EFECT OF LIQUIDITY AND PROFITABILITY

MANAGEMENT IN THE OPERATION OF

NIGERIA BANKS
(A CASE STUDY OF UNION BANK OF NIGERIA PLC.)

By:

ABDULRAHAMAN ABDULLAHI

ND/20/BFN/FT/073

BEING A RESEARCH PROJECT SUBMITTED TO BANKING

AND FINANCE DEPARTMENT, INSTITUTE OF FINANCE
AND MANAGEMENT STUDIES (IFMS) KWARA STATE
POLYTECHNIC ILORIN.

IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR

THE AWARD OF NATIONAL DIPLOMA (ND) IN BANKING
AND FINANCE DEPARTMENT.

JULY, 2022

i
 CERTIFICATION

This is to certify that this research work has been carefully assessed and

approved as meeting part of the requirement for the award of National Diploma

(ND) in Banking and Finance Department, Institute of Finance and Management

Studies, Kwara State Polytechnic, Ilorin.

DR. OLOWONIYI A.O. DATE

(Project Supervisor)

MRS. OTAYHOKE E.Y. DATE

(Project Coordinator)

MR. AJIBOYE W.T. DATE

(Head of Department)

EXTERNAL EXAMINER DATE

ii
 DEDICATION

This project work is dedicate to Almighty Allah, the creator, the highest

and the most merciful who give knowledge and wisdom for the successful

completion of this project and also dedicated to my lovely parent, brother and

sister, MR. ABDDULRAHAMAN IBRAHIM and MRS. TAIBAT AHMED. May

Almighty Allah have mercy upon them as they brought me up from infancy.

iii
 ACKNOWLEDGEMENT

All praise and adoration are due to no one but Almighty Allah (S.W.T), the

sole bestowed of knowledge and wisdom for the successful completion of this

project.

My special thanks goes to my wonderful and caring parent MR and MRS

IBRAHIM ABDULRAHAMAN, and MRS. TAIBAT HAMMED, for their

parental care, guidance, and support both spiritually, physically and financial. I

pray you shall reap the rise fruit of you labour you have sown for (AMEN).

Special gratitude also goes to my supervisor DR. OLOWONIYI A.O for his

fatherly guide and contribution throughout the effort of gathering this research.

And also to my amiable HOD (MR. AJIBOYE W.T) and the entire staff of

banking and finance for the knowledge imparted in me. May you all reap the ripe

fruit of your labour.

Kudos and shootout to my love once, friend and colleagues both in school

and homes. I thank you all for your prayers and support.

I PRAY WE SHALL ALL MEET AT THE TOP

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 TABLE OF CONTENTS
Title page i
Certification ii
Dedication iii
Acknowledgement iv
Table of contents v
CHAPTER ONE
1.0 Introduction or background to the study 1
1.1 Statement of the research problems 2
1.2 Research questions 3
1.3 Objectives of the study 3
1.4 Research hypothesis 3
1.5 Significance of the study 4
1.6 Scope and limitation of the study 4
1.7 Definitions of terms 5
1.8 Organization of the study 6
CHAPTER TWO
2.0 Literature review 7
2.1 Introduction 7
2.2 Conceptual framework 8
2.3 Theoretical framework 18
2.4 Empirical review 21
CHAPTER THREE
3.0 Research methodology 25
3.1 Introduction 25
3.2 Research design 25
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3.3 Population of the study 25
3.4 Sample size and sampling technique 25
3.5 Method of data collection 26
3.6 Method of data collection 27
3.7 Limitation of the study 27
CHAPTER FOUR
4.0 Data presentation, analysis and interpretation 28
4.1 Introduction 28
4.2 Data presentation 28
CHAPTER FIVE
5.0 Summary, conclusion and recommendation 33
5.1 Summary of finding 33
5.2 Conclusion 33
5.3 Recommendations 33
References 35

