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CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND TO THE STUDY

Liquidity of banks is “the case with which banks assets could easily be converted into cash”. The liquid asset include cash in bank vaults, and other government securities that have not been used as collateral for loans. The most liquid of all these assets is cash. These are many reasons why a bank should have reasonable liquid assets in its assets portfolio. These includes amongst others to babble the bank to meet prompt demands from deposits and to ensure that the bank main trained public confidence and also beadle to utilize profitable opportunities that may come out in future.

However, it should be mentioned that banks like most other business are profit oriented. They operate in order to make profit for their shareholders. The profits could duly be realized only if there is adequate deposits from bank customers. The deposits will not come unless the depositors could be assured of the safety of their deposits and for the safety of the deposit to be assured, these has to be enough liquidity in the bank. Conversely, a bank operates in order to make profit for her shareholders. It is a known fact that action designed to make profit in banks may bring about bank distress and vice versa. Therefore, equilibrium has to be sought between the two. These taken extreme cases, have been the constant concerns of bank management.

Liquidity management involves provision for depositor drawals and short term cash requirements. It also involves the provisions to meet legal reserves requirements and for the cyclical and secure cash requirement. In Nigeria, the activities of the banking Act of 1969 as amended under the control of Central bank of Nigeria. The essence of these regulations was to maintain trust and confidence in banking system as well as to achieve specific economic objectives. Thus in the period of mounting excess liquidity as was the case in the 1970s the banks were expected to hold some of their deposits in liquid form. This is known as legal reserve requirements and cash stabilization securities issued by the Central bank, the liquidity ratio requirement and special deposits.

The rationale for the use of these instruments was to mop up the excess liquidity in the economy to great extent, is also expected to enhance bank in the banking system. The problem of bank liquidity management was brought about as a result of continuous inflows of income from the oil sector in the 1960s. Since the introduction of the second tier foreign exchange market which resulted in the mopping – up of more than N56 million from the economy, the situation has automatically changed, so the era of excess liquidity has gone. Banks have devised new methods to attract deposits from their customers hence the new devices of marketing financial services and other innovations in the banking sector. Some questions which this research intends to address includes:- How does central bank policies on commercial banks solve excessive liquidity problems in the banking system and the national economy?

1.2     STATEMENT OF THE PROBLEM

This research is intended to identify problems of selected commercial banks prior to the introduction of the second tier foreign exchange market and under the second tier foreign exchange market operation. Bank liquidity either in excess or shortage constitutes operational and management problems. Positive responses of bank liquidity to monetary policies may resolve such liquidity problems in the economy. In Nigeria, regulatory and monetary policies appears to be ineffective hence the recent distress problems associated with some banks. However, the nature and extent by which commercial banks liquidity problems responds to monetary aggregates is not known. This informed the need to re-examine the bank liquidity problems, with the over all objective of investigating the nature and extent of these problems.

1.3     OBJECTIVE OF THE PROBLEM

The broad objective of this problem is to examine liquidity problems and their policy implication both in the banking industry and Nigeria economy.

Specifically the objectives are to:-

1. a)  Identifying bank liquidity problems wither in excess or shortage which constitutes operational and management problem.

2. b)  Identifying the overall impact of these problems on loans and advances to customers of the commercial banks.

3. c) Identifying the nature and extent by which commercial banks liquidity problems responds to monetary aggregates.

1.4   RESEARCH QUESTIONS

Some questions which this research intends to address includes:-

1. a) How does excess and shortage liquidity affects commercial banks/customers relationship?

2.  b)  How effective and efficient are central bank policies?

3. c) Does excess and shortage liquidity problems in the banking system affects commercial banks profit?

4. d) What are the overall impact of those problems on loans and advances to customers of the commercial banks?

5. e) Does the nature and extent by which commercial banks liquidity problems reports to monetary aggregates negative or positive?

6. f) Does bank liquidity problems either excess or shortage constitute operational and management problems?

7. g) The response of bank liquidity to monetary aggregates were analyzed using ordinary least square (OLS) regression and analysis of variance (ANOVA).

1.5    HYPOTHESIS OF THE STUDY

HO: Commercial banks liquidity responses to monetary aggregates is not positive.

1.6   SIGNIFICANCE OF THE STUDY

Following the downturn in the economies future of this country over the years, commercial banks behaviours is difficult to predict and their loan to deposit ratio appears to show a gross inefficiency and lack of depositors protection this study is therefore, intended to provide these banks without sound banking policies which will protect depositors fund and ensure viability and efficiency. The study also intended to ensure adequate managerial economic growth and development which will be encouraged as a result of improving banking operations and management. Therefore, the research intended to have an empirical base either to correct all the sources about the poor impression people have of the banks liquidity and to advice banks on how to improve their services by ensuring that liquidity problems does not affect loans and advances made to their customers.

1.7   BACKGROUND OF THE STUDY

Availability of research materials.

The researcher encountered some problems in getting the material necessary for the study. A lot of the researcher’s time and money was used up in buying Journals of the firm and test books dealing on the subject. And equally on visiting many libraries within Enugu and outside Enug Corporation from the management and workers of both banks (first bank and union bank plc). The researcher found it very difficult to get permission and co-operation from the management and workers of the firms who though that the researcher was trying to carry out an industrial espionage on the company or expose the internal operations of the firm to other firms or her competitors, it took researcher some reasonable time to convince the management that the study was strictly an academic exercise.

1.8   DEFINITION OF TERMS

The following terms used in this study should be taken to mean the following:-

FOREIGN EXCHANGE MARKET (FEM) The foreign exchange market is an arrangement which exists to assist buyers and sellers of foreign exchange to enter into contract of buying and selling.

LIQUIDITY RATIO This is the percentage of bank deposits that the banks should hold in the form of cash or eligible liquid assets in the tills of the bank.

MORAL SUASION It is a democratic instrument of monetary control. It involves the use of persuasion and appeal by the central bank to the commercial banks to comply with the central bank guidelines.

OPEN MARKET OPERATIONS (OMO) This method involves the sale and purchase of securities, bills, bonds, and government securities by the central bank.

ORDINARILY LEAST SQUARE (OLS) This is instrument used by central bank to analyse response of banks liquidity to monetary aggregates

ANALYSIS OF VARIANCE (ANOVA) It is also instrument used by bank to analyses response of banks liquidity to monetary aggregates

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