CHAPTER ONE

INTRODUCTION

1.1     Background to the Study

Cash liquidity reflects a financial institution’s ability to fund assets and meet financial obligations. Cash liquidity is essential in all banks to meet customer withdrawals, compensate for balance sheet fluctuations, and provide funds for growth. Funds management involves estimating liquidity requirements and meeting those needs in a cost-effective way. Effective funds management requires financial institutions to estimate and plan for cash liquidity demands over various periods and to consider how funding requirements may evolve under various scenarios, including adverse conditions.

Banks must maintain sufficient levels of cash, liquid assets, and prospective borrowing lines to meet expected and contingent liquidity demands. Liquidity risk reflects the possibility an institution will be unable to obtain funds, such as customer deposits or borrowed funds, at a reasonable price or within a necessary period to meet its financial obligations. Failure to adequately manage cash liquidity risk can quickly result in negative consequences for an institution despite strong capital and profitability levels. Management must maintain sound policies and procedures to effectively measure, monitor, and control liquidity risks.

In business, economics or investment, market liquidity is a market's ability to purchase or sell an asset without causing drastic change in the asset's price. Equivalently, an asset's market liquidity (or simply "an asset's liquidity") describes the asset's ability to sell quickly without having to reduce its price to a significant degree. Cash liquidity is about how big the trade-off is between the speed of the sale and the price it can be sold for. In a liquid market, the trade-off is mild: selling quickly will not reduce the price much. In a relatively illiquid market, selling it quickly will require cutting its price by some amount.

Money, or cash, is the most liquid asset, because it can be "sold" forgoods and services instantly with no loss of value. There is no wait for a suitable buyer of the cash. There is no trade-off between speed and value. It can be used immediately to perform economic actions like buying, selling, or paying debt, meeting immediate wants and needs. If an asset is moderately (or very) liquid, it has moderate (or high) liquidity. In an alternative definition,liquidity can mean the amount of cash and cash equivalents. If a business has moderate cash liquidity, it has a moderate amount of very liquid assets. If a business has sufficient liquidity, it has a sufficient amount of very liquid assets and the ability to meet its payment obligations.

An act of exchanging a less liquid asset for a more liquid asset is calledliquidation. Often liquidation is trading the less liquid asset for cash, also known as selling it. An asset's liquidity can change. For the same asset, its liquidity can change through time or between different markets, such as in different countries. The change in the asset's liquidity is just based on the market liquidity for the asset at the particular time or in the particular country, etc. The liquidity of a product can be measured as how often it is bought and sold.

1.2     Statement of Problem

Liquidity management has a significant positive effect on financial performance. Bank companies under going to achieve their goals have to consider to the liquidity management. Liquidity is the ability of the business to meet its cash obligations within a specific period. For instant liquidity is best measured with cash flow statements or budgets.

Liquidity management plays a significant role in determining success or failure of firm in business performance due to its effect on firm’s financial profitability (Eljelly, 2004).

In Nigeria, the commercial banks are faced challenges of financial performance. This is seen in the fact that the firms have problems with financial performance they may defer their payments to creditors which is a harmful for companies and can result in several consequences such as worse credit terms in the future. This in the long run adversely affects profitability. When working capital is the money needed to finance the daily revenue generating activities of the firm. So, if this continues will cause the a number of problems to not only the firm who depend so much on this liquidity management, but also the various stakeholders in the banking industry. It was evident that research in the area of Liquidity management has not been done in a more comprehensive approach. The study research gap is demonstrated by the scarcity of empirical studies on determinants of liquidity management. Empirical studies (Nwakaego, 2014) and (Lawrence, 2013), Zir and Afza (2009) were inadequate as they concentrated on liquidity management other industries in Small and Medium Enterprise. Banks to remain competitive emphasis should be made on liquidity management and profitability with regards to how their ability to manage financial performance and should be provided to the organizational achievement. This study will focus on the Effect liquidity management on financial performance of commercial banks in Nigeria.

1.3     Research Questions

Theessence that the respective bank should manage their balance sheet in such a way as to operate within that maximum range and still remain liquid. The basic questions this research attempt to answer includes;

i.                   What extent does excess cash liquidity affect the profitability of Nigerian banks?

ii.                 What extent does shortages in cash liquidity have significant effect on profitability of the Nigerian banks?

iii.              How do loans and advances affect the profitability of Nigerian banks?

1.4     Objectives of the Study

The broad objective of this study is to examine the impact of cash liquidity on the performance of deposit money in Nigeria. However, the following are the sub-objectives;

i.        To find out the effects of account receivable on financial performance of commercial banks in Nigeria.

ii.       To establish the effects of account payable on financial performance of Commercial banks in Nigeria.

iii.      To determine the effects of cash management on financial performance of commercial banks in Nigeria.

1.5     Statement of Hypotheses

On the basis of the above views, the researcher hereby proposes the following hypotheses;

Hypothesis One

HO:    Excess cash liquidity does not have a significant impact on the profitability of Nigeria banks.

HI:     Excess cash liquidity have a significant impact on the profitability of Nigeria banks.

Hypothesis Two

HO:    Shortage in cash liquidity does not have a significant impact on the profitability of Nigerian banks.

HI:     Shortage in cash liquidity has a significance impact on the profitability of Nigeria banks.

Hypothesis Three

HO:    Loans and advances do not have significant impact on the profitability of Nigerian banks.

HI:     Loans and advances have significant impact on the profitability of Nigerian banks.

1.6     Significance of the Study

The study justification arises given the unsavory experience of the deregulated banking era in Nigeria and the present global economic meltdown. Apart from this liquidity has always been a source of concern with some Nigeria banks. The importance of liquidity has even acquired a new dimension in the advanced countries of the world in recent years. This is basically because of responses to structural changes and funds management techniques in these countries. The development of new technical innovations that do not necessarily fit into the world of the age long liquidity tests.

The key role played in any banking set-up further epitomizes it importance. Right from time liquidity has been associated with allocation of assets. According to their capacity to generate the cash necessary to satisfy creditors and depositor calls on the bank liabilities.

However, with the emergence of active liability management strategies liquidity has been more than a function, particularly in some instance of the of the banks capacity to acquire additional funds in the market place.

1.7     Scope of the Study

Due to time and resources constraints the study at hand has been limited to First Bank of Nigeria Plc. A time frame of 5 years was used (i.e. 2011 – 2015).

1.8     Limitations of the study

a.       Time constraints were one of the limitations encountered in the case of the study.

This is because, this study was carried out during an academic session, the researcher did not have enough time to properly concentrating on this particular study.

b.       Finance was yet another problem that put a check on the extent of investigation.

c.       There was the problem of inadequate information and unavailable material or information for the study.

1.9     Definition of Terms

Liquidity Management: Is the ability to meet cash and collateral obligations without incurring substantial losses.

          Financial System: Is the system that enables lenders and borrowers to exchange funds.

          Profitability Ratio: This compares income statement accounts and categories to show a company's ability to generate profits from its operations.

          Liquidity Assts Theory: This theory argues that banks should hold large sum of liquid assets to avert sudden payment request that might be received.

          Call Money: They are banks excess reserves on daily or short-term basis with the correspondent banks.

          Short-Term Government Securities: These are gifted securities with short-term maturity which are being bought and sold in active market.

          Marginal Loans: This is a loan made by a brokerage house to a client that allows the customer to buy stocks on credit

          Liquidity Ratio: This is a class of financial metrics that is used to determine a company ability to pay off its short term debts obligation.

          Liquidity Portfolio: Is the ability for the bank to have sufficient capital in it account or cash deposited by individuals and portfolio.

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