vi
 CHAPTER ONE
1.0 Introduction Or Background To The Study
In every system there are major components that feature paramount for the
survival of the system. This is also applicable to the financial system as the
effectiveness of the entire financial system, for they offer an efficient institutional
mechanism through which resource can be mobilized and directed from less
essential uses to more productive investment (Wilner, 2000)
In the performance of the financial intermediation role. The financial
institution that makes themselves available for this all important role are merchant
bank, saving bank, the central bank, development bank and commercial bank.
Commercial bank have overtime become very important institution in the financial
sector as they function as retail banking units facilitating the transfer of financial
asset which are more widely preferred by greater part of the public (fund seekers).
In views of this role and of the public (fund seekers). In view of this role and of
the fact that the activities of the union banks affect the greater part of the society,
union bank are selected as the main focus of the study.
Financial intermediation role of the Union Banks become the bed- rock of
the two major functions of union banks namely deposit and mobilization and
credit extension. An adequate financial intermediation require the purposeful
attention of the bank management to profitability and liquidity which are two
conflicting goals of the union bank. These goals are parallel in the sense that an
attempt for a bank to achieve higher profitability will certainly erode its liquidity
and solvency positions and vice versa.
Practically profitability and liquidity are indicators of the corporate health
and performance of not only the union bank, (Eljelly 2004). But all profit oriented
ventures. These performance indicators are very important to the shareholders and
1
depositor who are major public of a bank as the shareholder are interested in the
profitability level, the depositors are concerned with liquidity position which
determines a bank’s ability to respond to the withdrawal need 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, while the other integral
component of monetary policy i.e. economy management involves promoting
sustainable, economic growth over the long term by keeping monetary and credit
expansion in accordance with an economy non- inflationary output potential,
liquidity or reserve management is a shorter time horizon. In order to maintain
relative macro- economic stability reliance is placed on liquidity growth in the
banking system.
1.1 Statement Of The Research Problems
Through the financial intermediation role; the commercial bank react to the
idle funds borrowed from the lender by investing such funds in different classes of
portfolio such business activity of the bank for profit maximization. This can be
recalled or demanded when the later is not in position to meet their financial
obligation considering the public loss of confidence. As a result of bank distress
which has bedeviled the emergency of large number of new banks, every union
bank should ensure that it operates on profit and at the same time meets the
financial demand of it depositors by maintaining adequate liquidity.
The problem then becomes how to select or identify the optimum point or
the level at which a union bank can maintain its asset in order to optimize those
objectives for each of the level of profitability. This problem becomes a myth as
the resulted liquidity can lead to both technical and legal insolvency with the
consequence of the low patronage, deposit flight erosion of the asset base.

2
 This research seeks to investigate other problems such as excess liquidity
and the problem of establishing the proportion of the deposits that will be
demanded by the depositor at any particular time.
There is also the problem of satisfying the two public liquidity also poses
some problem. All these problems are what the study intends to consider, in
finding solution and make recommendations where necessary.
1.2 Research Questions
This study is intended to answer the following questions:
1. What are the significant relationship between a banks level of deposit and
liquidity?
2. Is there any significant relationship between liquidity situation in a bank and
related profitability?
3. Do union bank in Nigeria keep the minimum liquidity ratio required by
CBN at all times?
4. Banks still earn income in spite that they pay interest on deposit on customer
(saving and fixed deposit).
1.3 Objectives Of The Study
1. To know the relationship between bank level of deposit and liquidity
2. To determine the relationship between liquidity situation in bank and
related profitability
3. To justify the minimum liquidity ratio required by CBN at all time
4. To determine the amount of interest bank have on the deposit on each
customer
1.4 Research Hypothesis
Ho: Null Hypothesis
Hi: Alternative Hypothesis
3
1. Ho: There’s no any relationship between bank level of deposit and liquidity
Hi: There are relationship between bank level of deposit and liquidity
2. Ho: There’s no relationship between liquidity situation in bank and related
profitability
Hi: There are relationship between liquidity situation in bank and related
profitability
3. Ho: There no minimum liquidity ratio required by CBN at all time
Ho: There are minimum liquidity ratio required by CBN at all time
4. Ho: There’s no any amount of interest bank realize on each deposit customer
Ho: There are amount of interest bank realize on each deposit customer
1.5 Significance Of The Study
In analyzing the union banks statement qualification and their investment
and degree of their liquidity the researcher will like to concentrate on one of the
union banks, Ilorin and any town’s community bank.
This research will examine how this union banks and community banks
carryout there portfolio management in the following areas.
 Loan and advances
 Investment in securities e.g. Treasury bill
 Balance held with and for other banks
 Operation or several accounts.
1.6 Scope And Limitation Of The Study
The scope of the study examines the effects of liquidity management on the
Nigeria banking industry, in Nigerian banking industry, and this has to do with its
performance in Nigerian deposit bank. Also the extent at which banks would be
able to manage and control their effect of liquidity and profitability management.

