LIQUIDITY MANAGEMENT AND PROFITABILITY OF LISTED FINANCIAL INSTITUTIONS ON THE NIGERIAN STOCK EXCHANGE

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LIQUIDITY MANAGEMENT AND PROFITABILITY OF LISTED FINANCIAL INSTITUTIONS ON THE NIGERIAN STOCK EXCHANGE

                                              ABSTRACT

The main aim of the research is to find the impact of examine liquidity management and financial performance of listed financial institutions in Nigeria. The study is divided into five chapters.

Chapter one talked about the background to the study, statement of the problem, significance of the study, objectives of the study, research question, research hypothesis, and operationalization of variables, scope of the study and definition of key terms.

Chapter two dealt with literature review which was broken down into three; conceptual framework, theoretical framework and empirical framework. It also covered the gaps in

literature.

Chapter three, the research design, research methodology, population of the study, sample size and sampling techniques, sources of data, instrument for data collection, method of data analysis, model evaluation, a priori expectation and limitation of the study.

Chapter four, data presentation, analysis, interpretation and discussion of findings and chapter five, which talks about the summary, recommendations and conclusions

 

 

 

 

                              CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

Commercial banks are vital institutions in the financial system that contribute significantly toward the development of any economy and they are treated as essential service firms in modern world due to their intermediating roles between the surplus and deficit sectors of the economy. Nowadays, the function of banks is not limited to the geographical limit of any country as a result of the globalization of trade and investment. The financial institution had contributed enormously to the efficiency of the whole financial framework as they offer a proficient institutional component through which resources can be mobilised and directed from less fundamental uses to more gainful investments (Wilner, 2000). Such financial intermediating roles of banks is not without problems since the deposits from the fund savers which have been invested by the banks for profit maximization, can be reviewed or requested when the last is not in position to meet their financial commitments. Moreover, the degree of rivalry in the Nigerian financial industry because of the development of mega new banks after the consolidation and recapitalization program, each Deposit Money Bank (DMB) endeavors to guarantee that it works on benefit and simultaneously fulfills the needs of its investors and other monetary commitments by keeping up sufficient liquidity at untouched (Olagunju, Adeyanju and Olabode, 201l). Profitability and liquidity as performance pointers are essential to the significant investors, depositors as well as tax authorities. The investors and shareholders are keen on the profitability and productivity of banks since it decides return on investment. However, depositors are worried about the liquidity position of their banks since it decides the capacity to react to

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their withdrawal needs, which are typically on request or without prior warning as the case might be. The tax authorities are interested in the profitability of the banks in order to determine the appropriate tax obligation (Olagunju, et al., 2011). The contradictory nature of liquidity and profitability can be explained by the intuitive reasoning that a bank operating with high liquidity (and in the process tying down investible funds) may have a low bankruptcy risk, yet with a trade-off of low profitability. Conversely, a bank operating at a low liquidity level (and thus freeing investible funds) may face high insolvency risk, but with a trade-off of higher profitability (Bassey and Moses, 2015).

Liquidity is a bank’s ability to meet its cash and collateral obligations without incurring l substantial losses. Sufficient liquidity is reliant upon the bank’s capacity to productively meet both expected and startling incomes and guarantee needs without antagonistically influencing either everyday tasks or the monetary state of the bank.

Liquidity management refers to the planning and control necessary to ensure that the banks maintain enough liquid assets either as an obligation to the customers of the bank so as to meet some obligations incidental to survival of the business or as a measure to adhere to the monetary policies of the central bank. Liquidity management involves the supply/withdrawal from the market the amount of liquidity consistent with the desired level of short-term interest rates or reserve money. It is the ability of a bank to meet demands for funds thereby ensuring that the bank maintain sufficient cash and liquid assets to satisfy client demand for loans and savings withdrawals and then meet its expected expenses. To guide bank’s management on the expected level of liquidity in the system over a period of time, liquidity management which involves the planning and control of cash and other liquid assets, may be supported by daily liquidity

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forecasting by the central bank so that appropriate measures are taken to prevent undesirable market developments that may negatively impact on the objective of price stability. Bhattacharyya and Sahoo (2011) argued that liquidity management by central banks typically refers to the framework, set of instruments, and the rules that the monetary authority follows in overseeing fundamental liquidity, steady with a definitive objectives of monetary policy. In such manner, central banks tweak liquidity conditions by differing both the degree of transient financing costs and affecting the supply of bank reserves in the interbank market (Agbada and Osuji, 2013).

Liquidity management is inversely related to the performance of banks (Bassey and Moses, 2015). A liquidity management crisis was evident in Global financial crisis of 2007–2008 this was the worst financial crisis raising fundamental questions about liquidity management (Basel Committee on Banking Supervision, 2013). During the crisis banks all over the world were hit hardest by liquidity management pressures cutting back sharply (Basel Committee on banking supervision, 2013). The indicators of poor liquidity management are a fall in asset prices, inadequate debt and low marketability of assets (Saunders and Cornett, 2005). Numerous commercial banks therefore face the test of diminished profitability (Molefe and Muzindutsi, 2016).

