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CHAPTER ONE

INTRODUCTION

1.1   Background to the Study

Banking can be classified as both a profession and trade.  As a trade, banking business involves the buying and selling of services. On the other hand, banking could be referred as a profession because could be referred as a profession because of its distinct body of knowledge, which distinguished it from other aspect of human endeavours. Bank treasury activities encompass not just cash management, but also short-term borrowing and investment in a variety of liquid debt market instruments. The treasury function funds the ongoing capital requirements of the institution, at the lowest possible cost, within reserve parameters set by regulatory and supervisory authorities. Historically, high returns at global banks have meant that investment management was not a particularly high priority within treasury operations.

However, as global interest rates have fallen, reflecting the economic prospect of continued low growth and low inflation, increased competition has reduced traditional intermediation margins. This prospective lower profit growth has caused a re-evaluation of the available returns from assets such as the underlying deposit base. Any surplus liquidity had, historically at least, been invested in a somewhat arbitrary manner via a spread of short-term government securities; the elimination of exposure to counter-party risk, as opposed to volatility, was the paramount investment criteria. Corporate treasurers, not always versed in modern portfolio theory, were often presented with volatile cash balances for short-term investment purposes. The basic requirement for banking institutions to maintain these substantial cash reserves stems from their essential economic function, arising from daily liquidity requirements of their clients. At an aggregate level, this entails net cheque clearing, either in favour of, or contrary to, an individual depository organisation  in turn affecting its overall net financial position. Collateral requirements for securities firms, including both tier capital ratios and liquidity reserves, have already been extensively reviewed in the banking literature; see Dimson and Marsh (1995). In an intermediary context these proprietary positions require the construction of properly diversified portfolios of low credit risk, high-quality, liquid assets across a plethora of divergent currencies. Performance must be monitored against an internal funding or benchmark interest-rate, reflecting the real costs associated with any investment.

Scholars and practitioners generally referred to a bank as a licensed institution chartered to provide deposit facilities for general public, accept money and collection of cheques from customers, permitting money to be withdrawn and transferred from one account to another and lending the surplus of deposited money to customers at agreed rate.  All over the world, the banking industry is deemed as a sensitive interface between the production and service sectors.  For any government to achieve the national objectives of stable price and sound economic growth, the banking system should be one that was well developed with the depth, breath that would make financial intermediation efficient, effective and productive.

The Nigeria banking industry started in 1982 when the Africa Banking Corporation based in South Africa was invited to open a branch in Lagos.  It was therefore the modern commercial bank to have a branch in Nigeria and from there, other banks evolved.  The banking industry had gone through many years of development.  At present, numerous banks had sprang up from first generation banks to community banks. The functions of the bank ranges from traditional role to more sophisticated functions such as electronic transfer.

Treasury operation can be defined as transactions relating to fixed deposit, call deposit and banker’s acceptances.  Thus, fixed deposit has to do with customers depositing cash for an agreed period of time at ten percentage (10%) per annum.  Fixed deposits attract withholding tax. Call deposit is related to fixed deposit but the difference is that the customers can breach the contract by coming to the bank to collect the money deposited before the agreed period with the bank.  Call deposit also attract withholding tax.  The current rate for fixed deposit in the United Bank for Africa as at May 10th 2006 is 22.5%.

Treasury operation started in Nigeria in April 1960 with the Central Bank of Nigeria, which was its market place.  It initiated the market with the first batch of treasury bills. The combination of earning and liquidity were especially relevant for treasury managers all over the world.  This was because, the ultimate objective of commercial banks were to make profit for its shareholders. To earn profit for all, the banker must maintain confidence and to maintain confidence, the bank must maintain an adequate degree of liquidity in his assets.  The amount of liquidity to hold and the form in which to hold it were the constant concern of treasury managers.

United Bank for Africa (UBA) Plc is one of the leading and oldest financial service group in Nigeria and also one of the Nigeria top three (3) commercial banks.  It was established in 1961 by a consortium of five international banks to take over the banking business carried on in Nigeria since 1949, by British and French Bank Ltd with a total asset of N18803 billion and 138 outlets across Nigeria and Two (2) foreign branches in New York and Grandcayman Island.  United Bank for Africa (UBA) Plc is the first international bank to be registered under Nigeria law, first to be listed on the Nigeria stock Exchange, first Nigerian bank to open a branch in USA, first and only Nigeria bank to issue Global Depository Receipts (GDR), and first Nigeria bank to establish a branch in a university campus.