4
 Furthermore, it entails the conceptual scope. Theoretical scope and
geographical scope of the banking industry. The geographical scope of the project
work is located at Ilorin, metropolis. One of the largest cities in Nigeria and it’s
the capital of Kwara State.
Finance is the main constraint facing the research work, coupled with
unlimited time. The researcher is self sponsored and so could not afford the cost of
elaborated area of coverage. Another major limitation is the difficulties in
obtaining material information as there are reluctances from sources
1.7 Definition Of Terms
Liquidity: Bank liquidity is the ability of a bank to be in a position to meet
the demands of depositors and borrows. Virtually all economic units need
liquidity.
Profitability: It can be considered as the main motive of bank as its
maximization ensure the survival and growth of the economic unit.
Solvency: It’s often used as a synonym for liquidity it is the ability of bank
to meet its day-to-day obligations towards depositors and creditors customers,
solvency is the ability of the bank to meets the long terms obligation
Portfolio: These are lots of securities and investment (stock shares) owned
by a bank.
Demand Deposit: These are money saved by customers of a bank
subjected to recollecting on demand.
Monopoly: This is the existence of one or few economic unit in a particular
industry thereby enhancing the few industry.
Expatriate banks: These are foreign owned banking institutions
Indigenous banks: These are locally owned banking institutions

5
1.8 Organization Of The Study
The organization of the study is based on how the research work is to be
done. This portion spells out the chapters of the research work.
Chapter one contains the background to the study, statement of the research
question, objectives of the study, significant of term and organization of the study.
Chapter two treats the theoretical frame work and literature review.
Chapter three deals with research methodology determination of population,
sample size, data collection, data analysis, limitation to the methodology and sores
of data.
Chapter four Centre’s on data presentation, analysis and interpretation.
Chapter five finally discusses the summary, conclusion and recommendations

