LIQUIDITY AND CREDIT MANAGEMENT IN NIGERIA BANKING INDUSTRY
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Liquidity management seeks ensure the attainment of short-term objectives of monetary policy, which means maintenance of desire monetary aggregate. It is very important aspect of monetary policy implementation and control commercial banks. Create money everyday but when the quality of money created in incompatible with the absorption capacity of the economy. Macro economics instability may result in order to maintain relative macro economics stability much reliance is place on liquidity management to leaven out the swing liquidity grown in the banking system.
Lending investment operation of commercial bank have been widely and extensively discussed in various literatures. It has also been stated that anyone who express it borrow from commercial bank should be most concerned with the loan and investment policies and techniques.
The principal profit making activity of a commercial bank is making loans available to its customer and in doing this; it faces uncertainties and therefore risk money kinds. These uncertainties are with regards to its feature volume and costs of funds and the future income and price of the various type of assets that it acquires.
A bank does not therefore consider earning alone instead is seeks some optimum combination earning liquidity and safety o secure more or one. It must often sacrifice same of the other for instance, do get higher earning, a bank may have to incurred more risk and liquidity and vice-versa liquidity and credit management in Nigeria banking industry.
However, commercial banks are limited in their ability to assure risk because of the very high ratio of their liability to their total asset.
1.2 STATEMENT OF THE STUDY
Liquidity and credit management have implication on bank profitability and ability to meet its obligation both to the regulation authority, depositors and shareholders. It could trigger off mass cash withdrawal thus plunge the bank into deeper crises. In analyses of credit and liquidity management of community bank.
I shall examine its assets quality, which include its performing and non performing loans. In addition efforts would be made to look onto the bank capital adequacy and ratio and its stock of risk asset using different measure of liquidity solvency.
1.3 RESEARCH HYPOTHESIS
1. Ho: Credit facilities is not useful in banking industry.
Hi: Credit facilities is useful to banking industries.
2. Ho: Microfinance bank has no impact on the development of Ifelodun Local
Government.
Hi: Microfinance bank has impact on the development of Ifelodun Local
Government.
3. Ho: Microfinance bank render assistance to small scale industry
Hi: Microfinance bank does not render assistance to small scale business.
1.4 THE PURPOSE OF THE STUDY
Commercial banks act as matter vies by collecting deposition and paying interest on them and granting loan charging the borrowers and depositors, their main goes of bank is to make profit. Part from granting loan bank also generates liquidity and credit management in Nigeria banking industry. Profit on investment in order to maximize their earning every bank attempt to structure its asset and abilities in such a manner as to yield the highest retune subject to some sufficient cash and other asset in its portfolio together with liability to raise funds quickly from other sources to enable to meet its payment obligation and financial commitment in a timely manner.
However way factors bear on nature of operations of commercial bank generally and lending functions in particular. An important factor which is the focus of this paper is the “theories in liquidity management of commercial bank” these theories defined by Wool Worth G. Walker (1967) have existed since the early days of commercial banking.
1. The commercial loan which stated that commercial liquidity is assured as long as its assets are held in short loan. That would be liquidity in the source of business. The ideal assets under this theory are short-time size liquidity loans granted for working capital pursues.
2. The shift ability theory which postulated a bank liquidity is maintained of it holds asset that could be sold or shifted to other lending or investors for cash.
3. The anticipated income, theory which states that bank “liquidity can be planned if scheduled repayments are based on the future income of the borrowers”.
4. The liquidity management theory which maintains that banks can meet liquidity management requirements by hidings in the market for additional funds.
These theories were founded in a developed environment different from the Nigeria environment which is till developing one liquidity and credit management in Nigeria banking industry.
This study there aims to discover the extent the microfinance bank plc is guided by the above enumerated theories in the management of its lending function and global liquidity problem. To supplement this lending practices and procedures of the bank will also be evaluated.
An in-depth attempt is made to analysis the relevant ratio relating to credit and I liquidity of the bank. This study is sub-divided of the study the work whilst relevant is review in chapter two with brief history of the bank, the methodology of research is presented in chapter three, chapter four is an analysis of data the work is summarized conclusion and recommendation are given in chapter five. The rest of these chapters take a cursor look at the historical development and functions of the bank in Nigeria as will as overview of liquidity problems in commercial banks.
