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THE IMPACT OF LIQUIDITY MANAGEMENT ON BANKS’ PROFITABILITY: A CASE STUDY OF GUARANTY TRUST BANK BRANCHES IN KANO, KANO STATE
The Nigerian economy has undergone fundamental structural changes over the last four decades (1960 to date). Evidence shows that the dramatic structural shifts that occurred lately have not resulted in any appreciable and sustained economic growth and development. Within these periods, the economy has also experienced stunted growth for the greater part of the period. The economy exhibited negative growth rates, which indicates depressed economic situation partly caused by the worldwide economic recession of the early 80s, the world economic meltdown, and recent fall in oil revenue which was as a result of over dependence of the Nigeria economy on oil proceeds, and gross mismanagement of the economy by successive governments (Biaobaku 2014).
According to Awokiyesi (2011), the aim of every economy is the attainment of a healthy and sustainable position, for the critical macro-economic variables, which are the Balance of Payments (BOP), Gross Domestic Topic (GDP), Inflation and Unemployment. The pursuits of these goals have become one of the major pre-occupations of policy makers worldwide. This is understandable due to the tremendous impact of developments in Balance of Payments (BOP), Inflation, GDP, Unemployment and social welfare of the society. Generally, the outcomes of these critical macro-economic variables provide a useful guide for appraising the appropriateness of current policy measures designed to bring about a well-ordered economic structure.
The objectives of macro-economic policy for the government of a contemporary mixed capitalist country (like Nigeria) have come to be formulated as the maintenance of high employment levels, without inflation consistently with the achievement of an adequate rate of economic growth, and the preservation of Balance of payments equilibrium. In this context, a major contribution to the theory of economic policy is the Philips curve.
In Nigeria, the realities of the current economic situation have drowned monetary authorities to focus on the framework for sustainable growth, encompassing stabilization as a component of this framework. This conviction is informed by the fact that the country, since the early 1980’s, embarked on the stabilization of the economy, when it became apparent that the economic policies of the 1960’s and 1970’s were no longer of any relevance to the realities of the economy at that time.
In the world of finance, no country can indeed act in isolation. The last few years Nigerian Banking Industry have witnessed the creation of the world’s banking group through mergers and acquisitions, this trend has been influenced by factors such as prospects of cost savings due to economies of scale as well as more efficient allocation of resources, enhanced efficiency of resource allocation and risk reduction arising from improved management. In 2005, the-then CBN Governor Charles Soludo visualized the Nigerian and world economy in the year 2025 and 2050, with no more than 10-20 ‘mega’ banks, noting that countries that fail to take proactive positions, will wake up and continue to complain of marginalization.For him, Asia was consolidating as well as Europe, North America and South America; even in South Africa consolidation was taking place resulting in mega banks such as Amalgamated Banks of South Africa (ABSA) which has asset base, larger than all of Nigerian Deposit money banks put together(Fakanye, 2006).
Before the advent of economic reforms, Nigeria-Africa’smost populous country and with the largest economy had 89 banks (International Business Management, 2011;Aregbeyen andOlufemi, 2011) with many having a capital base of less than 10 million US Dollars and about 3300 branches, while countries like South Korea had 8 banks with about 4500 branches. The Nigerian banking system has undergone remarkable changes over the years, in terms of the number of institutions, ownership structure, as well as depth and breadth of operations. These changes have been influenced by challenges posed by deregulation of the financial sector, globalization of operations, technological innovations and adoption of supervisory and prudential requirements that conform to international standards.
As at January 2005, 89 banks were operating in Nigeria comprising institutions of various sizes and degrees of soundness, with the largest bank in Nigeria having a capital base of 240 million US Dollars compared to 526 million US Dollars for the smallest banks in Malaysia. CBN, Economic and Financial Guidelines (2013) explained that the small size of most of Nigeria banks each with expensive headquarters, separate investment in software and hardware, heavy fixed costs and operating expenses, and with bunching of branches in few commercial centers leads to high cost of intermediation, affects the spread between deposit and lending rates, and puts undue pressures on banks to engage in sharp practices as means of survival, which ends in the unhealthy state of the nation’s economy.
The first phase of bank reforms in the fourth republic was concluded on 31 December 2005, with emergence of 25 banks and further consolidation within the year resulting to merger of two other banks bring the number to 24 banks, this marked the era of modern banking in Nigeria.
Recent reforms put the industry on a sound footing and improve over the situation, prior to the impact of the global financial crisis. Four banks were adjudged not able to be recapitalized; hence three of these banks were nationalized and one was taken over by African Capital Alliance Consortium. Thus the following are the remaining banks in Nigeria as at now: Citibank Plc, Diamond Bank Plc, Fidelity Bank Nigeria, First Bank of Nigeria, Guaranty Trust Bank, Stanbic IBTC Bank Nigeria Limited, Standard Chartered Bank, United Bank for Africa, Unity Bank Plc, WEMA Bank Plc, Zenith Bank Plc, Skye Bank Plc. Later, Access Bank acquired Intercontinental Bank Plc, Ecobank Nigeria acquired Oceanic Bank Plc, First City Monument Bank acquired FinBank and Sterling Bank acquired Equatorial Trust Bank. Other banks were nationalized with Bank PHB becoming Keystone Bank Limited, Spring Bank Plc becoming Enterprises Bank Limited and Afri Bank Plc becoming Mainstreet Bank Limited.
Nigerian banking came into the 21st century with very high hopes, especially since the apocalyptic millennium computer glitches that were predicted globally never happened. At that time, most of the banks were not internationally competitive, both in terms of size and the volume and the kind of transactions they handled. The 90 banks in operation in year 2001 had 2,994 branches, aggregate total assets of 2.167 trillion naira, total deposits of 947.18 billion Naira,andcapital and reserves of 172.42 billion. Their contribution together with other financial sector, sub sector to national economic growth was limited to 12.13% of the GDP in 2001.