6
 CHAPTER TWO
2.0 LITERATURE REVIEW
This study reviews related literature on the relationship between liquidity
management and Union Bank’s profitability.
Amarachukwu (2003) discusses the meaning and importance of liquidity
and profitability to Nigerian banks overview of Nigerian financial system the role
of Union Banks in the economy the concept of liquidity the concept of
profitability the relationship between liquidity profitability. The impact of
liquidity and working capital on the profitability and performance of quoted
organization.
2.1 Introduction
Liquidity is the ability of a company to meet its short term obligation which
matures within one accounting year. Short term also reflects the operating cycles,
i.e. buying – manufacturing.u
Selling and collecting.
A company that cannot pay its creditors on time and continue to fail its
obligation to the suppliers or credit services and goods. And loss of such
incentives may result in higher cost of goods which in turn affect the profitability
of the business so there is always a need of the company to maintain certain
degree of liquidity. However, there is no standard norm of liquidity, it depends.
On the nature of the business scale of operations, location of the business and
many other factors.
Every stakeholder has interest in the positive liquidity of a company thus
supplier of goods will check the liquidity. Liquidity of the company before selling
goods on credit. Employees also have interest in the liquidity to know whether the
company can meet its employee related obligation, salary, pension provident fund
7
etc shareholders are interested in understanding the liquidity. The liquidity are
inversely related. However shareholders are also aware that non – liquidity will
deprive the company from getting incentives, from the suppliers, creditors and
bankers.
2.2 Conceptual Framework
Concept Of Liquidity
The concept of liquidity has been a source of worry to the management of
firms of the uncertainty of the future.
Liquidity is a financial term that means the amounts of capital that is
available for investment. Today most of this capital is credit not cash. That is
because, the large financial institution that do most investment prefer using
borrowed money.
High liquidity means there is a lot of capital because interest rates are low
and so capital is easily available. Why are interest rates so important in controlling
liquidity? Because these rates really dictate how expensive it is to borrow. Low
interest rate means credit is cheaper, so business and investors are more likely to
borrow. The return on investment only has to be higher than the interest rate. So
more investments look good. In this way high liquidity spurs economic grow the
(Wilner, 2000).
Liquidity can be defined as the state or condition of a business organization
which determines its ability to honor or discharges its maturing obligations. These
maturing obligations are composed of current liabilities and long term debts.
Liquidity can also be defined as a measure of the relative amount of asset in cash
or which can be quickly converted into cash without any loss. Value availability is
ability to meet shorter liabilities.

8
 Liquid assented save, compose of cash and bank balance debtors and
marketable securities liquidity is the ability of a firm to meet all obligation without
end angering if financial conditions.
Liquidity will help a firm to avoid a situation where a firm will be forced to
liquidate with its attendant problems of selling assets at distressed price and the
extra fees paid to buyer’s trustee in bankrupted and liquidation. The definitions
above imply that as liquidity increases, the profitability of technical insolvency is
reduced. The definitions above goes ahead to expand the view by recognizing two
dimensions of liquidity namely, the time necessary to convert an asset into money
and the degree of certainty associated with the conversion ratio or price realized
for the assets.
Liquidity Management And Performance
A bank’s portfolio represents a classified arrangement of its asset.
According to Anyanwu (1993), portfolio refers to securities help by an investor or
the commercial paper held by a bank or other financial institutions. Therefore
portfolio management involves principles and procedure to manage such sets of
assets. He further said that the parts of a bank’s asset portfolio include investments
liquidity resources, and loans and their management include the total balance sheet
that Bankers analyze into relationship among balance sheet items, and they
actively manage these interrelated items in the context of rapid, often
unpredictable changes in interest rates, and competitive innovations banks should
note the following:
1. Structure their portfolio to maintain reasonable balanced interest sensitivity
position
2. Shorten the policy limits an maximum and average maturities of the bond
accounts;
9
3. Reduce their government portfolios, possible to amounts required for pledging
needs;
4. Increase their use of less marketable asset; and
5. Restrain their timing operations due to increased interest rate risk.
Mainoma (2001) argues that it is necessary to prepare the put folio wisely
since both the shareholders and the depositors are interested in the portfolio; like
other institutions, banks face they risk of operating expenses exceeding their
operating income. If this happens. The institution is facing liquidation. Apart from
the risk of incurring, losses, banks face the risk of bad debt which again translates
to making loses. Another risk is the environmental changes occurring in the area
of technology and competition, Nwankwo (1991) said the ever – changing markets
in which the banks operate and the fluctuations point to the fact that working
capital level could affect performance.
Elements Of Liquidity
Liquidity is a complex concept as the rate of liquidity among different
liquid assets differs. For instances, a savings or time depositors are more liquid
than common stocks. Liquidity is a relative concept because there is not specific
level of any balance sheet ratio that indicates that the firm is no longer liquid.
Liquidity involves three elements or characteristics namely:
 Marketability
 Stability
 Conservation
Liquidity asset should be more marketable or transferable. That means they
are expected to be converted to cash easily and promptly and are redeemed prior
to maturity. All assets that cannot be redeemed at maturity are said to be liquid.
Am other quality of liquid asset is price stability. Based on this characteristic,
10
bank deposit and short term securities are more liquid than equity investment such
as common stock are real estate due to the fact that there the price of the former
are fiscal and have lesser variability.