1.5 THE SCOPE OF THE STUDY
The study shall focus on the credit and liquidity management of microfinance bank for a period of three years 2002 – 2005, this period is selected because it is current and has also witnessed both bank boon bank failure resisting from poor liquidity and credit management. This focus is no microfinance bank plc because of its top position in the banking industry.
1.6 LIMITATION OF THE STUDY
In any research work a few problems usually encountered, first and foremost, the time factor constrain bound to hinder the research because of the time constraint. It was not possible to carry out the study extensively as it was originally anticipated liquidity and credit management in Nigeria banking industry. There is also problem arising from collection of the questionnaire distribution due to non challent attitude of some respondents library facility is another limitation factors there is inadequate in libraries to consult for the purpose of selecting secondary data
1.7 THE SIGNIFICANCE OF THE STUDY
The services offered by commercial banks are numerous and they include:
a. Mobilization of saving: Commercial banks performs a very important function to all sector of the economy by providing facilitate for the mobilization of saving and making the funds available to business to enable them to expand their productive capacity and to individuals and households to facilitate consumption.
b. Extension of credit facilities: According to Needit in (1984) the primary function o commercial bank is the extension or waiting borrowers in banking credit available commercial banks are rendering great social services through their actions production in increase capital investment is expanded and high standard of lives in realized.
c. Transfer of funds or money transmission commercial banks serve as medium for transforming funds. They facilitate payments by enabling business, Government and consumers to transact without cash, cheques and credit card are use for the bank purchases as measured by naira amount of transaction.
d. Creating money commercial bank create money used to extend productive facilities otherwise there would be a slowdown of economy activities generally as business would be force to wait until sufficient profit are made before they could expand liquidity and credit management in Nigeria banking industry.
e. International trade services: All commercial banks are involve in the financial aspect of international trade and the service required supporting this important part of the country’s economy such services included bills for collection documentary, credits and open amount which are instrument use in impart and expert trade.
f. Services to the travelers: All commercial bank in Nigeria offer services to the travelers by providing them with travelers cheques are form of travel currency giving the would the security of letters of credit and the convenience of a local currency.
g. Status inquiries: A customer gives his name to another bank for reference purpose and enquiry is sent to the customer bank to find out about his financial and personal accounts in commercial bank.
h. Business advisory services: The aim of this service is to assist small business customer to develop their business to such a way that they can attract bank finance.
1.8 DEFINITION OF TERMS
1. Bank: A place were goods and other valuable materials are kept i.e. cash, asset, etc they also accept cash deposit from the public and other business concern.
2. Cheques: This is the instrument use by the customers operating current account with the bank to withdraw money.
3. Loan: This is the [process of lending money to banks customer in which the interest is agreed and fixed it is only meant for customer operating current account.
4. Collateral: A credit or ledger is not satisfied with the amount of capital possessed by the borrower may support the debt property whose value can be liquidity and credit management in Nigeria banking industry determined early and which can be readily converted into cash is preferred for this purpose.
5. Capital: The types and value of capital if the borrower affect his ability to obtain credit capital is protecting the creditor against loss hence the credit analyst must carefully scrutinize the balance sheet of the borrower.
6. Credit Transfer: It is a types of banking method of payment whereby cash can be withdraw fro another branch of the bank or another bank entirely from that where the account is held.
7. Bank Draft: bankers draft is regarded as near money instrument, it is more acceptable than a cheque can be dishonor for lack of funds or irregularities in preparation but in the case of draft, the finds has been moved out of the customer account.
8. Microfinance Bank: Can be described as a self sustain financial institution owned and managed by a group of people in microfinance for the purpose of providing credit collection deposit and other financial services to public largely.
9. Small Business: Small business refers to self instituted largely self financed and closely self managed and it is of relatively small size when considered as part of the industry.
10. Organization: In economic term organization can be described as economic institution having materials resources for the purpose of making production of profit, liquidity and credit management in Nigeria banking industry.
11. Deposit Account: Saving accounts funds that are not required for immediate use can be deposited in this account fund deposited are usually for a special period which may be between five month to one year thus its termed turn deposit.
