The Effect Of Liquidity On The Profitability Of Commercial Banks In Nigeria
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The Effect Of Liquidity On The Profitability Of Commercial Banks In Nigeria
CHAPTER ONE
1.0 INTRODUCTION
- EVOLUTION OF COMMERCIAL BANK IN NIGERIA
The history of banking business in Nigeria dated to the colonial Era with the Establishment of first commercial bank.
THE AFRICAN BANKING CORPORATION
Opened its first branch in 1892, Messis Dempster and co a shipping firm based in Liverpool actively involve in trading in Nigeria organized a trust and registered in Liverpool with monetary banking from the British colonial Government. The sole responsibility of African banking corporation was the distributors of bank of England’s note for the British to treasury.
The Bank experienced some difficulties at initial and Eventually decide to transfer its interest to Elder Dempster in1893.
This led to the formation of a bank known as BRITISH BANK OF WEST AFRICAN (BBWA) in 1893 with $10,000 capital which was later Increase to $100,000 during the same year. The first Lagos branch was opened in the year 1891. While the second Nigeria branch was opened in old Calabar in 1900.
During this period the British Bank of West Africa (1894)now FIRST BANK OF NIGERIA PLC and Barclay DCO(Dominion colonial and overseas 1917) now UNION BANK OF NIGERIA PLC which enjoy a virtual monopoly of banking industry.
Before 1894, Nigeria have become used to cowries and manila as unit of monetary transaction. This means that the banking system did not come to Nigeria in 1894 as a fresh experience.
This is supported by the fact that they had their small trust groups and kept money in safe places. The ideal of cowries and manila was introduced by the merchant of the Royal Niger Company, the antecedent of the present U.A.C to standardize coinage system when the British Bank Of West Africa (BBWA) was established, people were very suspicious of its intention.
However, such men asking Jaja of Opobo, Taiwo Olowo, Da_Rocha and many others to named after where largely used in getting the message across to the people (Akinosho 1984 p.7).
The Bank Of West Africa (BBWA) later changed to BANK OF WEST AFRICA (BWA) in 1956 owing to ownership structure of the present Company (Standard Chartered Bank plc in UK) it again change its name to STANDARD BANK OF NIGERIA in 1979 the following Nigerian acquisition of majority shares, it become FIRST BANK OF NIGERIA (FBN) BARCLAY BANK (DCO) joined in 1916 and opened it branch in Lagos in 1917. Barclay Bank DCO was renamed UNION BANK OF NIGERIA (UBN) after 80% of Nigeria share, soon after nine (9) other branch’s were opened.
The foreign banks came principally to render services in connection with international trade. So there relations at that time were chiefly with the expatriate trading companies and with the government. They largely ignored the development of local Africa entrepreneurship. Together these three (3) banks controlled closely to 90% aggregate bank deposits from 1894 to the early 1930. several abortive attempts were made to established locally owned and managed banks to break foreign monopoly.
In 1945, the private indigenous bank to be established was the AGBOMAGBE BANK founded by chief Okupe. The bank was taken by the western state government in 1969 and its name was changed to WEMA BANK PLC.
The merchant bank was opened for the business in 1952 and crashed in 1960. Another successful indigenous bank was the AFRICA CONTINENTAL PLC (ACB) founder by Dr Nnmadi Azikwe in 1947 (ACB plc is currently having mismanagement problem). Between 1947 and 1952, this was a free for all banking, a total of twenty two (22) banks were registered in Nigeria. (CBN conducted study) professor Grein O. Nwankwo. (1980) reported that the country witnessed the registration of 185 banks.
In 1947 only, 145 banks were registered and in 1952. This period can be describe as the first phase which was characterized by the absence of any banking legislation to control the activities of this banks.
The rare of bank failure that time prompted the Government to set up the patrol commission of injury in1948 to investigate the banking condition in the country and tostipulate the condition for healthy banking industry operations. It was discovered that the liquidation of most of these bank was due to gross mismanagement.
1.1a PRIMARY ROLES OF COMMERCIAL BANKS
The role of commercial banks as saving institution and as financial Intermediaries enable the commercial banks to perform an important Services to all sector of economy by providing facility for the mobilization of savings and making the form available for investment purposes by process of granting credit facility to other customer. According Reedetal (1984), the primary function of commercial banks convert shot term deposit into long term loan and revolve it to generate income for themselves.
They bring together people who have to save (which they will like
to lend out, but who also need the assurance or guarantee that they can have the money back wherever they wish) and those who need money (to borrow now and pay back later).
The act as intermediaries, collecting deposits and payment interest on them and making loans and changing the borrower interest at higher rate. However, there in legal limit to credit creation of banks. Credit creation and consequent profitability is restricted by central bank control.
