research questions and hypotheses of the study earlier formulated. The
instruments employed for the analysis are the parametric statistical paired
sample t-test model and Pearson’s – Product Moment Correlation Coefficient will
be applied in testing the third hypotheses under study. The t- test statistics
determines the difference between the mean of two groups when the sample size
is small i.e. less than 30 i.e.
n
<30.
Model Specification I
A model is a mathematical representation of a
problem situation. Based on the fact that different methods of data analysis
will be used to test the hypotheses, the model to be applied will therefore be
more than one.
For
hypotheses 1 and 2, 3, using t-test statistical model the formula is defined
thus:
x1 -
x2
t =
S12 + S22
n1 n2
where: X1 = Mean of
Group one
X2 = Mean
of Group two
S1 = Variance
of X1
S2 = Variance
of X2
df = n1+ n2
– 2 (degree of freedom)
Model Specification I1
Using
Pearson’s Correlation Coefficient from mean method, the formula to be adopted
in testing Hypothesis Three is defined as follows:
r =∑ (X-X) (Y-Y)
∑(X-X)2
∑(Y-Y)2
The data was condensed Annual Financial Statement reports of the
selected banks which provided the major ingredients for statistical analysis
and presentation. Between the period as shown on table 4:1 the ratio of
Non-performing loans at First Bank of Nigeria Plc, in relation to the total
loans and advances (LAD) stood at 28.34% (N8072.08), 20.8% (N5256.8), 18.45%
(N4231.57), and 16.27% (N3248.56) respectively, indicating that the liquidity
of the bank is affected as the ratio of non – performing loans continues to
rise.
Again, in the year 2004 –
2005, the ratio of non – performing loan as it affects the liquidity of the
bank rose tremendously to 20.13% (N6782.33) and 30.67% (N9086) respectively.
From the year 2006 – 2008 and
consequent to banking sector reforms put in place, the effect of non-
performing loans, relative to the total advances reduced to 7.92% (N3512.28),
7.85% (N1417.66) and 6.27% (N1781.74). Nevertheless in 2009, the effect of non
– performing loans (NPL) continues to soar astronomically to 28.3%, thereby
affecting the liquidity of the selected under study, more seriously.
In Access bank, in the year 2000
– 2004, the ratio of non – performing loan, shown on table 4.1 as it affects
the liquidity of the bank was 20.5% (N9091.13), 21.61% (N7330.32), 21.35%
(N7016.91), 19.35% (N19.15), 18.65 (N2625.55), 24.20% (N9361.52), 24.65%
(N8361.52), 18.5% (N7656.22), 12.5% (N2370.5) and 5.25 (N 5530.2).
DATA ANALYSIS ON HYPOTHESIS ONE
Hypothesis One:
Ho: Non-performing
loan does not affect commercial bank’s
Liquidity.
Non-performing
loan affects commercial bank’s Liquidity.
From the result, the following statistical values
were obtained at 0.05 level of significance.
Non-performing Loan (x1) =3.00, SD =1.010
Other
Classified Debts (x2) =2.44, SD =1.033
Therefore:
x1 -
x2 t =
S12 +
S22
n1 n2
= 3.00 – 2.44
(1.010)2 + (1.033)2
14 14
=
0.56
0.07286 + 0.07622
14 14
= 0.56
0.07286 + 0.7622
0.56 =
0.1514
= 0.56
0.1491 = 1.45
df =n1 + n2 -2=14+14-2=14
=n1 + n2 -2=14+14-2=14
at 
=0.05 =1.45
=0.05 =1.45
t – Critical/ t- table =1.06
Table 4:2 shows the mean value, standard deviation
and standard error for the pair(s) of the variables compared in the paired
sample t- test technique. It further
shows the values of the Correlation Coefficient and the significance value for
each pair of the variables used in the paired sample t- test statistical
procedure.