It is against this background that liquidity management is regarded as the life blood of the economy and in its absence; financial markets cease to function efficiently and profitably (Molefe and Muzindutsi, 2016). Persistent liquidity management constraints in the Nigerian economy have resulted in reduced public confidence in the banking sector as well as increased financial disintermediation resulting in the economic recession being experienced in 2015 – 2016

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in every sector of the Nigeria economy. Liquidity crisis becomes more pronounced as good numbers of financial institutions are engrossed with profit maximization and as such they tend to neglect the importance of liquidity management which eventually lead to financial insolvency with the consequence of low patronage and deposit flight.  The primary goal of banking business is to optimize profit through effective intermediation between the surplus and deficit sectors of the economy; and considering the fact that the issue of capital adequacy has been a major policy thrust of the CBN with the banking reforms aimed at increasing the capital base of banks for efficient performance in the recent past. It is on this background that this study seeks to examine liquidity management and profitability of listed financial institutions on the Nigerian Stock Exchange.

 

 

 

 

 

 

 

 

 

 

 

 

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1.2       Statement of the Study

Commercial banks have to work to maximize their profits and be able to meet the financial requirements of their depositors by holding a sufficient amount of liquidity at the same time so as to accomplish a balance between the profitability and liquidity. As stated by Alshatti (2015), banks should determine the optimal amount of cash that enable them in achieving balance between profitability and liquidity together because each level of liquidity has a different effect on the levels of profitability; therefore, the problem arises when commercial banks attempt to maximize their profits at the expense of neglecting the liquidity effect, which may cause a technical and financial hardship with the consequent withdrawal of deposits. Mainoma (2001) saw that there is a strong positive connection between short term fund and profitability. The connection between profit and loanable asset is additionally sure for a particular bank (Union Bank Plc, 1990 – 1999). But the study is limited to five commercial  banks for a period of eight years. This study will attempt to fill this void by investigating Zenith Bank Plc, Guaranty Trust Bank Plc, Union Bank Plc, First Bank Plc and United Bank for Africa Plc profitability in relation to liquidity within the banking industry and the appropriate relationship between the four variables under study for a period of fifteen years, from 2010-2018.

 

 

 

 

 

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1.3       Objectives of the Study

The main objective of this study is to examine liquidity management and profitability of listed financial institutions on the Nigerian Stock Exchange. However, the specific objectives are:

  1. i) To understand the relationship between liquidity management and profitability of commercial banks ii) To examine the relationship between deposit levels of commercial bank and profitability management iii) To investigate the effect of Central Bank Policy on the performance of commercial banks in relation to liquidity management and profitability iv) To find out the extent in which the current ratio affect Nigerian commercial banks’ ROI,

ROA and ROE

1.4       Research Questions

The following research questions are what this study intends to give answer to:

  1. What is the relationship between liquidity management and profitability of commercial banks?
  2. What is the relationship between deposit levels of commercial bank and profitability management?
  • What is the effect of Central Bank Policy on the performance of commercial banks in relation to liquidity management and profitability?
  1. To what extent does the current ratio affect Nigerian commercial banks’ ROI, ROA and

ROE?

1.5       Research Hypotheses

The following statements are considered to be the research hypotheses for this study:

  1. i) There is a significant relationship between liquidity management and profitability of commercial banks ii) There is no significant relationship between deposit levels of commercial bank and profitability management iii) There is a significant correlation between Central Bank Policy and the performance of commercial banks in relation to liquidity management and profitability iv) There is no significant relationship between current ratio in Nigerian commercial banks and ROI, ROA and ROE

1.6       Scope of the Study

This study will be limited to selected commercial banks in Nigeria, whose shares are traded on the stock exchange market operating in Nigeria which is the Nigeria Stock Exchange (NSE), i.e. listed banks. The study will examine the effect liquidity management and Profitability have had on the performance of the listed banks over a period of eight years (between the years 2010 and 2018). These years were selected because they represent the past years in which all the banks have published their financial statements.

 

 

 

 

 

1.6       Significance of the Study

The study helps strengthening the banking sector by providing information on the liquidity management policies in regard to the profitability of Commercial Banks in Nigeria. The results of the study can guide finance managers in banks to make sound investment decisions that will satisfy the stakeholders’ interest with regard to liquidity and profitability needs of the investors. Identification of liquidity levels that maximize profits enables managers revise and adopt relevant strategies. Furthermore, the regulators will have evidence as to what levels of liquidity are present in profitable banks. This will help them formulate rules and regulations that help minimizing failure risk in the sector. Finally, the research adds to the body of knowledge in finance as well as further evidence on how banks are managed.

1.8       Definition of Terms

The following terms were used in this study:

Liquidity Management: This is the act of storing enough funds and raising funds quickly from the market to satisfy depositors, loan customers and other parties with a view to maintaining public confidence.

Bank: A bank is a financial house established for the purpose of Accepting deposits and lending out funds in addition to other services.

Central Bank of Nigeria: This is the national apex and financial institution that regulates the banking system value supply and cost of finds in the Nigerian economy.

Liquidity Ratio: This is a class of financial metrics that is used to determine a company’s ability to pay off its short term debts obligation. Generally the higher the value of the ratio, the larger the margin of safety that the company possess to over short-term debts.

Listed Banks: These are banks that are allowed to trade their shares on the stock exchange market. These banks are allowed to raise funds from the public and they can be referred to as public companies. For the purpose of this study, listed banks indicate any bank allowed to trade on the NSE.

Stock Exchange Market: This can be defined as the market in which financial instruments are traded. This is the market whereby money is raised either on a short term, medium term or long term basis (Adenuga, 2006). In every country, there is at least a stock exchange market and the stock exchange market operating in Nigeria is the Nigerian Stock Exchange (NSE).

LIQUIDITY MANAGEMENT AND PROFITABILITY OF LISTED FINANCIAL INSTITUTIONS ON THE NIGERIAN STOCK EXCHANGE

 

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