1.1b LIQUIDITY VERSUS PROFITABILITY
At the micro_level the individual commercial bank is viewed as an economic unit whose goal is to maximize profit. Banks hold portfolio of asset and given the characteristic and distribution of their liabilities, they attempt to structure their portfolio of asset in such manner as to yield the greater return.
The asset are two groups of balance sheet items called loan and investments,
Profit are generated by earning assets (loan and investments) while is provided partly by earning assets like short_terinvestment and partly by non_earning assets e.g. cash balance held in the bank vault and also at the central bank, called money reserves. e.t.c.
1.2 STATEMENT OF THE PROBLEM
The project will analyze the problem faced by the commercial banks in maintaining equilibrium between profitability and liquidity some of the belong faced by the commercial banks in maintaining equilibrium between profitability and liquidity arise from;
Like other comprises bank also incurred substantial cost and must be earn an income at least sufficient to meet there cost. They also accountable to their shareholders who have invested in them with the aim of good return interim of future dividends. From these point of view banks need assets which produce income substantially higher than that paid on deposits.
In practice, these two objectives (profitability and liquidity) tend to work in opposite directions. Cash itself produce no income and the relatively liquid assets like money, treasury bills and treasury certificate usually produce low income. The rivalry between liquidity and profitability remains a headache to the management of banks. But for the need to harmonically balance profit motive and maintenance adequate liquidity, most banks would certainly overemphasize the pursuit of the profitability at the determinant of remaining liquid can have disastrous consequence. The precisely way in which this harmonious balancing is aid rived in Nigeria will be examine in details in the chapter two of this project.
1.3 PURPOSE OF STUDY
This project aim at bringing out the effect of the regulatory power given in the CBN decree 24 of 1991 and BOFID decree 25 of 1991. This project will analyze the effect of liquidity on profitability of commercial banks in Nigeria so as to determine whether the control is effective. The purpose of economy in general will be covered in this project. The purpose of this liquidity control by the CBN will be examined, so that it may be conducted whether the control is really achieving objectives or not. The project will make suggestion on how to solve the problem of balancing liquidity and profitability dilemma. The problem of optimal assets selection to yields maximum profits will also be analyze in this project.
1.4a SCOPE OF THE STUDY
The Control weapon of the CBN liquidity ratio affects
the profitability of all banks and other financial institution but this project will be limited only the affect of liquidity on profitability of commercial banks in Nigeria, because this weapon of central bank usually affect the commercial banks more than the other financial institutions. This study is a theoretical exposition which focuses attention on the central problems of bank management reconciling the conflicting banks goals of profit ability, liquidity and solvency which in all affect the operation of the banks.
1.4b LIMITATION OF STUDY
Finance is the main constraints facing this research work coupled with short available of time. The research is self sponsored and so could not afford the cost of elaborate area of courage.
Another major limitation is the difficulties in obtaining material information as there are reluctances from sources.
- SIGNIFICANCE OF THE STUDY
Working on the premise that the day of cheap profit
are gradually been eclipsed and that in future, banks would need to complete more fiercely for business only those bank can show innovative approaches to treasury and fund management will be capable of surviving the competition ahead. Although the Nigeria scare as remind up till now a seller’s strong balance sheets huge profit and impressive dividedness, this trend in unlikely to continue much longer, hence, it has now become expedient for banks to appraised their asset mix policy, goals and procedures, so that they are not change by the time unless new and portfolio management strategies are brought into places bank might in future be left.
Apart from the foregoing considerations, the present treasury and management techniques used in Nigerian banks are often time based on haphazard and subjective factors which tends to increase the risk of goal achievement.
The generally accepted of techniques of quantitative and scientific techniques are very rarely used in publication by Adekanye Femi (1986) he noted that up fill now, there is no report of the techniques and management science/ operation research techniques in banking were as considerable integration of these technique for banking decision have been evolve in America, Europe and Japan.
The main focus of this project is therefore to develop a decision model in asset mix (Treasury and fund management) for the policy making and senior management in commercial banks using linear programming model. The model we hopefully assist banks in enhancing their profitability effectively from it present low point, this improve target planning and achievement.
- DEFINITION OF TERMS
Liquidity: Bank liquidity is the ability of a bank to be in a position to meet the demand of depositors and borrowers virtually all economic unit needs liquidity.
Profitability:It can be considered as the main motive of banks as it maximization ensures the survival and growth of economic unit.
Solvency: It’s often used as a synonym for liquidity. It is the ability of banks to meet its day of obligation or activities to the deposition and credit customers, solvency is the ability of a bank to meet its long term obligation.
Portfolio: There are the lists of security and investment (stocks, shares) owned by a bank.
Demand deposit:These are the money saved by customers of a bank subject to recollection on demand.
Monopoly: this is the existence of one or few economic unit in a particular industry thereby enhancing the few economic units to have uncompetitive control over the industry.
Expatriate banks: Theseare foreign owned banking institutions.
Indigenous bank: These are locally owned banking institutions.
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