DECISION:
Given the t-test statistical result shown on Table
4:2 on the appendices, the Table t-value= (Tt=1.06) is less than the calculated
t-value (Tc=1.45). Following the statistical deduction from the result, the
null hypothesis is therefore rejected and alternate hypothesis accepted. Since the
Table t-value= (Tt=1.06) < calculated t-value (Tc=1.45 at =0.05,
the implication of this paired t-test statistic sampled result is that changes
in the Non-performing loans significantly affect commercial bank’s liquidity
positions. Thus, the statistical proof
has further accentuated that liquidity shortfalls and capital erosion
experienced in most commercial banks in Nigeria have direct correlation with
the problems caused by Non-performing loans.
=0.05,
the implication of this paired t-test statistic sampled result is that changes
in the Non-performing loans significantly affect commercial bank’s liquidity
positions. Thus, the statistical proof
has further accentuated that liquidity shortfalls and capital erosion
experienced in most commercial banks in Nigeria have direct correlation with
the problems caused by Non-performing loans.
Specifically, the outcome of the paired t-test statistical
result clearly indicates that an upward high level of non-performing loans
ratios have considerably been a major contributor to every ugly episode of systematic commercial bank’s
illiquidity problems that often lead to distress, threat of insolvency, and invitation to
forbearance by the banking regulators. The result extensively reveals the
extent to which non-performing loans negatively affect bank’s commercial liquidity. Thus, the study has
unequivocally drawn its conclusion that liquidity shortfalls and capital
erosion experienced in most Nigerian commercial banks have direct correlation
with the negative effects of Non-performing loans (NPL). At decision rule, further statistical analysis
obtained on Table 4:3 showed a high positive t-test statistical value 7.897 and
a low significance value of 0.000 at the lower and upper limits of 95%
confidence interval of the difference of the paired differences. It therefore
becomes statistically expedient to reject the null hypothesis and accept the alternate
hypothesis.
Hypothesis I1:
Ho: Changes
in the liquidity levels of a Commercial bank do not negatively affect its
profitability.
Changes
in the liquidity levels of a
bank significantly affect its profitability.
NOTE: Profit
remains the standard indicator measuring the degree of efficiency attained by a
profit-making bank in the utilization of organizational resources. It enhances the index of economic well-being
for affected stakeholders, particularly shareholders, depositors and government.
The above hypothesis was tested, using
Pearson’s product Moment Co-efficient correlation (r). Two variables were
correlated – as the statistical tool to analyze the condensed data collected
from First Bank, Access Bank United Bank Annual Reports and predicated at 0.05
level of significance to verify the extent to which changes in bank’s liquidity
levels affect bank’s profitability.
DATA NALYSIS OF HYPOTHESIS 11
From the
result using a parametric statistical paired sample t-test analytical technique,
the following statistical values were obtained .
Liquidity (x1)
=4.68, SD =0.88 Other Classified Debts (x2) =3.73, SD= 0.86
Therefore:
x1 -
x2
t =
S12 + S22 
n1 n2= 0.95
(.88)2 + (.86)2
14 14
=
0.56
0.07286 + 0.07622
14 14
= 0.95 0.05531 + 0.05282
0.95 =
0.10813
=
0.95
0.32883 = 2.88
df =n1 + n2 -2=14+14-2=16
=n1 + n2 -2=14+14-2=16
at =0.05 =2.88
=0.05 =2.88
t – Critical/ t- table =1.94
The data on the Table 4:4 contained on the
Appendices shows the relationship between profitability growth and the
liquidity positions of Access bank, United Bank, and First Bank, selected for
the research study.
In the year 2000, the growth rate of profitability
in relation to liquidity for Access Bank was 19.04% at N11292 liquidity level,
16.75% for United Bank at N7428.2 liquidity level while First bank recorded
20.49% at N9091.31 liquidity level. In 2001, Access bank experienced 23.05%
profit growth when the liquidity position rose to N12624, 18.5 %( N6275.38) at
United Bank for Africa and 21.61% (N7330.32) at First bank. However, in the
year 2003 and owing to liquidity shortfalls at Access bank, the profit growth
dropped to 19.3% at N9634 liquidity level,
17.5%(N5683.75) at United bank for Africa while First bank recorded 21.05% profit growth at liquidity level of N1533.19 level of
liquidity. On a cumulative average, the
periods 2004 up till 2007 as shown on the Table 4:4,indicated that
affected commercial banks profitability growth rate stood at 21.32%(Access bank), 14.88%(United Bank) and
16.85% for First Bank.
