THE ROLE OF LIQUIDITY AND PROFITABILITY AS A TOOL FOR EFFECTIVE CASH MANAGEMENT IN NIGERIAN COMMERCIAL BANKS

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THE ROLE OF LIQUIDITY AND PROFITABILITY AS A TOOL FOR EFFECTIVE CASH MANAGEMENT IN NIGERIAN COMMERCIAL BANKS

Abstract:

The main aim of managing cash effectively in banks is geared towards enhancing an optimal balance between liquidity and profitability. This is done through the provision of loans and advances in the investment of excess funds to generate income otherwise known as profit. This research study has the objective of assessing liquidity and profitability as a tool for an effective cash management of Nigerian commercial banks with emphasis on first bank of Nigeria plc. The study is a survey research. Primary and secondary data were applied and formulated hypotheses tested using Chi-square derived from Kendal coefficient of concordance. The findings of the study revealed that that there is a relationship between effective cash management and profitability in Nigerian commercial Banks, There is also a relationship between effective cash management and liquidity in First Bank Plc, that First bank’s technique of cash management reduces risks and First Bank’s staff have adequate training in cash management because management of cash is very important to the bank The study recommends that in order to guide against unforeseen circumstances which would have adverse effect on a bank, Care must be taken in the employment of staff in the treasury department. Therefore qualified professionals would be most appropriate

Abstract

Keywords

1. Introduction

1.1. Statement of the Problem

1.2. Research Questions

1.3. Objective of the Study

1.4. Research Hypotheses

1.5. Scope of the Study

2. Literature Review

2.1. Conceptual and Theoretical Framework

2.2. Liquidity and Liquidity Management in Bank

2.3. Investment of Excess Funds/Profit Management in Banks

2.4. Specialized Methods of Cash Management

2.5. Evaluation of Liquidity in Nigerian Banks

2.6. Evaluation of Profitability in Nigerian Banks

3. Research Methodology

4. Results / Findings

5. Summary of Findings

6. Conclusion

Recommendations

Appendix

References

Introduction

Financial institutions which in the Nigeria context include banks, Insurance companies, leasing companies, Pension fund and Provident institutions play important roles in the economic life of the country, To understand the concept of banking, we must understand the meaning of bank or banker, because banking is the set of activities which a bank or banker performs. Banking, according to Alabi, [1] is the business of providing services to consumers and businesses. The bank provides a wide large of services to both its customers and the economy. These services are; cheque accounts, which can be used like money to make payments and purchase goods and services; savings accounts and time deposits that can be used to save money for future use, loans that consumers and businesses can use to purchase goods and services; and basic cash management services such as check cashing and foreign currency exchange. Falegan, [2] offers a broader definition of a bank as any financial institution that receives, collects, transfers, pays, exchanges, lends, invests, or safeguards money for its customers. This broader definition includes many other financial institutions that are not usually thought of as banks but which nevertheless provide one or more of these broadly defined banking services. These institutions include finance companies, investment companies, investment banks, insurance companies, pension funds, security brokers and dealers, mortgage companies, and real estate investment trust. There are several categories of bank, such as commercial banks, investment banks and merchant banks. Our emphasis is on money deposit banks otherwise called commercial banks. These are banks that are general purpose in status. They are opened for specific or restricted banking activities but participate in a range of network of financial activities. According to Ofuani [3] commercial Bank mobilizes deposits and the extension of credits. They act as financial intermediaries, collecting money on deposits from one group and lending it out to another group. In order to maximize their earnings, every bank attempts to structure its assets and liabilities in such a way as to yield the highest returns. It is clearly evident that a large chunk of the bank’s balance sheet is under the control of treasury and cash management skill which is required for effective control of the items in order to meet their operational targets, such as the case of liquidity and profitability. Therefore, the need for effective cash management cannot be overemphasized in the successful operation of a bank. The justification for effective cash operation is that more money will be earned. Cash management involves managing the moneys at a maximum cash availability and maximum interest income on idle funds. Maximum cash availability enhances the liquidity of a bank’s obligation when they fall due, while maximum interest income on the other hand enhances the profitability of a bank. The concept of profit in the banking industry can be seen from the perspective of banks being able to increase revenue and minimize cost to stay afloat through the strategies of products innovation, penetration, positioning, low prices and charges, high sales volume, and ability to meet customers claims or demands when due. Thus Profitability is the difference between cost of the funds deposited by customers and the charges on loans to customers [4]. It is worth nothing at this point that for effective cash management, a bank needs a true professional cash manger (Treasurer) instead of a clerk. According to Ejiogu [4], a well instituted treasury department will be better off in improving a working capital by spending its precious time collecting receivables, taking cash discounts, stretching out payments and also playing the float difference between the business recorded and the amount credited to the business by the bank. It is in the light of this that this research work focused on the role of liquidity and profitability as a tool for effective cash management in Nigerian commercial banks with particular emphasis on First bank of Nigeria Plc.

1.1.Statement of the Problem

There is no doubt that an effective cash management in place to evaluate liquidity and profitability to their maximum has some problems facing that evaluation. Most problems encountered include default risk, Conflicting requirements of liquidity and profitability which can be viewed as resulting directly from the conflicting desires of the two groups who have provided the bank’s financial resources, the shareholders and the depositors. There is also Interruption of cash flow, resulting from sudden shift in demand or economic recessions which cannot be predicted, and Inefficiency of the internal control system where it allows for resource waste and frauds. The task of this study is to investigate why banks do face liquidity problem and low profitability in spite of their apparent good cash management systems.

1.2.Research Questions

This research study will provide answer to the following pertinent questions;

(1) To what extent is the relationship between effective cash management of banks and their liquidity and profit level in Nigerian commercial banks, especially First bank Nigerian plc?

(2) Does First bank liquidity ratio and profit level influenced by its cash management style/policies?

(3) How does the desire for high liquidity and profitability of banks affect cash management goals?

(4) Does internal control system of First bank plc reduce risk, resource waste and frauds?

1.3.Objective of the Study

The main objective of this study is to assess the role of liquidity and profitability as a tool for effective cash management in Nigerian commercial banks with particular emphasis on First Bank Nigeria Plc. To achieve this, the following secondary objectives will also be considered;

(1) To determine the relationship between effective cash management of Nigerian commercial banks and their liquidity and profit level especially First bank Nigerian plc

(2) To examine whether First bank liquidity ratio and profit level is influenced by its cash management style/policies.

(3) To assess whether First bank staff have adequate training in treasury management

(4) To evaluate whether the internal control system of First bank plc reduce risk, waste and frauds

1.4.Research Hypotheses

A hypothesis is a conjectural statement of the relationship between two or more variables. Hypotheses are guides for the investigator in the entire process of research endeavour and they keep the researcher on the main line of his/her study. They tend to serve as assumed answer to his/her principal questions, the correctness of which he/she assesses in the course of the study.

Hence for the purpose of this research to be achieved, the following hypotheses will help in verifying the research statement.

H°1: There is no significant relationship between effective cash management and profitability of Nigerian banks.

H°2; There is no significant relationship between liquidity and profitability of First bank Nigerian plc.

H°3: First bank staff have no adequate training in treasury management

H°4: The internal control system of First bank Nigeria plc does not reduce risk, resource waste and frauds

1.5.Scope of the Study

Although the banking sector consists of the commercial banks and development banks, the study is limited to only commercial banks (DMBs) in Nigeria with particular focus on First Bank Plc.

The study will only examine the cash operations and how this impacted on their profitability between 2010-2015 financial year.

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