LIQUIDITY PROBLEM IN COMMERCIAL BANKS

CHAPTER ONE

1.1     BACKGROUND OF THE STUDY

          Liquidity banks means, “The ease with which banks assets could be converted into cash”.  The liquid assets include cash in the banks vault with the Central banks and to their government securities that have not been used as those assets is cash.

There are many reasons why a bank should have reasonable liquid assets in it assets portfolio, these include to be due to meet prompt demands for deposit withdrawals, that is the banks must maintain confidence and also be able to utilize profitable opportunities that may come out in future.

However, it should be noted that bank like most other business are profit oriented, operating to make profit for these share holders.

These profit could be realized only if there is enough depositors.  The deposit will not come unless the depositors could be assured  of the safely of their deposits to be assured.  There has to be enough liquidity in the banks.

          It is a known fact that action designed to make profit brings about illiquidity in the bank and versa.

Therefore, equilibrium has to be sought between the two these two extreme cases have been the constant concern of bank management.

          Liquidity management involves provision for depositors withdrawals, short term cash requirement and cyclical and circular cash requirements.  It also involves provisions to met with legal reserve requirements.

          In Nigeria, the activities of the commercial banks are regulated by the banking act of 1970 as amended under the control of Central bank of Nigeria.  The essence of these regulations were to maintain trust and confidence in banking systems as well as to achieve a special economic objective thus, in the period of mounting excess liquidity as was the case in the 1970’s, bank were expected to hold some of their assets equal to a certain percentage of their deposits in liquid for this is known as legal reserve requirement.  The components of legal reserve requirements are, cash establishment securities issued by the Central banks.

          The rational for the use of those instruments was to map out the excess liquidity in the economy and also to stop the inflationary trends in the economy.

          The excess liquidity in the banking sector give rise to inefficiencies in banks operation.  Bank staff were no longer polite since they had little outlets to invest money, banks have devised new method of attracting deposits from their customers thus, the recent innovations in the banking sector.

1.2            SIGNIFICANCE OF THE STUDY

This research will also help the monetary authorities in no

small way towards the formulation and the implementation of their monetary and fiscal policy.   Merchant Banks in Nigeria and in deeds other related countries with similar problems will equally also serve as a reference point to their researchers.

1.3            OBJECTIVES OF THE STUDY

1.                 Identify Federal Government policies about commercial banks Liquidity position;

2.                 To identify Commercial Banks Liquidity problems during the period 1988 – 1990;

3.                 To find out the effect of the various liquidity of Commercial Banks on their profitability;