This fluctuation in the profitability growth
of the selected banks under study was orchestrated by the inverse relationship
between shortfalls in the liquidity levels of the affected commercial banks.
This scenario could arise when certain commercial banks begin to experience
crisis of illiquidity, on account of deposits flight, capital erosion and
investments mismatch in portfolio selection.
However, the year 2008, Access bank recorded
a 19.5% decline in the profit growth at N12011 liquidity level, 17.5 %
(N18964)
at United bank and 12.85% profit shortfall was similarly experienced at First
Bank Plc.
This means in effect that, as the liquidity
position is enhanced, banks are predisposed to availability of funds that could
be committed to investment opportunities to maximize profitability and
shareholders wealth.
DECISION:
The result shows the
profitability growth rate of the commercial banks selected for study. From the result of the statistical analysis
shown on Table 4:5, the table t-value obtained is 1.94 while the calculated
t-value (t-cal.) =2.88 Given the fact that
the calculated t-value-cal=2.88>table value=1.94, it is therefore
sufficiently evident for the researcher to reject the null hypothesis and
safely accept the alternative hypothesis.
The implication of statistical result clearly suggests that changes in
commercial bank’s liquidity significantly affect its overall profitability
performance.
Hypothesis I11:
HO: Changes
in bank’s Statutory Reserve Requirements do not negatively affect its
liquidity.
Changes in bank’s Statutory Reserve
Requirements significantly affect its liquidity position.
ANALYSIS OF THE HYPOTHESIS
Basically, commercial
banks accept current deposits and they also lend to their customers. To
safeguard the deposits of customers and to prevent bank failure, commercial
banks are statutorily required to maintain a certain percentage of their total
cash holdings (Deposits) with the Central Bank of Nigeria (CBN). This
percentage is called the Cash Reserve Ratio (CRR). This ratio varies from time to time,
depending on the monetary policy being pursued by the apex financial authority.
By the same token, the law makes it mandatory for
commercial banks to keep a certain
proportion of their deposit liabilities in liquid
form. This proportion is known as the liquidity Reserve Ratio (LRR).
In Nigeria, when the Central Bank of Nigeria
(CBN) wants to reduce banks’ liquidity, it increases this ratio. This
regulatory measure invariably
affects the level of liquidity at the disposal of the commercial banks to
engage on potential investment opportunities and cope with other conflicting
interests(particularly of shareholders) as they fall due.
To enhance their liquidity requirements, the
commercial banks must then recall their outstanding loans and advances. As they
do this, their liquidity base will be boosted. However, experience of the
commercial banks in the past indicated that the task of recalling outstanding
loans and advances has been an uphill task, impairing their lending ability.
But if the Central Bank wants to promote liberal cash flow in the economy
through increased bank lending, it will reduce this ratio as well as the Monetary
Policy Rate (MPR).
In effect, the vagaries in the statutory
reserve requirements have close relationship with the overall operating
liquidity of commercial banks. As shown on the Table 4:6 on the appendices in
the year 2000, the liquidity ratio 64.1% and cash ratio of 9.8% were prescribed
as the statutory requirements by the monetary authorities (CBN) when the total demand deposit was N345001.4.
The table4:6 on the Appendices revealed further that as the banks’ demand
deposits increased to N448021, the reserve ratio requirements rose to (52.9%)
and cash ratios 10.8% respectively. The
implication of this phenomenon is that, as the statutory ratio increases, the
liquidity of commercial banks invariably shrinks. Between the 2002 to 2005, the
rising trend in reserve ratios persisted, indicating an inverse functional
relationship between a rise in reserve ratios and decline in the liquidity
positions of the affected banks.