Liquidity Versus Profitability

Bank liquidity is the ability of a bank to be in a position to meet the
demand of deposition and borrowers. Virtually all economic units need liquidity
and banks are not exceptions. Demand deposits which represent the major
proportion of banks liabilities constitute nearly 80% of the nation money supply.
The integrity of money supply therefore requires solvency and customer
acceptance of banking system a commercial bank is an economic unit whose main
goals is to maximize profit for survival and growth working capital provides the
liquidity needed to avoid insolvency but was a high opportunity cost. A balance
must be reached between liquidity and profitability of a bank but nevertheless, the
mismanagement of liquidity can eventually bring to a half or its ultimate down fall
of what might otherwise be a successful and profitable bank.
Solvency Versus Liquidity
Solvency and liquidity are words that are often used as synonyms in
everyday discussion of banking institution and banking system. They are subjects
that currently engage the attention of the monetary authorities.
Solvency and liquidity are two important concepts in banking whilst one
define. The ability of a bank to meet its long term obligation the other define the
ability of a bank to meet its short term obligation to depositors and credit
customers.
Bank Assets
The asset helped by banks may be divided into brad classes
11
 Earning Assets
Non – earning asset (Havilesky and Borrowman 1980).
1. Earning Asset: there are the two groups of balance sheet items called loan and
investment shile.
2. Non – earning asset the bank, vault cash and non – interest earning deposit
with central bank of a Nigeria both as working balances and cash reserves.
The bank are in fiduciary position making use of thousand of different
categories of savers in addition to their own capital resources and funds therefore
banks must be managed efficiency and made optimal mix of their asset because
there is too much of stake and if caution is not taken, any bank failure will have
damaging effect on the industry in particular and economy in general. Since banks
must make profits in order to make adequate return to the shareholders, for the
purpose of growth or at least to survive and at the same time maintain a reasonable
level of liquidity in order to meet customer’s demand, who are the major fund
providers or the business operation. The bank must take adequate care in order to
avert conflict of interest to the two major role player in their operation.
Liquidity Management In Nigerian Banks
The management of banks liquidity in Nigeria is of paramount interest to
profitability operation. It connects the distribution of funds amongst investment,
such as cash, loans and advance, and other assets. Essentially bank liquidity
management at all times allocates funds available to them in such a way as to
ensure high liquidity to the asset with maximum profitability.
C.B.N (1998) series declared that liquidity management in Nigerian
includes the provision of short run reserves needs of the banking system for
purpose of meeting short term liquidity obligations. Before the introduction of
open market operation on 30th June 1993, the C.B.N employed the direct
12
techniques of liquidity management which involved the setting of credit selling
discount rates liquidity and cash ratios.
As a supplement to cash and liquidity ratio, bank also occasionally called
for special deposit from the banking system as well as issued stabilization
securities. Since June 1993, open market operations have become the dominant
instrument of liquidity management while the use of stabilization securities exist
only as a fall – back position to augment other instrument as the need arises. The
use of credit selling has been phased out, while the application of the discount rate
– liquidity and cash ratio is still in force as the main adjustment instruments.
The management of liquidity by banks is constrained by the following
factors. Banks are usually highly regulated by the monetary authorities. The high
level of regulation ensures that bank liquidity are managed with the legal and
regulating frame work. The relationship between a bank and his customer imposes
another constraint. This relationship is basically one of trust and accommodator.
The customer expects the bank to honor all obligations at maturity.
Olutan (2004) examined the components of bank health which impact upon
them for stability and has discovered that loans and advances is viewed as a major
component for banks profitability, since the volume of income made by the bank
is in part a function of the interest income receivable on credit facilities booked.
However, bank should lend at a level such that loan / deposit ratio will not
jeopardize the liquidity.
The Importance Of Liquidity Management
The proportions in which the various forms of assets are kept vary from
bank to bank country to country. Also, it vary with the state of trade. The larger
the liquidity of the asset. The more confidence will a bank inspire, but the lower
will be in project and vice versa. The whole activity of the banking business rest
13
mainly on the confidence of the people in relating to the banks’ ability to pay their
money on demand. If such confidence is lost, which is contagions. There will be
ream on the bank as it can face a run because all the bank’s assets are not in
liquidity form.
The issue of liquidity is very important to banks management Asuzu
(1995), Nzotta (2004) gave the importance of liquidity to include the following.
 To provide timing difference in it cash flow arising from deposits being
repayable at shorter notice then its loans.
 To provide a margin to meet overall increase in demands for advance, and / or
withdrawals of deposit.
 To meet depositors demand for repayment in cash
 To provide for any information of interruption (or any interruption) in its
expected in ward cash flow arising for example, however be enable to repay on
dictate.
 To provide for its own operating on capital expenses.
 To provide caution against losses from bad debts.
Thus, liquidity management is usually employed to minimize revenues
while holding risk of insolvency to desired levels. The four main liquidity
management policies includes
Effective cash mobilization
Cash flow forecasting
Identification of needs for productive liquidity
Productive use of liquid assets
The bank should mobilize cash through accelerating collections and to hand
disbursement so that minimum cash is available the aim of time is to reduce funds

