Liquidity Management In Banks

INTRODUCTION
1.1 BACKGROUND OF STUDY
A bank is set to be liquid when there is sufficient cast and cash transferable assets including investment in securities that are easily realizable at a short notice without loss to the bank, together with the ability to raise fund quickly from other sources to enable it to meet its payment obligations and financial commitment in a timely manner, but in community a bank security investment is not realizable since they appoint securities individually (i.e. not from an organization concern for provision of security) so security is excluded in liquid of community banks. In addition, there should be sufficient liquidity buffer to meet almost all financial emergencies.

Liquidity management of commercial banks is a very vital issue in the banking industry. It is the ability of the bank to manage it liquidity position so that the liquidity and profitability will not suffer. But for this to be effective, liquidity management must contribute to the achievement of the overall co-operate fund management objectives for attaining and maintaining a balance of profitability, solvency and liquidity.

The obligation of maximum liquidity owed by surplus units can only be achieved by holding all ingestible funds as cash since it has maximum profitability, the bank must invest all funds in loan and overdraft which is considered the average fielding and most liquid of all assets of the banks.

Banks plays an important role in the economy particularly in monetary and credit aspects of the economy but face a lot of restrictions. Irrespective of the facts that banks are the most highly and closely regulated of all business, union bank still have to operate within the confines of the law (CBN) and solve problems of liquidity and profitability dilemma in the economy.

Despite all these constants and dual role of liquidity. Profitability and otherwise, there is vertically no work in the liquidity management in Nigeria commercial banks and community banks. Though the regulations of CBN are not affecting community banks much but they still have little work on the liquidity management. In the light of this, the researcher has decided to discuss this topic based on the analysis of data collected; the researcher will suggest some solutions to the problems of liquidity management.

Union bank assets management is a never-ending tug of war. This war is pitched between efficiency liquidity management on one hand and profitability at the other hand. In community banks like Nise community bank some notorious community banks have found little solution on management of assets.

As liquidity and profitability and two inherent goals in commercial banks, banks managers continued experiencing the conflict of trying to provide efficient mechanism of addressing their banks liquid and safety necessary from the nature of their liabilities.

A high proportion of commercial banks liabilities are made up demand deposits (current account deposits, saving deposit, fixed deposits and funds from other sources like loan interest changers, overdraft, treasury bills, treasury certificate travelers cheque, services changes Semites of valuable items of customers changes.

Necessarily, union bank need to keep only liquid asset, earn, it is less risky and less it is likely to field adequate returns. As such the higher the less risky assets the more union bank is exposed to experience a “backrub” or crisis”. At this rate, banks will probably not be able to cover all its cost and also make profit for the owner.

Union bank and Nise community bank as business oriented firms with their share holders interested on profitability should satisfy it shareholders while community banks not only satisfy their share holders also ensure development and establishment of private sections (small scale business). A bank might be temped to forget liquidity and pursue profitability by investing only on high yielding less liquid assets that are profitable at the expense of liquidity which is dangerous. It is always necessary to balance liquidity and profitability in order to have efficient bank management

The ratio or percentage of idle cash balance banks are to gold at a point in time and in what form to hold it is very necessary, that they should bear in mind the importance of satisfactory levels of profit. There are many constraints to banks in achieving of their goals liquidity and profitability such as legal reserved requirement and they should maintain adequate liquidity to meet unforeseen and seasonal loan demand and fluctuations of deposits, cash reserves are also needed to take advantage of unexpected profitability investment opportunities.

In effect, union banks and community banks are constrained and have to walk on a “tight rope”. That is the never – ending tug of war or dilemma policy of commercial banks sometimes inconsistency of monetary policy as administered by the central bank of Nigeria CBN elevates banks problems.

1.2 STATEMENT OF PROBLEMS
Despite some techniques in liquidity management in financial institution, there is no doubt that a lot of ills are base thing financial institutions existence in Nigeria especially in the area of liquidity management and profitability management.
Regulations do not guarantee that they will reserve bank failures and serious banking crises. No matter how effective and thorough the regulation mechanism the problem of liquidity and profitability management may still occur as history has shown it even with high policy and regulation which usually accompany the movement of liquidity and problems of keeping idle cash that yields no income. it is to prevent impact of such problems from threatening the system last resort function on the central bank exist in protect the aggregate deposit of the system and prevent the collapse of single institution from stabilizing the entire financial system. Also problems due exist due to hand care of some policies like high interest rates and rift among flow financial institutions.