1.2   Statement of Problem

The miscellaneous overheads and operating cost of most banks have had to be on the increase over the past decades due to high rate of lending and depositing in fixed deposits.  The depression brought about a number of survival strategies to banks to enable them manage or monitor their fund collection and utilization.  Several measure have, however, been introduced to reverse the receding economy.

In any case, this research work addresses the following problems:

a. Uncontrollable lending of funds influenced the effectiveness of treasury operations.

b. Placement of inexperience personal in United Bank for Africa can constitute the problem in treasury operations.

c. Fraudulent practices of staff and management generate its own problems and deplete United Bank for Africa (UBA) Plc.

d. Lack of diversification of investments can create problem in the bank, which can give room to ineffectiveness and inefficient of liquidity level.  Therefore, we want to examine the factors that leads to the issues and problems of treasury operation in financial institution.

1.3   Purpose of the Study

This research work is intended to determine the following:

a. To find out the factor that would influence effective treasury operation in United Bank fir Africa (UBA) Plc.

b. To determine whether the efficiency of treasury operation was based on treasury personnel employed in United Bank for Africa (UBA) Plc.

c. To find out what would generate treasury operation problems in the bank that can lead to liquidity crisis.

d. To determine if investment diversification is dependent on effective treasury management activities.

1.4   Significance of the Study

This research work is of particular relevance to the role of banking industry in the economic development since it has not been fully appreciated and the service banks were suppose to render to the society were inadequate. Treasury operation was a part of treasury management in the banking industry.  It is a financial activity involving financial institutions and the Central Bank of Nigeria as a market environment.  This study is primarily interested in identifying factors that influence effective treasury operations in United Bank for Africa (UBA) Plc and whether these have a direct or indirect bearing on treasury operations in other bank.  A logical corollary to this is the hope that the outcome of the study might suggest the need for improving treasury management practices in banks. This study, therefore, is considered important to treasury operations in order to investigate whether this linkage exist and if it does, what are its implication of the improvement of an effective treasury operation in Nigeria.  It will also serve as material for further research.

1.5   Research Question

This study will attempt to find out suitable answers to the following research questions;

(a) What factors influenced an effective treasury operation?

(b) Does the effective and efficiency of treasury operation dependent on the caliber of personnel existing in the bank?

(c) What would generate problems in treasury operation that can lead to liquidity crisis?

(d) In what ways and manner does investment diversification dependent on treasury management.

1.6   Scope of the Study

Commercial banks had encountered a lot of treasury operation problems.  For the purpose of the study, this research work is limited to United Bank for Africa (UBA) Plc.  The study will first primarily direct its attention on the problems and challenges.  And later will attempt to give recommendation for further study.

1.7   Limitations of the Study

The researchers’ major constraints were time, finance and uncooperative attitude of some bank officials whose repetitive response were always “I am very busy now”, I am not authorized to give out any information”.  The correctness of the information given by respondents can not; therefore, fully be guaranteed, some clearly avoided the receipt of the questionnaire.The time constraint was much evident in the production of this work in area of researching exhaustively and widening our studies and knowledge to more than one bank.  Finance prevented us from getting all the necessary materials needed to produce a masterpiece project, therefore, we could not go beyond this.

1.8   Definition of Terms

(a) Asset - Anything tangible or intangible that is of value to its owner.  It is either cash or can be turned into cash.

(b) Bank - A commercial institution that takes deposit and extends loans.  It also keeps valuables like will, certificates and jewelries.

(c) Bank Deposit – A sum of money placed by a customer with a bank. It may or may not attract interest.

(d) Cheque - A preprinted form on which instructions are given to an account provider to pay a stated sum to an account provider to pay a stated sum to a named recipient.

(e) Deposit – A sum of money left with an organization such as bank to either earn profit or safe keeping.

(f)  Earning – The net income or profit of a business.

(g) Electronic transfer – The transfer of money from one bank account to another by means of computers and communication links.

(h) Financial Institution – Any organization whose core activity is to provide financial services or advice in relation to financial products.

(i)  Liability – An obligation to transfer economic benefits (generally money) as a result of past transactions.

(j) Liquidity – The extent to which an organization’s assets are liquid enabling to pay its debt when they fall due and also to move into new investment opportunities.

(k) Withholding Tax – Tax deducted at source from dividends or other income paid to a non-residents of a country.

(l)  Treasury Bills – This is a short-term instrument used by the government to borrow money with a maturity date of ninety-one (91) days.

(m) Treasury – This is the control of public fund.

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