14
tied up in the process of receiving and collecting cheques and in the routines of
transferring bank balances to the points where they will become most used.
Collection can be accelerated by the use of telegraphic transfers; and concentration
on banking and disbursement can be handling by optimal timing of payments.
The banks should also project it is future cash follows. The validity of
future on marketable securities.
In addition, the bank should also be able to identify contingencies such as
the possibilities of increase in customer withdrawal, especially during festivities
and the probabilities of their occurrence other a period in to the future etc.
Furthermore, the bank should analyze the alternative marketable securities
before investing their money in them. The marketable securities can be evaluated
based on their marketability, time ability and deficit risk with these, formulated
and modifies over.
Therefore, it is important for a bank to keep a certain proportion of its asset
liquid but also to that people’s confidence in its soundness is not shaken. Bankers
should take in to consideration a certain degree of opportunity on the part of the
depositors. The best way to inspire confidence into depositors is to give credits in
time of panic.
Functions Of Liquidity
According to Nwankwo (1991), adequacy is a sine qua non of banking. It
becomes a crisis if the bank(S) cannot meet this demand and assets cannot be sold
quickly at prices that permit the bank or bank to meet the commitment. The
significant of adequate liquidity is in the fact that while an astute banker can live
for something with an inadequate capital. Liquidity is what keeps the door of the
bank pen in the short run. Some of the functions of liquidity, according to
Nwankwo (1991) include the following.
15
 Also it enables a bank to meet the three risk that is, funding risk, the ability
to replace outflows of funds either through withdrawal of arising from call to
honor maturing obligation or from request for funds important customers.
It also helped for commercial prudence and to avoid five sales of assets.
Which is forced sales at unfavorable market condition and at heavy losses?
2. Liquidity: It enables the bank to fund new funds to honor the maturity
obligation such as a sudden up surge in borrowing under automatic or
agreed lined of credit or to be able to understand new leading when
desirable. Example is a request from a highly liquid are however
distinguishable they are:
 The stored liquidity
 The purchased liquidity
(A) The Stored Liquidity: These are assets-based liquidity and consists of assets
in which funds are temporally invested. Warehouse or stored with assurance
that they will either mature or will be readily saleable without material loss in
advance of maturity. Stored liquidity incorporate elements of the three assets
based liquidity theories, viz
 The liquid assets
 Real bill doctrine
Shift ability theories of liquidity management the major or types of stored
liquidity includes: Cash and balance due to other bank. Cash and balance with the
central bank of Nigeria (CBN) balances with other banks at home and abroad cell
money funds.
Short-term government securities, treasury bills. Treasury certificate and
government bundle of risk not more than 3.year maturity.

