THE IMPACT OF LIQUIDITY ON CREDIT MANAGEMENT IN NIGERIAN BANKS

ABSTRACT

Banks generally provide avenues for savings to those who have surplus funds. The bulk of such funds are then lent out to needy personnel and business customers in loans and overdrafts, it has been widely appreciated that more than half of the total gross earnings of banks is earned from interest on loans and advances, which constitute the single most important assetsof the banks. Demands savings and time deposited constitute the major source of banks profitability, it has to be aggression in its lending function. At the same time, it has to be liquid to meets the depositors request and maintain public confidence. It therefore, has to strike a balance between liquidity and profitability. As lending is one of the most intricate services provided by banks, this paper will examine in 8rme details many theories emanating from developed environment and their effect on the operation of banks especially the credit, lending activities. They include the consumer loans theory, and the anticipated income theory. Those theories will thus be evaluated to measure the extents to which they guide the lending activity of the First Bank of Nigeria Plc in a developing environment. This is with a view of highlighting the degree of compliance to these theories by the banks and also proffers solutions and recommendations to resolve the liquidity and profitability position in a developing economy such as Nigeria.

CHAPTER ONE

INTRODUCTION

1.1  Background to the Study

Liquidity management involves the supply/ withdrawal from the market the amount of liquidity consistent with a desired level of short-term interest rates or reserve money. It relies on the daily assessment of the liquidity conditions in the banking system, so as to determine its liquidity needs and thus the volume of liquidity to allot or withdraw from the market. The liquidity needs of the banking system are defined by the sum of reserve requirements imposed on banks, excess reserves, i.e. funds held in excess of these requirements, autonomous factors, i.e. a set of items on the central bank balance sheet which have an impact on banks' liquidity needs but are not under the direct control of the central bank (e.g. banknotes in circulation, government deposits or net foreign assets). Liquidity management is supported by daily liquidity forecasting of the central bank balance sheet to guide the Bank’s management on the expected level of liquidity in the system over a period of time from the current period so that appropriate measures are taken to prevent undesirable market developments that may negatively impact on the objective of price stability.

            Liquidity is the availability of funds, or assurance that funds will be available, to honour all cash outflow commitments (both on- and off-balance sheet) as they fall due. These commitments are generally met through cash inflows, supplemented by assets readily convertible to cash or through the institution’s capacity to borrow. The risk of illiquidity may increase if principal and interest cash flows related to assets, liabilities and off-balance sheet items are mismatched.

            Liquidity is essential in all banks to compensate for expected and unexpected Balance Sheet fluctuations and to provide funds for growth. The recent liquidity crises faced by banks and financial institutions have brought to the fore the need to review their existing Liquidity Management Policies, Practices and Procedures.

1.2       Statement of the Problem

            Liquidity and credit management have implication on bank profitability and authorities’ depositors and shareholders. It could trigger off mass cash withdrawal thus plunging the bank into deeper crisis. In analyzing the credit and liquidity management in Nigerian banks, its assets quality shall be examined, which includes its performing and non-performing loans. In addition efforts would be made to look into the bank’s capital adequacy ratio and its shocks of risks assets different measures of liquidity and solvency.

1.3       Justification of the Study

            Liquidity is defined in its broadest sense as the ability to meet cash quickly and at a reasonable cost. Credit management is the way First Banks lend money out to borrowers. However, this study tends to reveal the problems that one involved in the liquidity is essentially that having sufficient fund to meet at all times demand of money that may be made on a bank. Bank must maintain adequate liquidity in order to provide for and line in deposit for and other liabilities, to satisfy unforeseen increased investment in particular desirable earning assets when such opportunities arises, the liquidity requirement of any bank out of the banks. It is the responsibility of management to measure these requirements and to anticipate them on a current and continuous manner.

1.4       Objective of the Study

            A bank is considered liquid if it has sufficient cash and other liquid assets in its portfolio together with the ability to raise fund quickly from other sources to enable it meet its payment obligations and financial commitment in a timely manner, therefore the main purpose is to highlight how liquidity and credit management in this Nigerian Banking Industry is being discovered and the extent to which First Bank in Nigeria is guided in the management of its lending functions.

1.5       Hypothesis of the Study

            The following hypothesis is developed and tasked to ensure a more effective and result oriented research work.

Hypothesis 1

Hi:      The liquidity of banks could be determined efficiently from the effectiveness of its credit management.

Ho:     The liquidity of a bank could not be determined efficiently from the effectiveness of its credit management.

Hypothesis 2

Hi:      Lending and investment operations of banks depend widely and extensively on its liquidity.

Ho:     Lending and investment operations of banks do not depend widely and extensively on its liquidity.

1.6       Organization of the Study

The research work is divided into five chapters in addition to the Table of contents, Title page, Dedication, Acknowledgement and Abstract.

Chapter One: Introduction, Background of the study, Statement of the problem, Justification of the study, Objective of the study, Statement of the study, Hypothesis, Objective of the study, Scope of the study, Organization of the study, Limitation of the study.

Chapter Two:Literature review, Introduction, Review of related literature, Conceptual framework, Liquidity theory, lending procedure, Credit administration in banks, Liquidity and credit management, Regulatory directives on banks liquidity and credit, Prudential guidelines on credit, the role of asset management company.

Chapter Three: Research methodology, Introduction, Sources of data, Sampling population, Research instrument, Data analysis technique.

Chapter Four: Data analysis and presentation/Introduction, Interpretation of data, testing of hypothesis, General Comment.

Chapter Five: it includes summary, conclusion and recommendation.

1.7       Limitation of the Study.

These are the constraints we encountered during the course of this project:

1. Time:this is one of the constraints and this come as a result of long period of strike and serves as a delay for this research work.
2. Finance: much money was spent in the process of getting facts and figures that we need concerning this research work.
3. Rigidity: the rigidities on the part of library staff to provide necessary journals and write-ups for references.