Therefore, the constraints imposed by the statutory regulation over
commercial bank’s deposits reserves tend to curtail the enormous liquidity flow
that would have ordinarily remained at the disposal of the commercial banks for
profitable investments and other commitments.
DATA ANALYSIS OF HYPOTHESIS 111
Using a parametric
statistical paired sample t-test analytical technique was adopted to establish
the extent statutory requirements affect commercial bank’s liquidity levels,
the result obtained was predicated at
0.05 probability level of significance. From
the result, the following statistical values were obtained.
Liquidity Ratio (x1) =4.54, SD =0.39 Cash Ratio (x2) =4.51, SD =0.43
Therefore:
x1 -
x2 t =
S12 +
S22
n1 n2
= 4.54 – 4.51 (0.39)2 + (0.43)2
9 9
=
0.03
0.1521 + 0.1849
9 9
= 0.03 0.0169 + 0.0205 |
0.03 =
0.0374
= 0.03
0.19347 = 0.551
t-cal=0.551
df =n1 + n2 -2=9+9-2=16
=n1 + n2 -2=9+9-2=16
at =0.05
=0.05
t – Critical/ t- table =2.12
Table 4:7 shows the mean value, standard deviation
and standard error for the pair(s) of the variables compared in the paired
sample t- test technique. It further
shows the values of the Correlation Coefficient and the significance value for
each pair of the variables used in the paired sample t- test statistical
procedure.
The table
4:7 contained on the appendices shows the respective values of the computed
mean, the table t – value, calculated t-value, standard deviation and
corresponding significance probability.
The statistical result showed a calculated t-statistic of 2.12. Based on the fact that the calculated
t-value (Tc=0.551is less than the t-tabulated (Tt=2.12), at =0.05,)
the null hypothesis is therefore accepted. The implication of the Paired t-test
statistic result is that there is no positive difference to suggest that bank’s
reserve requirements have any significant impact on commercial banks liquidity.
Specifically, the t-test statistic result has safely provided the premise for
the researcher to conclude unequivocally that fluctuations in the Statutory
Reserves requirements do not constitute a major determinant that influences
commercial bank’s liquidity positions.
=0.05,)
the null hypothesis is therefore accepted. The implication of the Paired t-test
statistic result is that there is no positive difference to suggest that bank’s
reserve requirements have any significant impact on commercial banks liquidity.
Specifically, the t-test statistic result has safely provided the premise for
the researcher to conclude unequivocally that fluctuations in the Statutory
Reserves requirements do not constitute a major determinant that influences
commercial bank’s liquidity positions.
SECTION E
SUMMARY
OF FINDINGS, CONCLUSION AND
RECOMMENDATIONS
This last part of the study presents the concluding part
of the findings, conclusion, and recommendations on liquidity management as it
affects banks’ operations for effective service delivery and sustainable public
confidence. Based
on the findings of the study, it was revealed that liquidity and capital adequacy
are critical factors that significant impact on the performance, increased
efficiency, resilience of the banks in Nigeria.
DISCUSSIONS AND FINDINGS
The findings from the study revealed the
following:
(1) In relation to the first objective of the
study, it indicated that Non-performing loans impact negatively on
effective bank liquidity management since the ratio of non-performing
loans to total loan portfolio is more than 12%
and persistently higher than the tolerable limit of 10%, prescribed in
the Central Bank (CBN) prudential guidelines.
(2) In relation to the second objective, it was revealed that the poor profitability and capital
erosion observed in most commercial banks was
orchestrated by some of the inhibiting factors such as institutional weaknesses, margin
loans, poor perfection of realizable securities, unethical sharp practices poor corporate governance and misleading
financial returns by the commercial banks. This was further aggravated by the failure of
banks’ regulators to adopt more pro-active mechanisms in the discharge of their
oversight functions.
