ABSTRACT
The study
examined the extent to which Central Bank of Nigeria’s Liquidity Management efforts impacts on
Deposit Money Banks’ Performance in Nigeria. The study covered the period
2005-2013 and contained a sample of 10 DMBs currently operating in Nigeria. While DMBs cash
balances held with the CBN was specified dependent variable measuring CBN
liquidity management efforts, Return on Assets, Assets quality and current
ratio were specified as proxies for bank performance. The researcher estimated
the specified model using the ordinary least squares method applied on the
panel data collected from the various issues of annual report of the ten
deposit money banks used in the study. The results garnered from the data
analyses indicated among other things that: A positive relationship existed between cash
balances with the Central Bank of Nigeria return on asset of the banks. The
implies that as bank return on asset increases, this invariably leads to
increase in the bank’s cash balances with the central bank of Nigeria. Our
findings also showed that a negative relationship between cash balances with
central bank and current ratio (liquidity ratio) of banks. This finding does
seem to support the scenario of balances with the central bank improving the
liquidity position of the individual banks concerned. Finally, a negative
relationship was recorded between cash and balances with the central bank of
Nigeria and the asset quality (risk assets) of the banks. The implication of
this finding is that as cash balances held with the central bank increases,
DMBs risk assets is expected to decrease and vice versa. This seems to be quite
logical since an increase in balances with the central bank is expected to help
reduce the toxicity in the banks, loan and advances portfolio. On the basis of
the findings, the following recommendations were made: The use of balances with
the CBN as a liquidity management tool be supported with more responsive or
stringent measures. Since cash balances yield very little income for the banks,
some of the cash balances be substituted into very short term securities still
held with the CBN in place of cash. Secondly, there is need for the Central
Bank to intensively fund research into the common phenomenon of key
policy/regulatory measures not having the desired effect. Finally, competence should
be given credence in considering people for management jobs. This is because
management quality is the driving force of DMBs performance.
101
Pages
Project Reference Code: C045
CHAPTER
ONE
INTRODUCTION
1.1 Background to the Study
Bank
Liquidity Simply means the ability of the bank to maintain sufficient funds to
pay for its maturing obligations. it is
the bank’s ability to immediately meet
cash, cheques, other
withdrawals obligations and
legitimate new loan demand while abiding by existing reserve requirements.
Liquidity management therefore involves the strategic supply or withdrawal
from the market or
circulation the amount of liquidity
consistent with a desired
level of short- term reserve
money without distorting
the profit making
ability and operations of the bank. 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 usually defined by the
sum of reserve requirements
imposed on banks
by a monetary authority (CBN
2012). To guide Bank’s management on the expected level of liquidity in the
system over a period of time, liquidity management which involves the planning
and control of cash and other
liquid assets, may be
supported by daily
liquidity forecasting by
the central bank
so that appropriate measures are
taken to prevent
undesirable market developments that
that may negatively
impact on the
objective of price stability.
Bhattacharyya
and Sahoo (2011), argued
that liquidity management by central
banks typically refers
to the framework,
set of instruments, and the rules
that the monetary authority follows
in managing systemic liquidity, consistent with the ultimate goals of monetary
policy. In this regard, central banks modulate liquidity conditions by varying
both the level of short – term interest rates and influencing the supply of
bank reserves in the interbank market. While central bank liquidity management
has short term effects in financial markets, its long – term implications for
the real sector and on price level are more profound.
Effective liquidity management is a key
factor that helps sustain bank profits and concurrently keeps the banking
institution and the financial system generally from illiquidity and perhaps,
insolvency. Strategic bank management aims prominently at keeping the bank
solvent and liquid in order to earn good profits and remain sound. In order to
maintain public confidence in the financial system of the country, banks are
required to maintain adequate amount of cash and near cash assets such as
securities to meet withdrawal obligations. It is paramount for the survival of
a country and the banks in particular whose core function of financial intermediation
depend on the availability of adequate liquidity. This study therefore is
focused
1.2 Statement of
the problem
In Nigeria
Barely
five years of what was applauded and considered as fortified repositioning of banks against
liquidity shortage, Central
bank of Nigeria (CBN) in 2009 came
on a rescue mission
to save some illiquid
banks among which were
Intercontinental bank plc now Access Bank, Union Bank of Nigeria plc,
Oceanic International Bank plc now Ecobank, Fin Bank plc now First City
Monument Bank, and Equitorial Trust Bank
now Sterling Bank. The global financial
crisis of 2008 also
had its claws on the already ailing banks and
to contain the crisis of confidence and ease
financial conditions, (CBN) used both conventional and
unconventional measures to
inject liquidity into
the system. In its rescue mission in 2009, CBN injected N620b to save
the affected five
banks that were operating on negative share holder’s funds. The
use of unconventional measures
become necessary as
the regular monetary policy
transmission mechanism got
seriously impaired by
the liquidity crisis
that warranted the setting
up an agency,
Asset Management Corporation
of Nigeria (AMCON)
to buy out the
bad debts of
affected banks. This study
therefore seeks to explore the efficacy of liquidity management by the Central
Bank of Nigeria and DMBs’ performance
in Nigeria.
