Liquidity Management in Banks: A Study of Selected Commercial Banks in Nigeria (2000-2009)

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

This study sought to examine the challenges of Liquidity Management in Nigeria’s Commercial banks. The study identified some of the notorious factors responsible for most banks’ liquidity problems such as high ratio of Non-performing loans (NPL), excessive risks concentration, fluctuations in statutory Reserve requirements; Assets mismatch in portfolio selection, and Poor Corporate Governance. In order to tackle the magnitude of the problems, the researcher limited the scope of the study to ten year period (2000-2009) in First Bank, Access Bank and United bank for Africa PLC and established three specific objectives and related research questions to guide the study. Based on the research findings, it was recommended among others that banks should strengthen their institutional capacity, exercise prudence in credit administration and avoid excessive risk exposure.CBN should also re-appraise the existing corporate governance code necessary and also embrace more pro-active mechanisms in the discharge of their oversight functions for sustainable banking sector liquidity, public confidence, safety and professionalism in banking practice. 
Key: Liquidity, Non-Performing Loan, Credit Administration
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 are mandated to keep certain percentage of their cash as legal reserve.   Experience in Nigeria has shown that most commercial Banks run into problems of illiquidity because of assets mismatch, excessive risks concentration on portfolio investments, massive fraud and other insider -related abuses.
 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 began to record poor net-income earnings and also experienced low level patronage in banking transactions. Consequently, massive retrenchment of bank workers ensued and the displaced workers miserably joined the labour market which is already saturated with unemployment problems.
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?
  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.

  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 thatthe 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.
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.    
                   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 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.

         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)
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).
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
            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
       =        0.1514
       =      0.56
              0.1491     = 1.45

df =n1 + n2 -2=14+14-2=14
at  =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. 
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.
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.
 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
              x1     -      x2
 t =           S1  +   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
       =        0.10813
       =        0.95
              0.32883     = 2.88
df =n1 + n2 -2=14+14-2=16
at  =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. 

  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.
     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.
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
             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

       =        0.0374
 =            0.03
              0.19347     = 0.551

df =n1 + n2 -2=9+9-2=16
at  =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.  
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.
  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.
       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.
   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.
 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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