Our Blog

List of recently published project topics and materials

PROJECT TOPIC:LIQUIDITY PROBLEMS IN COMMERCIAL BANKING IN NIGERIA

LIQUIDITY PROBLEMS IN COMMERCIAL BANKING IN NIGERIA

 

ABSTRACT

 

In this study, chi-square method was used to regressed the data collected. Data were sources from primary and secondary data. At the end of this research work, it is pertinent to note that liquidity shortage imposed some problems to commercial banks while excess liquidity boom the commercial banks in Nigeria. Excess liquidity as has shown in the regression, might signify unrestrained credit expansion, excess profit and guaranteed growth in commercial banks if properly utilized contrary, liquidity shortage is a great impediment problem to commercial banks such impediments are inhabitation of business expansion, low profitability etc.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

“ Liquidity is the word that the banker uses to describe his ability to satisfy demand for cash in exchange for deposits”. It can also be defined as the capacity of a bank to prompt demands that it payment obligation. A bank is considered to be liquid when it has sufficient cash and other liquid assets, together with the ability to raise funds quickly from other sources, to enable it to meet its payment obligations and financial commitments in a timely manner. In addition, there should be a sufficient liquidity buffer to meet almost any financial emergency.

How much liquidity to hold and in what form to hold it is a constant concern of bank management. Banks are required to comply with legal reserve requirements. In addition, banks need liquidity to meet seasonal and unexpected loan demands and deposit fluctuations. The majority of these transactions can be anticipated in advance and met from expected cash inflows from deposits, loan repayments or earnings. Cash reserves also are needed to take advantage of unexpected profit opportunities, or for what might be termed aggressive purposes. When a business firm that the bank has been working to secure as a customer finally represents a loan application, or a particularly desirable investment develops, the bank must have funds available to seize these opportunities. During periods of expanding economic activity, banks are frequently presented with attractive loan situations which can only be met if banks maintain adequate liquidity. To determine the liquidity what a bank needs at a particular time is to find the ratio of loans to deposits.

The higher this ratio is, the less willing banks will be in lending out and vice versa.

In Nigeria, commercial banks activities are regulated strictly by the banking Act of 1969 as amended under the control of the central Bank of Nigeria. As a result of these regulations by the central bank, the commercial banks are required to hold specific assets equal to a certain percentage of their deposits and certain other liabilities in liquid form. This is known as the legal reserve requirements. The legal reserve requirements are liquidity ratio requirement, cash reserves requirements, stabilization securities issued by the central Bank and special deposits. Liquidity problems, for the purpose of this study, are looked at as the problems, encountered by bank managers who are responsible for liquidity management,   when there is either excess liquidity or liquidity squeeze in the banking system or in the commercial banks.

It will be noted that since the end of the Nigerian civil war, the Nigerian financial system has been experiencing economic transformation which started as a result of the increasing inflow of foreign exchange receipts from the oil sector. This increase exerted preponderant influence on the liquidity of the economy. There was excess liquidity in the banking system. The Banks had little outlets for short term resources and yet were not ready to commit the bulk of its short-term resources to long-term instruments. Commercial banks were faced with excess liquidity problems they had more funds than they can profitably employ.

But it is believed that the situation reversed with the introduction of second tier foreign exchange market (SFEM) under SAP. Banks are now faced with the shortage liquidity. This stems from the fact that they have been using the liquidity at their disposal to buy foreign exchange for sale to their various customers, chiefly, for importation. This is because of the abolition of the import license system of foreign allocation.

LIQUIDITY PROBLEMS IN COMMERCIAL BANKING IN NIGERIA

 

STATEMENT OF PROBLEMS      

There is no gain-saying, the fact that prior to the introduction of the structural adjustment programme (SAP) of which the second tier foreign exchange market (SFEM) is the nucleus, the commercial banks in Nigeria has been wallowing in excess liquidity. Consequently they maintained excess liquidity ratios and were in the habit of refusing deposits from the public.These may be accountable to some deficiencies in the management policies of the central Bank of Nigeria and the overall under-developed nature of the entire economic system. However, the structural adjustment programme with SFEM as the chief feature changed the trend. The situation became that of shortage of liquidity or liquidity crunch, as it is popularly called.

In any case, for the purpose of this research, the liquidity problems of commercial banks have been identified from two perspective:One is that they had excess liquidity before the advent of second-tier foreign Exchange Market (SFEM).The other is that shortage of liquidity have been telling hard on them since the existence of SFEM under SAP. In other words, this research takes a PRE-SFEM and POST-SFEM stance on the liquidity problem of commercial banks.With respect to the excess liquidity situation, this study intends to find out the effect of the excess liquidity in the banking system that is on the profitability of commercial banks. It investigates whether or not the policies imposed on the commercial banks by the central Bank have succeeded in mopping up the liquidity in the banking system, and finally whether or not the excess liquidity in commercial banks affects loans and advances to their customers.

On the other hand, the shortage of liquidity perspective, focuses on its (shortage of liquidity) effect on the profitability of commercial banks, whether or not the policies of the Central Bank can actually corrects the shortage of liquidity position of commercial banks, and above all how shortage of liquidity affects loans and advances to customers.

LIQUIDITY PROBLEMS IN COMMERCIAL BANKING IN NIGERIA

</div

Was the material helpful? Comment below. Need the material? Call 08060755653.