1.3
OBJECTIVES
OF THE STUDY
1.4 RESEARCH QUESTIONS
1.5 HYPOTHESES
1.6 SIGNIFICANCE OF THE STUDY
1.7
SCOPE
OF THE STUDY/LIMITATIONS
1.8
ORGANIZATION
OF THE STUDY
1.9
DEFINITIONS
OF TERMS
CHAPTER
TWO
LITERATURE REVIEW
2.1 Conceptual Framework
In every system, there are major components
that feature paramount for the survival of the system. This is also applicable
to the financial system. The banking institution has contributed significantly
to the effectiveness of the entire financial system as they offer an efficient
institutional mechanism through which resources can be mobilized and directed
from less essential uses to more productive investment’s (Wilner, 2000).
In the performance of this financial
inter-mediation role, the financial institutions have proved to be an effective
channel between savers and borrowers. among the financial institutions that
perform this role are the merchant banks, savings banks, the central bank,
development banks and the Deposit money Banks (DMBs). Deposit money Banks
(DMBs), have overtime become very important institution in the financial system
as they function as retail banking units facilitating the transfer of financial
assets that are well desired from some part of the public (surplus units) into
other financial assets which are more widely preferred by greater part of the
public (deficit units).
In view of this role and of the fact that the
activities of the commercial banks affect the greater part of the society,
deposit money banks (commercial banks) are selected as the main focus of this
study.
Financial intermediation role of the DMBs
hence becomes the bed-rock of the two major functions of commercial banks
namely deposit mobilization and credit extension. An adequate financial
intermediation requires the purposeful attention of the bank management to
profitability and liquidity, which are two conflicting goals of the commercial
banks. These goals are parallel in the sense that an attempt for a bank to
achieve higher profitability will certainly erode its liquidity and solvency
position and vice versa.
Practically, profitability and liquidity are
effective indicators of the corporate health and performance of not only the
commercial banks (Elijelly, 2004), but all profit oriented ventures. These
performance indicators are very important to the shareholders and depositors
who are major public of a bank. As the shareholders are interested in the
profitability level, the depositors are concerned with liquidity position which
determines a bank’s ability to respond to the withdrawal needs which are
normally on demand or on a short notice as the case may be.
Liquidity management is an important aspect
of monetary policy implementation, so reliance is placed on it to even out the
swings in liquidity growth in the banking system.
The
responsibility for monetary policy formulation rests with the central bank of
Nigeria (CBN). Monetary policy objective is couched in terms of maintaining
price stability and promoting non-inflationary growth. The primary means
adopted to achieve this objective is to set aggregate money supply targets and
to rely on the open market operations (OMO) and other policy instruments to
achieve the target.
The CBN manages banking sector liquidity by
supplying or withdrawing liquidity from the banking sector which it deems to be
consistent with a desired level of short –term interest rates or reserve money.
To this end, the banking sector plays an important role in the Nigeria economy.
According to soludo (2009:23), Nigerian banks account for over 90 percent of
financial system assets and dominate the stock market. As a result a well-funded
banking sector is essential in order to maintain financial system stability and
confidence in the economy.
An
important step towards market oriented policy procedures takes place when the
central bank assumes responsibility for evening out swings in demand relative
to demand on its own imitative rather than waiting passively for individual
banks to come to it. Once it begins to supply or absorb liquidity through
market intervention, the discount window plays an important but subordinate
safety valve role by proving the short-run reserve needs of the banking system
for purposes of meeting short term liquidity obligations.
2.1.1.1
Definitions
of Liquidity
2.1.2 Theoretical Framework.
2.1.3 Recent global trends on the liquidity
position of banks
2.1.4 Liquidity Management
2.1.5
Sources
of Liquidity
2.1.6 Liquidity Components
2.1.7 Bank
Liquidity Theories
2.1.8 Liquidity Measures
2.1.9 Banking
System Liquidity Management in Nigeria
2.1.10 The Process of Liquidity Management.
2.1.11 Objectives of Liquidity Management
2.1.12 The Institutional Process of Liquidity
Managemen
2.1.13 The Secondary Market
2.1.14 Process of Liquidity Management
2.1.15 The Institutional Arrangements
2.1.16 Trends
in Banking Sector Liquidity and Regulation in Nigeria
2.1.17 Liquidity Management Regimes in Nigeria
2.1.18 Challenges of Liquidity Management in Nigeria
2.1.19 Way Out of Liquidity Crises
2.1.20 Bank Management Performance Tools (BMPTs)
2.1.21 Bank Performance Measuring Tools
2.1.22 Inadequacies of BMPTs
2.1.23 Bank Performance Measures
2.1.1.2
Empirical Review
CHAPTER THREE
METHODOLOGY
3.1 Research Design
The
Research design adopted for this study is the Times Series Design and the Panel
Regression Technique which is an econometric model to examine Central Bank of
Nigeria’s Liquidity Management and Banks’ Performance. The Times Series is a
quasi-experimental design in which periodic measurements are made on a defined
group of individuals in this case, banks; both before and after implementation
of an intervention. In this study the DMBs’
are being studied after the 2005
Post Consolidation exercise.
