EFFECT OF LIQUIDITY MANAGEMENT ON FINANCIAL PERFORMANCE OF LISTED DEPOSIT MONEY BANKS IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The financial performance plays a significant role in the growth and development of modern economy. Indeed, banks are frontline players in the financial performance. According to Anshoria, Rado, Samugwede& Nyazenga (2017) Financial performance is an idea of weather banks’ financial objective is being realized to an acceptable level under various performance indicator. It is use to measures firms over all financial health over a given period of time and can also be used to compare similar firms across the same industry or sectors in aggregation.
Financial performance in broader sense is an idea of weather banks’ financial objective is being realize to an acceptable degree in form of overall financial health over a given period of time and can also be used to compare similar firms across the same industry. Financial performance is an important aspect in monetary terms.
Turyahebya and Qeshta (2013) defines financial performance as the ability to operate efficiently, profitably, survive, grow and react to environmental opportunities and threats.
Liquidity management is inversely related to the performance banks (Bassey, 2015). A liquidity management crisis was evident in Global financial crisis of 2007–08 (Dullien, 2010). This was the worst financial crisis raising fundamental questions about liquidity management (Basel Committee on Banking Supervision, 2013). During the crisis banks were hit hardest by liquidity management pressures cutting back sharply (Basel Committee on banking supervision, 2013). The impact on the stock market was very severe as stocks shed prices (Basel Committee on Banking Supervision, 2013). In many areas the economy faced a huge financial blow, resulting in house evictions, foreclosures and prolonged unemployment (Basel Committee on Banking Supervision, 2013). The crisis underscored the role of liquidity management to commercial banks (Basel Committee on Banking Supervision, 2013).
Liquid asset management entails assets and investment in security that are easily convertible at a short notice without a loss to the bank together with the ability to raise funds from other sources to enable it meet payment obligation and financial commitments and meeting all financial emergencies in a timely manner. Liquidity and profitability are the two concerns of a straight line, if you are on the line and move towards one, you automatically move away from the other. In other words, there is a trade-off between liquidity and profitability (Puneet & Parmil, 2012).
It is well known that liquidity asset management is a basic tool of business either private or public organization, and includes also manpower, cash, materials or machines. For this to be effective, liquidity management must contribute to the achievement of the overall corporate fund management objectives, to attain and maintain a balance of profitability, solvency and liquidi ty in an organization and especially First Bank of Nigeria Plc. It may generally be assumed that there is a negative relationship between the two, but is not in all cases. The existence of a linear relationship though not continuous, between profitability and liquidity corresponding to the holding of current assets at least up to a certain level of firms, is not an impracticable proposition (Bhunia, Khan & Mukhuti 2012).
In addition, Egai and Ajie (2012) said liquidity plays a significant role in business organizations. It has tremendous effect on the survival of banks. Realizing its importance, banks devote a considerable number of managerial resources to the day-to-day business decision-making process. Akinsulire (2006) defined working capital as “those items that are required for the day-today production of goods to be sold by a company”. It represents the amount that is invested in assets that are expected to be realized within the year’s trading. It is not a permanent investment but as the name implies, it is continually in use, being turned over many times in a year.
Furthermore, Nwezeaku (2016) defined working capital as “the totality of a firm’s investment in short-term assets, namely cash, marketable securities, inventory and accounts receivable (Gross Working Capital)”. Also, Bhalla (2010) viewed working capital as the firm’s holdings of current or short-term assets such as cash, receivables, inventory, and marketable securities. On their part, Egai and Ajie (2012) noted that working capital refers to short-term (current) assets and short-term (current) liabilities, which by characteristics are operated within a limited period of maturity of not more than one year.
It is of interest to observe that working capital management in the words of Bhalla (2010) “is the process of planning and controlling the level and mix of the current assets of the firm as well as financing these assets”. Specifically, working capital management requires financial managers to decide what quantities of cash, other liquid assets, accounts receivable, and inventories the firm will hold at any point in time. Nwezeaku (2006) also said working capital management is “the setting out of policies regarding working capital and carrying out of those policies in the day-to-day operations of the firm”.
Akujuobi (2006) on his part said short-term financial management involves the management of current assets and current liabilities, which usually last about one year. This is the same thing as working capital management. He also opined that a financial manager should among other issues, inquire about what is reasonable level of cash to keep either in bank or at hand for payment of expenses; how much to borrow in the short-term and the quantity of credit to extend to customers. Therefore, this research attempts to look at an aspect of the management of resources, that is, liquidity management and see how it affects the financial profitability of Nigerian Deposit Money Banks.
