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THE IMPACT OF LIQUIDITY AND PROFITABILITY AS A SURVIVAL STRATEGY FOR BANKS IN NIGERIA

 

 

CHAPTER ONE

1.0 INTRODUCTION

1.1 GENERAL OVERVIEW

Banks are engaged in essential activates, which entail balancing their liabilities with the assets composition of the balance sheet in order to maintain equilibrium.

No doubt the core business of banking, which is credit, involves from the surplus unit of the economy and channel the funds soured to the deficit unit according.

The deposit is mobilized at a cost of the bank and this cost is often called interest. The deposit is channeled to the users who pay interest at higher rate than the deposit rate.

The primary objective of the bank is to make profit which is the difference between the cost of deposit and other cost and the income form credit advance and other investment. This pre supposed that a bank must ensure proper management of its assets and liability has, both in composition and utilization in this way the highest return is ushered in for all stakeholders in the business. It is true that the lips service paid to assets and liabilities management in the banking debacle of the 1980's hence it is important to work hard in order to avoid the fails of the past and restore confidence in the industry.

The impact of the regulations and the mode of insurance have been adduced by scholars as playing significant role in banks. Liquidity crisis of the 1980's specifically, the critics point at the central bank of Nigeria's directive to the bank to lodge the naira equivalent of foreign exchange requests, the withdrawal of public sector deposit from bank as some of the factors that engendered the bank failure. To a large extent, the situation revealed the fragile liquidity positions of Nigeria banks notwithstanding the contributory role of central bank of Nigeria guidelines and directive.

One important issue of note is that in the pursuit of profit maximization objectives, bank must endear to balance credit extension push and liquidity management in such a way that bank safety is not jeopardized.

 

1.2 OBJECTIVE OF THE STUDY

This study seeks to achieve the following objectives.

1. To examine how banks establish, maintains and manage an optimum balance between Liquidity and profitability.
2. To show the correlation between Liquidity and profitability
3. To identify the basis for proper understanding of the impact of liquidity and profitability as an aspect of assets and liability management in the administration of deposit money bank.
4. To show banks manage various risk associated with their operations.
5. To reveal the specified liquid assets for financial institution and the degree of their liquidity and profitability.

1.3   STATEMENT OF PROBLEM

This research work tend to address or examine the impact of liquidity and profitability as a survival for banks in Nigeria visa-vis the maximization of the cost of liquidity and maximization of profits to ensure bank solvency Nigeria

 

1.4   RESEARCH HYPOTHESIS

From the statement of problem and purpose of study the following hypothesis are formulated.

1. Null hypothesis [HO] there is no correlation between profitability and liquidity. Alternative hypothesis [H I] there is correlation between profitability and liquidity.
2. Null hypothesis [HO] the amount of loan and advances granted to customers does not determine the bank profit levels.
   1. Null hypotheses [HO] the amount of cash held by bank do not determine the liquidity levels of a bank. Alternative hypotheses [HI] the amount of cash held with the bank determine the liquidity level of a bank

 

1.5   SIGNIFICANCE OF THE STUDY

The significance of this study is to provide the basis for proper understanding of the impact of liquidity and profitability as a survival strategy for the banks in Nigeria and as an aspect of assets and liabilities management in the administration of deposit money banks and people in general and banks will know the prudent ways in which their resources can be managed and economy as a whole will be positively affected in various ways.

 

1.6   SCOPE AND LIMITATION OF THE STUDY

The scope of this study is limited to the analysis, interpretation and manipulation of the information provided in the financial statement and manipulation of the information provided solutions to the problem unveiled in the research problem. The scope was expanded to how Nigeria banks manage their liquid assets to maximize profit.

Financial statement by their nature only shows the aspect of the business that can be qualified in monetary terms. But business generally among which deposit money banks felt, have quantitative among which deposit money bank felt, have quantitative aspects that cannot be qualified monetary, but they affect positively or negatively the performance of the business. The example is the effects of the retrenchment of some worker would have on the moral of other workers and boost their efficiency and productivity.

The effect on the efficiency and production directly or indirectly affect the performance of the performance of the business but there can hardly be quantified and induced in the financial statements.

Besides, bank operate in a very keen competitive environment in fact makes it to be reluctant in giving out financial and other information due to fear of playing into their competitors hand.

 

1.7   DEFINITION OF OPERATIONAL TERMS

1. Liquidity: This is the availability of bank to meet sudden withdrawal demand or request for loan by borrowing customer.
2. Profitability: Is the ability of a bank to earn positive net return on its investment over a long period of time
3. Solvency: Is the investment in asset that will be ready to mature at the time the long them obligations of bank are due for settlement.
4. Deposit: This is the money kept with the bank by customer which is the major source of fund, accounting for over 60% of what a bank needed to finance its lending operation.
5. Loan and advances: These are funds granted to loan seeking customers to meet there demand in which interest will be paid on it to the bank.
6. Market risk: This is the possibility that market will move against an operator in terms of change in interest or exchange rate and therefore result in either potential loss of income or utilization of funds below the optimum level.
7. Cash: This is the fund held by bank to meet its daily obligation most especially customers withdrawals.
8. Asset: Asset are owned by bank.

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