Banks generally provide avenues for savings to those who have surplus funds. The bulk of such funds are then lent out to needy personnel and business customers in loans and overdrafts, it has been widely appreciated that more than half of the total gross earnings of banks is earned from interest on loans and advances, which constitute the single most important assetsof the banks. Demands savings and time deposited constitute the major source of banks profitability, it has to be aggression in its lending function. At the same time, it has to be liquid to meets the depositors request and maintain public confidence. It therefore, has to strike a balance between liquidity and profitability. As lending is one of the most intricate services provided by banks, this paper will examine in 8rme details many theories emanating from developed environment and their effect on the operation of banks especially the credit, lending activities. They include the consumer loans theory, and the anticipated income theory. Those theories will thus be evaluated to measure the extents to which they guide the lending activity of the First Bank of Nigeria Plc in a developing environment. This is with a view of highlighting the degree of compliance to these theories by the banks and also proffers solutions and recommendations to resolve the liquidity and profitability position in a developing economy such as Nigeria