The problem identified in the global financial sector is mainly a problem of vibrancy in performing its roles in the growth and development of the economy. This has attracted international comments because of its importance in the facilitation of fund transmission in the domestic economic and international trade. The problem arises due to problems of maintaining equilibrium between profitability and liquidity, in most or all the banking institutions in Nigeria. These problems curtail banks from meeting up with current obligations and costs incurred, due to large Non Performing Loan in all the banks which have effect on the shareholders who have invested in the banks with the aim of making good returns in form of future dividends. The relationship between liquidity of the banks and their profit has been the focal point of this work.
The survival and growth of other sectors of the economy are intrinsically linked with fund transmission in the local economy, of which the banking sector plays a significant role in any nation. Hence the problem of study rests on the effect of recent global financial crisis, on the component member of financial system in the economy of Nigeria, and on whether changes in the global financial system affect the activities of Nigerian financial system. From these points of view, banks need assets, which will produce income substantially higher than that paid on deposits. At the same time, the assets of a bank must be kept reasonably liquid, so as to meet possible demands from depositors and to maintain public confidence.
The main aim of this study, is to analyze the impact of liquidity management on banks’ profitability, with a case study of Guaranty Trust Bank Plc. Thus the specific objectives will be the following:
- To examine the correlation between liquidity management and performance of Guaranty Trust Bank Plc.,
- To examine the correlation between liquidity management and Guaranty Trust Bank Plc.’s profitability,
- To examine the correlation between liquidity management and growth ofGuaranty Trust Bank Plc.
The research questions that will guide this work are as follows:
- What is the relationship between liquidity management and performance of Guaranty Trust Bank Plc.?
- What is the correlation between liquidity management and profitability of Guaranty Trust Bank Plc.?
- Is there any relationship between liquidity management and banks’ growth in Guaranty Trust Bank Plc.?
HO: Liquidity management does not have significant relationship to bank’s profitability in Guaranty Trust Bank Plc.
HO: There is no correlation between Liquidity management and performance in Guaranty Trust Bank Plc.
HO: Liquidity management does not have influence on banks’ growth in Guaranty Trust Bank Plc.
The scope of the study covers the activities of the Nigerian banking industry, as related to its ability to make profit. However due to logistic constraints,Guaranty Trust Bank Plc. is used as the case study. Emphases were made on the performance, profitability and growth aspects of the banks.The scope of this study is limited to the examination of related literatures, obtained from Securities and Exchange Commission (SEC), Central Bank of Nigeria (CBN) and Association of Issuing Houses of Nigeria (AIHN), the internet and interviewing of the people that matters within the study.
A study of this magnitude is expected to run into some obstacles, due to the nature of the research which involves the ‘main article in trade’: fund and liquidity of the bank. There is a major constraint of the uncooperative nature and reluctance of staff of banks which will be used as respondents to questionnaire that will be used for data collection.Due to these constraints, the research will make use of the available materials in the Securities and Exchange Commission’s Library, Central Bank of Nigeria (CBN), Association of Issuing Houses of Nigeria’s Library where books relevant to the research topic will be consulted, and the internet.
This work is relevant in the area of financial management in the manufacturing sector. It will enlighten the leadership structure of liquidity management in banking sector on the impact of performance. Also the project will be relevant to scholars, students, researchers and upcoming research.The work will contribute to existing work on management in general and financial management in particular.
- Asset and Liability Management: The process of effectively managing a bank’s portfolio mix of assets, liabilities and, when applicable, off-balance sheet contracts. This process involves the management of two primary financial risks – interest rate and foreign exchange – and directly relates to sound overall liquidity management.
- Interest Rate Risk: The exposure of a bank’s financial condition to adverse movements in interest rates. Changes in interest rates can have significant impact on a bank’s earnings, as well as the underlying economic value of a bank’s assets, liabilities and off-balance sheet items.
- Liquidity: The ability to fund all contractual obligations of the bank, notably lending and investment commitments, deposit withdrawals and maturities in the normal course of business; that is, the ability to fund increases in assets and meet obligations as they come due.
- Liquidity Management: An on-going process to ensure that cash needs can be met at reasonable cost, in order for banks to maintain the required level of reserves at the CPO and to meet expected and contingent cash needs. Required reserves at the CPO, should not be considered to be a routine source of liquidity. Good management information systems, analysis of net funding requirements under alternative scenarios, diversification of funding sources and contingency planning, are crucial elements of sound liquidity management.
- Liquidity Risk: The risk of loss to a bank resulting from its inability to meet its needs for cash, or from inadequate liquidity levels which must be covered by funds, obtained at excessive cost.
- Net Funding Requirements: The liquid assets necessary to fund a bank’s cash obligations and commitments going forward, determined by performing a cash flow analysis, all cash inflows against all cash outflows, to identify potential net shortfalls.
- Corporate Social Responsibility: Theconcept whereby companies integrate social and environmental concerns in their business operations, and in their interaction with their stakeholders on a voluntary basis.
- Performance: Thisis the outcome of work that provides the strongest linkages between goals of the organization, customer satisfaction and economic contributions.
- Organizations: A group of people who form a business, club etc. together in order to achieve a particular aim.
- Multinational Companies: Companies existing in or involving many countries or companies, operating in several different countries especially a large and powerful company.
- Acquisitions: This is the take-over of some, or all aspects of the ownership and management of one company by another.
- Capital: This are the funds committed to a business with the hope of success.
- Recapitalization: This means the re-injection of more capital funds into a business concern.
Bank Capital Adequacy: It is referred to as the quantum of capital of bank should have planned to maintain in order to conduct its operations in a prudent