1.2 Statement of the Problem
The issue of liquidity for organizations is very vital to the existence of any organization especially the deposit money banks. However, illiquidity of firms especially the banks can lead to loss of businesses thereby reducing the potentials of earnings and profitability. This is the because high liquidity position of firm helps it to meet up with obligations of which some lead to funding of loans and advances that could aid the bank to earn income. In the light of this, scholars have argued for and against liquidity as being critical in firms’ life and profitability. Some scholars such as Duru, Ekwe and Okpe (2013), argue found out that firms that maintain high liquidity earn high profitability.
However, other authors argue that liquidity does not positively affect profitability. In other words, for sustainable intermediation function, banks need to be profitable. Beyond the intermediation function, the financial performance of banks has critical implications for economic growth of countries. Good financial performance rewards the shareholders for their investment. This, in turn, encourages additional investment and brings about economic growth. On the other hand, poor banking performance can lead to banking failure and crisis which have negative repercussions on the economic growth, Ongore and Kusa (2013). Liquidity problems may adversely affect the financial performance of a bank as well as its solvency. Some studies have shown a significant positive relationship between bank profit and liquidity while others have shown a weak positive relationship. Deposits money bank in Nigeria registered strong performance in 2013, exceeding the overall country economic growth.
The banking sector in Nigeria was rated strong in 2013 using the capital adequacy, asset quality, management quality, earnings and liquidity rating performance (Banking Supervision Report, 2013). Although, studies have it that lack of adequate liquidity in a bank is often characterized by the inability to meet daily financial obligations. At time it may have the risk of losing deposits which erodes its supply of cash and thus forces the institution into disposal of its more liquid assets. As opined by Pandy (2015), managing monies of a firm in order to maximized cash availability and interest income on any idle cash is a function of liquidity management. However, the problems of weak corporate governance, poor capital base, illiquidity and insolvency, poor asset quality and low earnings are some of the constraints faced by the banking sector in Nigeria. Some worked by Johnson (2008) examined the differences in financial ratio averages between industries.
The results showed that liquidity management has no effect on the firm’s profitability. Moreover, Kweri (2011) examined the same problem among manufacturing firms. There is no study done so far on the effect of liquidity management on the performance of commercial banks in Nigeria. It is the light of this, that this study has evaluated the effect of liquidity management on the financial performance of deposit money banks in Nigeria.
1.3 Objectives of the Study
The main objective of this research work is to determine the effect of liquidity management on the profitability of deposit money banks in Nigeria. However, other secondary objectives are:
i. To determine the effect of the loan to deposit ratio on the return on asset in listed deposit money bank.
ii. To examine the effect of cash reserve ratio on return on asset in listed deposit money banks in Nigeria.
iii. To identify the effect of stock turnover on the return on asset in listed deposit money banks in Nigeria.
1.4 Research Hypotheses
Based on the objectives of the study, the following hypotheses were developed;
H01: There is no significant relationship between loan on deposit ratio on return on asset on listed deposit money banks
H02: There is no significant association between cash reserve ratio on the return on asset in listed deposit money banks
H03: There is no significant relationship between effect of stock turnover on the return on asset in listed deposit money banks.
1.5 Scope of the Study
The researcher intends to limit his findings to the effect of liquidity management on financial performance of listed deposit money bank in Nigeria. The scope of the study will cover annual report of different banks for five years (2013-2022).
1.6 Significance of the Study
For the fact that deposit money banks operate on liquidity and profitability motives in the mind to satisfy their major publics, the shareholders and depositors, the need arise for them to bring into agreement these two motives with the aim of satisfying these two publics concurrently. With this the money deposit bank need effective and efficient liquidity management approaches and principles that will help them realize these motives. The result gotten form this study will reveal the level of attachment of the commercial banks to the monetary policies (liquidity ratios) established by the government and these will help the government to set appropriate liquidity ratio’s and cash ratio’s that will not be harmful to the operation and survival of the commercial banks. Regulators and policy makers: The recent crisis has revealed the importance of sound financial firm’s liquidity management. Regulators and policy makers in response are devising new ways of making commercial banks stable. Findings of study are essential to financial institutions managers and industrial practitioners as they can use it to improve their effectiveness in the asset liability match as well as ensure the maintenance of adequate levels of liquidity management in the institutions. It also aims at shedding more lights to policy makers, governing bodies, regulators, and liquidity management department of financial institutions; those to be informed about liquidity management and how they affect the performance of financial institutions. This research will also serve as a resource base to other scholars and researchers interested in carrying out further research in this field subsequently, if applied will go to an extent to provide new explanation to the topic.
CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
This chapter reviews and presents relevant literature on liquidity management and financial performance in listed deposit money bank. It discusses the concept of liquidity, liquidity management and the concept of financial performance. The chapter also presents the objectives of liquidity management, policies liquidity management in financial performance. Empirical studies on liquidity management and the theoretical framework of liquidity management are also discussed and presented.