1.3 OBJECTIVE OF THE STUDY
The objective of this research is look into the liquidity management of union bank and Nise community bank with more emphasis on commercial banks investment, liquidity and profitability position. The researcher will try to find out why commercial banks and community banks need to be move liquid than any other business organization and financial institution, to fined out what methods techniques banks should employ to solve problems.

It will also look at the effectiveness and management of their portfolio by employing and using various approaches, theories, instruments methods to solve this liquidity / profitability problems.

At the same time critical loot will be their at the assets portfolio management of union bank and Nise community banks with a view of determining if there is a defined relationship between the rate of profitability and liquidity.

Finally I wish to identify, differences and similarities in their banks and community banks options and Nigeria commercial banks are excessively liquid but make high profit at the same time.

1.4 SCOPE OF STUDY
In analysis the commercial and community banks statement qualification and their investments and degree of their liquidity. I will like to concentrate on one of the commercial banks:- Lagos and any town’s community bank.

The research will examine how this commercial and community banks carryout there portfolio management in the following areas.
i. Loan and advances
ii. Investment in securities e.g. treasury bill
iii. Balance held with and for other banks.
iv. Operation of several accounts.

1.5 RESEARCH QUESTION
1. Banks still earn income in spite that they pay interest on deposits of customers (savings & fixed deposits)
2. Your bank strictly select people that will mind the vaults or treasury
3. Your banks have excess in any amount that is been kept in vaults.
4. There is no need for your bank to invest the profits earned?
5. The liquidity of assets of banks are positively related to the profitability of the banks portfolio
6. Banks earn income in COT, and foreign exchanges.

1.6 RESEARCH HYPOTHESIS
Ho: Banks still earn income in spite that they pay interest on deposits.
Hi: Banks does not earn income since that they pay interest on deposit
Ho: Banks strictly select people that will wind the vaults or treasury
Hi: Banks does not select people that mind the vaults or treasury
Ho: Banks always have excess in any amount that will be kept in vaults.
Hi: Banks does not have excess in any amount that will be kept in vaults.
Ho: There is no need for your bank to invest the projects earned
Hi: There is need for banks to invest the project earned
Ho: The liquidity of assets of banks are positively related to the profitability of banks portfolio
Hi: The liquidity of assets is inversely related to the profitability of banks portfolio management.
Ho: Banks earn income in COT. Foreign exchanges and treasury / bills
Hi: Banks does not earn income in COT. And foreign exchanges.

1.7 SIGINIFICANT OF THE STUDY
The important of liquidity management in banking industry cannot be over emphasized since not much contribution was made on the topic, liquidity management the research will carefully consider those factors relevant to efficient liquidity management for a successful achievement of the desired profitability.
The result that will be obtained from the study will benefit management commercial bank community banks, non – bank financial institutions business enterprises, students of a accounting students of management and administration banking / financial and other related courses.

Readers of this work will be exposed as regards the impact of future of study. The basis of this research work is the positive of liquidity of Nigeria commercial and community banks as a determinant of profitability.

1.8 DEFINITION OF TERMS
1. PORTFOLIO – It is a list of securities and investment loan stock, shares and bands etc. held carried by a bank individual or organization
2. PORTFOLIO MANAGEMENT – It is the management of security holding of a bank or business firm. A portfolio may be managed by a committee or a portfolio management department or by any over body.
3. LIQUIDITY – It is the ability of banks to pay cash immediately when called upon to do so for all of its demand liabilities
4. LIQUIDITY MANAGEMENT – It is the ability of the bank to manage the liquidity position so that neither the liquidity is the profitability will suffer. It involvers the provision for the withdrawal of deposit. Short time cash cyclical and secular cash requirement of the specks – financial institutions.
5. BANK DEPOSIT – It is divided into demand saving and time deposited.
(a) Demand deposit – This is also know as checking account deposit payable on demand that is without prior notice of withdrawal like current account.
(B) Savings deposit – This type of deposit is usually evidenced by a voucher in pass book form which the deposit / customer of the bank in required to notify the bank before withdrawal
(C) Time deposit – This deposit cannot be with drawn until after a specific period of time.
6. ASSETS – These are the entire properties of a bank and other investment in other profitable organization
7. VAULTS – It is known as treasury / where liquidize kept.
8. ASSETS MANAGEMENT – It is the allocation of funds. The basic objective being maximization of fatigability solvency and regulatory constraints
9. BANK RUN – A run occurs in a bank when there is mismanagement of liquidity and profitability
10. TRADING ON EQUITY – This is a situation where a firm earns more with borrowed fund than that which is cost to borrow the fund.