Strategies For Management Bank Liquidity
(A Case Study Of First Bank Of Nigeria Plc)
Effective management of bank liquidity involves implementing strategies to ensure that a bank can meet its financial obligations as they come due while maintaining optimal levels of liquid assets. This typically entails maintaining a diversified funding base, establishing robust liquidity risk management frameworks, and conducting regular stress testing to identify potential liquidity gaps. Banks also often employ liquidity buffers, such as cash reserves and high-quality liquid assets, to withstand periods of market stress. Additionally, actively monitoring and adjusting liquidity positions in response to changes in market conditions, regulatory requirements, and internal risk assessments is essential for effective liquidity management. Overall, a proactive approach that combines prudent liquidity risk management practices with a comprehensive understanding of market dynamics is crucial for safeguarding the stability and resilience of a bank’s operations.
This topic is about liquidity management, which means the ability of a bank to determine for itself, the appropriate point in time. This is done by looking at it’s credit portfolio is an indispensable factor for the success of any enterprise. The success or survival of commercial banks, like any other business organization is a function of it’s liquidity management.
What the researcher intends to do is to explore the strategies employed by the first bank of Nigeria Plc in managing it’s liquidity. The study also aims at giving suggestions, as to how the bank, based on the findings of this research can improve it’s business through well planned and articulated liquidity management policy.
In the course of this research work, the researcher encountered some constraints, such as lack of time, inadequate attention from the public and financial constraints.
Nevertheless, the researcher recommends that management accounting techniques should be applied in banks to determine the extent of liquidity holdings of a bank at a particular point in time in order to meet up with the financial obligations of the bank to their customers.
Cover page
Title page
Approval page
Dedication
Acknowledgment
Abstract
Table of contents
CHAPTER ONE
1.0 INTRODUCTION
1.1 Statement of problem\
1.2 Objectives of the study
1.3 Significance of the study
1.4 Scope and limitations of the study
1.5 Research hypothesis
CHAPTER TWO
2.0 REVIEW OF RELATED LITERATURE
2.1 Definition of terms
2.2 The concept of liquidity
2.3 Understanding liquidity ratio
CHAPTER THREE
3.0 Researcher design and methodology
3.1 Sources of data
3.2 Sample used
3.3 Method of data collection
3.4 Population size
3.5 Data analysis techniques.
3.6 Statistical method
CHAPTER FOUR
4.0 DATA PRESENTATION AND ANALYSIS
4.1 Analysis of data using the simple percentage(%)
4.2 Test of hypothesis
CHAPTER FIVE
5.0 Summary of findings, recommendation and conclusion
5.1 Findings
5.2 Recommendation
5.3 Conclusion
Bibliography
Appendix
INTRODUCTION
Virtually, all economic units need liquidity, and banks are no exception. Demand deposits, which represent a major proportion of bank liabilities, constitute a large percentage of the nation’s money supply. Each bank must therefore maintain a substantial part of its assets in cash or in cash assets that can be converted into cash quickly. Since demand deposit represent a high proportion of bank’s liabilities, they at all times, try to prevent a rush on their liquid position. When therefore a bank is faced with infrequent loan demands, the banker is guided by what is known as liquidity ratio. The banker has to determine the ratio of loans to deposit cash ratio and legal requirements. The banker must be sure that at all times, it complies with the central bank of Nigeria liquidity requirements. The banks will put into consideration the ratio of loans to deposit liabilities. When the ratio of loan to deposit liabilities rises to a relatively high level bankers become less inclined to lend and to invest.
Commercial Banks employ different strategies to maintain adequate liquidity and these strategies include:
1. Lending only for short term commercial purposes.
2. Maintaining liquid assets, which ranges from cash to money at call and bills discounted.
3. They also hold deposit at the central bank.
The combination of earning of liquid is especially relevant for commercial bank managements in Nigeria. This is because the ultimate objectives of a commercial bank is to make profits at all, the banker must maintain confidence, and to maintain confidence he must maintain an adequate degree of liquidity in highs assets.
It is therefore against this bank ground that the researcher wishes to examine the concept of liquidity management strategies adopted by First Bank of Nigeria Plc.
1.1 STATEMENT OF PROBLEM
The major problem inherent in strategies for managing bank liquidity in this research work is how to determine the extent of liquidity holdings of a bank at a particular point in time in order to meet up the various financial obligations of the bank to their borrowing customers.
There is no doubt that for any bank to survive successfully and consequently maintain the public trust and confidence in their banking operations, it has to adopt strategies that shall put in place an adequate liquidity so that the various demand of customers shall always be met. If a bank fails to maintain enough liquid assets in their banking management, it stands the risk of jeopardizing their existence by loosing their various. Customers and public confidence in there banking operations.
To measure the liquidity that a bank needs at a particular points in time, it would require an accurate forecasting of cash needs and the expected level of liquid asset and cash receipts over a given period of time.
Besides, it is important to note that in view of maintaining enough liquidity, the central bank of Nigeria (CBN) have adopted some measures by stipulating that banks should be able to maintain a cash reserve ratio of 5% and liquidity ratio of 25%. Apart from this, the CBN strictly regulate the commercial banks’ activities through the banking act of 1969 and currently through the bank and other financial institutions decree of 1991.