2.1 Conceptual Review
2.2.1 Financial Performance
Financial performance is the terms used in relation to its capacity to generate sustainable profitability. For a bank to be successful in its operations, managers must weigh complex trade-offs between growths, return and risk, favouring the adoption of risk-adjusted metrics (Bassey, Tobi, Bassey & Ekwere, 2016). Bank’s performance measure can be classified into traditional, economic and market-based. Financial performance has faced difficulties over the years for a multitude of reasons, the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank’s counterparties Abdulrahmon and Adejare (2014). Bookkeeping record helps a business to record the following transactions, which include financing transactions such as a loan to a business. Recording a loan in bookkeeping often involves reporting the receipt of the loan, paying for interest expense over time and the return of the loan principal at maturity. If a loan is amortized, the recording must reflect changes in outstanding loan balance over the loan term. This would require periodic adjustments to the original loan principal. The account used to record a loan in bookkeeping consists of different liability accounts, an interest expense account and the cash account (Kenneth, 2003; Lando, 2004).
2.2.2 Liquidity Management
Liquidity management is essential for the outstanding performances of all business entities, particularly to financial institutions due to the fact that customer confidence of the banks is to a large extent dependent on the accessibility of funds in good time. Inadequacy of liquidity can destruct the proper operations of banks even as they might be unsuccessful to meet the financial demands of the customers in time. This would result to tight relationship with their customers, and so it is of vital importance to formulate policies for the efficiency of liquidity management. This is possibly in the form of suitable courses of actions for the evaluation, control and management of liquidity (Andrew & Osuji, 2013).
Bhattacharyya and Sahoo (2011) opined that liquidity management includes the conservation of adequate cash balance and its corresponding balances to give satisfaction to the needs of the customers at any moment and in addition, making sure that money is also at hand to carry out the day-to-day functions of the bank. In the course of discharging these functions, the banks ought to be able to make profit for all stakeholders who are necessary for its continuous existence and running. Nevertheless, attaining profitability requires the stabilization of liquidity and how it is being managed.
According to Choudhry (2011) liquidity management refers to the funding of deficits and investment of surpluses, managing and growing the balance sheet, as well as ensuring that the bank operates within regulatory and stipulated limits. European Central Bank (ECB) (2010) describes bank performance as the capacity of a bank to generate sustainable profits. Bikker (2010) identifies costs, efficiency, profits and market structure as the main drivers of bank performance and returns on Assets (ROA), return on equity (ROE) and net interest margin as the measures of bank’s performance or profitability. Banks (2014) argues that to achieve effective liquidity management and profitability, there must be an uninterrupted endeavour of ensuring that a balance exists between liquidity, profitability and risk. This view is supported by Lands kroner and Paroush (2011) who argues that in managing assets and liabilities the period of uncertainties in cash flows, cost of funds and return on investments, banks must establish the trade-off between risk, return and liquidity.
2.2.3 Loan to Deposit Ratio
Various categories of users of financial statement required different information to enable them access the performance of a firm. A trade loan deposit ratio is primarily interested in liquidity position of the firm since his claims or interest in the firm is short term. The debenture holder on the other hand has a long-term claim and so his concern is usually on the long-term cash flow ability of the firm to service debt. He may list this ability by analysing the capital structure of the firm, the major sources and users of funds, its profitability, overtime and the projection of financial performance. Accounting figure convey meaning only when it is related to other relevant information. The function of deposit ratio analysis therefore is to allow comparison to be made which aid their decision-making process.
Therefore, ratio analysis is a technique or means of reducing total financial performance contained in the financial performance into meaningful ratio for the purpose of obtaining desirable measure like liquidity, solvency, stability and financial performance of a company to satisfy the various needs of information of varying users. Different types of ratios are usually calculated. This is usually obtained by company ratio between similar business to see if the firm under examination is improving or declining within its particular business sector or industry.
Douglas (2011) stressed that accounting ratios, although useful do not provide complete financial information, they must be considered along other types of financial performance. These are ratio used to denote a company’s ability to settle its current financial obligations as they fall due Anao (2009). A company is said to be liquid if it can conveniently meet its current obligations as they fall due. Thus, the greater amount of cash and near cash items a firm has in relation to its debt and other business obligation, the more liquid the firm is said to be. So, solvency refers to the underlying financial strength of a firm that enables it to meet its maturity obligation Garbutt (2010).
Ratios are employed in evaluating the ability of a firm to meet its short-term financial obligations, which usually relates to a current accounting period. Under liquidity there are two ratios. These which relates current liabilities and those which indicates the rate at which short term assets such as stock and debtors are turned into cash.
Date: 2026-08-02 00:00:00.000000