(3) In relation to the third objective of the
study it was observed that the liquidity shortfalls in most Nigerian commercial
banks have no significant relationship with the changes in the statutory
reserve requirements. Technically speaking, although the liquidity reserve
ratio (LRR) imposed by the Central Bank has fairly remained persistent at
33%,it does not substantially impair their ability to engage readily on
investments, maximize profit and satisfy other commitments.
IMPLICATIONS OF THE FINDINGS
It is an incontrovertible fact that the
banking system remains as the fulcrum that propels the belt of the economy,
given its function of financial intermediation that promotes the growth of
domestic and foreign investments. The findings of this study have a lot of
negative implications that may dangerously spell doom to both the banking
industry and the entire economy, if serious measures are not addressed
vigorously to tackle the challenges, posed by liquidity management issues in
the commercial banks.
Firstly, the anomalies observed in credit
administration, corporate governance and banking supervision raised serious
questions that have their roots on professional misconduct in Nigeria’s banking
practices. If the ugly situation is left
unabated without stiffer prudential reforms and overhauling of the institutional
framework, public confidence which constitute the bedrock of banking business
could be eroded.
Absence of adequate operating capital or
strong liquidity base has debilitating impact on investment in the Nigerian
banking sector. Consequently, the
prospect for sustainable future growth, corporate image and increased
profitability to maximize shareholders dividends will be shaken and ultimately
jeopardized. The danger inherent in banking sector illiquidity and its
far-reaching implications which is a negative signal of weak regulatory
apparatus is an indication that government and banks’ regulators have failed in
their onerous task of providing an enabling environment, conducive to guarantee
safety, security and soundness of banking practice in Nigeria.
Broadly speaking, the consequences of these
operational deficiencies may be disastrous and capable of inflicting negative
repercussions on the overall banking operations and profitability.
CONCLUSION
Banking is a very strategic industry whose activities
have far-reaching consequences on other sectors of the economy. Given the
objectives of this study, it has not been an easy task to put up a thesis of
this depth, when delicate issues such as banks’ liquidity management are being
discussed. This is particularly of interest, in view of the fact that one has
to consider its vast implications on the depositors, the bankers and other
stakeholders, to which the banks owe conflicting obligations. The study has comprehensively opened up new
vista of knowledge and suggestions that provided further insights, aimed at
expanding the frontiers of knowledge for future research on effective liquidity
management.
It is
therefore imperative that liquidity is very crucial and must be prudently
managed, if banks are to truly remain competitive and viable. An owner of a property, placed on trust, has
the right to demand it when he decides to have it back. In the light of this,
the researcher therefore expressed strong opinion that the interest of
depositors, investors and other stakeholders which places dilemma on a banker
should be the focal point in course of discussions on banks’ liquidity
management issues. It is therefore, no gainsaying the fact that only a
commercial bank with adequate liquidity position can remain competitive,
relevant and an active player within the domestic economy and in the global
arena.
RECOMMENDATIONS
The
dictum that prevention is better than cure is very apt in the management of
banks’ liquidity. In a bid to prevent
the problems of illiquidity in banks, the regulatory authorities should as a
matter of necessity, put in place an effective mechanism, capable of enforcing
stringent regulatory controls on the commercial banks. This can be achieved through regular
oversight functions, carried out periodically with a view to ensuring strict
compliance or imposition of sanctions against deviations to operational
guidelines. Such measures and recommendations which are designed to promote
sound financial condition and confidence among bank customers include the
following:
(1) In order to build a virile, competitive and
resilient banking system, there is need for the government and its regulatory
agencies to enforce effective compliance to regulatory policy by the banks for
a healthy financial system growth.
(2) The apex regulator should put in place
effective control machinery and remain pro-active in the discharge of their
oversight functions so as to promote good corporate governance to deter
unethical conduct and other abuses that had systematically eroded banks’
liquidity in the past.
(3) In
view of the numerous findings made in this study, it is strongly recommended
that banks should introduce measures to control indiscriminate credit
extension such as margin loans which has
been the practice in the past, without recourse to perfect and realizable
collateral security.
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