The above hold attempts, were the various measures that have been taken so far by the regulatory authorities of our financial system to address this problem without success.
1.2 OBJECTIVES OF THE STUDY
This study intends to achieve the followings:
1. Find out the factors that are highly considered by banks in their liquidity needs.
2. Evaluate the effectiveness of the bank liquidity management strategy adopted over the years.
3. Find out the liquidity management need of banks.
4. Identify problems that confront bank’s liquidity management strategy.
5. Find out ways and means through which these problems can be solved.
1.3 SIGNIFICANCE OF THE STUDY
This research work is carried out to ascertain how first Bank of Nigeria Plc have been able to maintain an adequate liquidity management over the years.
The research work will be of immense, since it is a partial fulfillment for the award of Higher National Diploma in Accountancy Department of the Institute or Management and Technology Enugu.
The findings will also be useful to researchers in the field, scholars and others in the banking industry.
Finally, the findings will be used by both the government, the Central Bank of Nigeria and then serve as an avenue for commercial banks to understand the criteria to be adopted in determining the level of liquidity to maintain the level of liquidity to maintain at any particular time so as to achieve its corporate goals.
1.4 SCOPE AND LIMITATIONS OF THE STUDY
This research work concentrated on the operational activities of the First bank of Nigeria Plc in managing it’s liquidity.
The period in review is between 1998-2004.
The researcher faced some limiting factors in the process of information gathering.
1. Financial Constraints, Caused by the huge amount of money required.
2. Time constraints, because of other numerous academic engagements.
3. There is also the problem of death of data to obtain the needed information.
Nevertheless, these limitations were not sufficient enough to make the objective of the study unrealizable
1.5 RESEARCH HYPOTHESIS
In furtherance of this research, the following hypothesis are formulated and will be used in the analysis of the study.
1. First Bank of Nigeria Plc considered it necessary to adopt policies on liquidity management.
2. Low liquidity has no impacts on the overall performance of the bank.
Strategies For Management Bank Liquidity:
Managing bank liquidity is crucial for ensuring the stability and smooth functioning of a financial institution. Banks must be able to meet their financial obligations, including withdrawals and loan disbursements, while also maintaining a healthy balance between their liquid assets and liabilities. Here are some strategies for managing bank liquidity:
- Cash Flow Projection and Analysis: Regularly forecast and analyze the bank’s cash flows, taking into account expected inflows and outflows of funds. This will help in identifying potential liquidity gaps and planning accordingly.
- Liquidity Stress Testing: Conduct stress tests to assess how the bank’s liquidity position would be affected under various adverse scenarios. This helps in identifying vulnerabilities and developing contingency plans.
- Maintain Adequate Liquid Assets: Hold a sufficient amount of highly liquid assets, such as cash, government securities, and short-term marketable securities. These assets can be easily converted into cash to meet unexpected liquidity demands.
- Diversification of Funding Sources: Relying on a variety of funding sources reduces the risk associated with sudden disruptions in any single source. This includes diversification of deposit types and sources of wholesale funding.
- Monitoring and Managing Deposit Mix: Different types of deposits have different withdrawal patterns. Monitor the deposit mix and structure the bank’s product offerings to maintain a stable and predictable source of funding.
- Short-Term Borrowing Facilities: Establish credit lines or short-term borrowing arrangements with other financial institutions. These facilities can provide access to additional liquidity when needed.
- Contingency Funding Plan (CFP): Develop a CFP that outlines strategies and actions to be taken in case of unexpected liquidity challenges. This plan should identify alternative sources of funding and actions to reduce cash outflows.
- Asset-Liability Management (ALM): Use ALM techniques to match the maturities of assets and liabilities. This helps in reducing liquidity risk by ensuring that funds are available when needed.
- Collateral Management: Optimize the use of collateral for borrowing. Efficient collateral management can provide the bank with access to additional funding options.
- Central Bank Facilities: Establish a relationship with the central bank and be aware of the emergency liquidity facilities they offer. These facilities can serve as a last resort source of funding.
- Liquidity Contingency Funding Plan: Develop a comprehensive liquidity contingency funding plan that outlines actions to be taken in various liquidity stress scenarios. This plan should be regularly reviewed and updated.
- Regular Monitoring and Reporting: Implement a robust monitoring and reporting framework to track liquidity metrics and indicators. This allows the bank to proactively address any emerging liquidity issues.
- Communication and Transparency: Maintain open communication with regulators, stakeholders, and investors regarding the bank’s liquidity management strategies and practices. Transparency can enhance confidence in the bank’s stability.
- Technology and Automation: Implement advanced technology and automated systems for liquidity monitoring, reporting, and stress testing. These tools can provide real-time insights and streamline liquidity management processes.
- Educating Staff: Train bank employees about the importance of liquidity management and how their roles contribute to maintaining a sound liquidity position.
Remember that effective liquidity management is an ongoing process that requires constant monitoring, assessment, and adaptation to changing market conditions and regulatory requirements. Each bank’s liquidity management strategy may vary based on its specific business model, risk profile, and market environment.