3.2 Population
for the Study
3.3 Nature/Sources
of Data
3.4 Method of
Data Analysis
3.5 Model
Specification
To
examine the impact of cash and balances with CBN on performance of the DMBs in
Nigeria the following panel model is relevant:
where:
y
= dependent variable
X`
= vector of explanatory variables
i
= the ith bank
t
= time in years
uit = Error term
α is
a scalar, β is K×1 and Xit is the itth observation on K explanatory
variables.
To capture objective 1- the impact of cash and balances
with CBN on asset quality in DMBs in Nigeria, the relevant model is:
where:
RKA
= risk asset proxy for asset quality
CBC
= cash and balances with CBN
uit
= serially uncorrelated error
For
objective 2 – the impact of cash and balances with CBN on DMBs returns on asset
the model is specified as:
where:
other variables remain as defined
ROA
= returns on asset
CHAPTER FOUR
RESULTS AND DISCUSSIONS
4.1 PRESENTATION
OF DATA
In
this section, we shall present and briefly explore the trends and
characteristics inherent in the data collected in the course of the research.
4.2 DATA
ANALYSES
In
table 4.1 above, we presented the data collected for the purpose of the study.
In this section, we will analyze the data for the purpose of the study. We
shall also provide and in depth interpretation of the results obtained as well
as testing the hypotheses stated in chapter one. The hypotheses will be tested
using multiple regression analysis on E-views econometrics software
4.2.1 HYPOTHESES TESTING
HYPOTHESIS ONE
HYPOTHESIS TWO
HYPOTHESIS THREE
4.3 DISCUSSION OF FINDINGS
CHAPTER FIVE
SUMMARY CONCLUSIONS AND RECOMMENDATIONS
5.1 SUMMARY
In chapter one of the study, we outlined the
background of the study shedding light on the prevailing condition of the
Nigerian banking system, it problems and challenges. We also detailed the
liquidity management challenges faced by Deposit Money Banks in Nigeria, as
well as providing justification for the study. In chapter we also stated the
hypotheses formulated for the purpose of the study and outlined the
scope/limitations of the study.
Chapter of the thesis was dedicated to an in depth
review of literature including the theoretical framework on liquidity
management practices around the globe. Empirical evidence on the subject matter
of the thesis was also investigated in order to draw from the experience and
insight of previous research in the area of study.
In chapter three, we outlined the research
methodology. Our choice of banks was detailed, while the nature and sources of
the data used was also given full treatment. Our data which was collected
mainly from secondary sources (annual reports of the concerned banks) was
analysed using ordinary least square method of regression analysis.
In chapter four we presented in tabular format the
data used for the study. Data for the study was analysed using multiple
regression analysis on E-views version 3.1. Our findings were also discussed in
chapter four.
In this chapter, we shall provide a brief summary of
the study so far, we shall also make conclusions on the basis of our findings
as well as make recommendations.
5.2 CONCLUSIONS
5.3 RECOMMENDATIONS
BIBLIOGRAPHY
Agénor, P-R., Aizenman, J., and
Hoffmaister, A.W. (2004). The Credit Crunch in East Asia: What Can Bank Excess Liquid
Assets Tell Us? Journal of International Money and Finance.
Ajayi, F. O. and Atanda, A. A.
(2012) Monetary Policy and Bank Performance in Nigeria: A Two-Step
Cointegration Approach, African Journal of Scientific Research Vol. 9, No. 1
(2012)
Ajayi, S.I., and Ojo, O. (1981).
Money and Banking Analysis and Policy in the Nigerian Context London: George
Alford, D. (2010). Nigerian Banking
Reform: Recent Actions and Future Prospects, http://ssrn.com/abstract=1592599
(March 1, 2011).
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Soludo, C.C. (2004). Consolidating
the Nigerian banking industry to meet the development challenges of the 21st
century. Special Meeting of the Bankers’ Committee, Abuja.
Uremadu, S.O. (2009). Determinants
of Financial System Liquidity (1980 – 2005): Evidence from Nigeria. Annals of
University of Bucharest, Economic and Administrative Series.
Project Reference Code: C045
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