16
 Commercial pages acceptance Negotiable certificate of deposit bank unit fund
e.tc.
Other marketable securities state and local government securities.
3. The Purchased Liquidity: This incorporates and take account of the
liability management theory. This theory states that funds are acquired in
the market at a price and used for profitable operations, especially for
lending and other banking investment. This approach focuses on the
permanent expansion of bank assets based on opposed to the compositional
charge in assets or the liquidity reserve approach the major or typed of
purchased liquidity include:
Borrowing from the certain bank of Nigeria through discounts or advance call
money held for other banks certificates of deposits bank with funds
Other liabilities include large time deposits of state government local authorities,
personal funds and investment funds.
Measurement Of Bank Liquidity
From the foregoing. It should be obvious that a bank can be considered
liquid if it stores enough cash and other liquidity assets together with the ability to
raise funds quickly from other source to enable it meet its payment obligation and
financial commitments in timely manner. It can be measured either as a stock at a
point in time or as a flow over time. It should be noted at this point in time that
liquidity (in terms of finance) refers to the state of owing thing of value that can
easily be changed to cash.
According to Nwankwo (1991) with banks becoming major borrower on
the wholesale money market. Their credit worthiness have become of fundamental
importance of liquidity. In spite of the above, the most widely used measures are
derived from the stock approach. One of these are the loan-deposit ratio under this
17
measure, all bank loans are lumped together and the bank that they are the most
liquid of all assets. They are compared with the total bank deposit as a proxy to the
liabilities that bank should be called upon to honor.
A rise in the ratio is taken to indicate a less liquid position. When this
happens, bank become less incline to lend and to invest; they become more
selective and as standards are increased and credit is more strictly allocated.
Intents rates lend to rise.
Through the simplest of the liquidity measure the loan deposit ratio is
probably also the least satisfactory. This implies that loan-deposit ratio does not
give an accurate indication of the liquidity needs it also does not give an accurate
indication of the creature of the loan portfolio (Nzotta 2004)
a) It measure only assets liquidity and exclude any measure any measures
of the ability to a bank to raise funds other than through the sale of
assets.
Secondly a slightly better measure of banks liquidity is the loan to
liabilities ratio, this has merit in recognizing that liabilities other than deposit, can
also represent portrait drain on bank funds.
Thirdly. It measured the liquid asset ratios this allows assets to be selected
on the basis of investment. Like the other assets based ratios the liquidity ratio is
detective in measuring only assets liquidity, ignoring the liquidity available
through a beans ability to borrow more it does not take amount of the composition
problems.
Finally. There is also the cash ratio, this ratio deal with the ratio of cash to
total deposit or assets.
2.3 Theoretical Framework
Theories Of Bank Liquidity
18
 Many theories have been developed over the years concerning bank
liquidity. Nzotta (2004) Thingan (2004) gave five different theories of bank
liquidity. These include:
Demand for payment by depositors. The theory emphasize the need for
holding short terms asset as a prudent caution in face of various uncertainties in
banking operation and the various needs of bank liquidity.
How do you determine the level of liquid assets a bank must hold at any point
in time?
This is the ethical issue. The level of liquid assets depend on the banks
perceived need for liquidity, the volatility of its deposits. The state of the financial
market (money market) and the level and direction of the monetary policies of the
government.
According to Nwankwo (1991) by forcing on the assets side of the balance
sheet the theory is grossly deficient in a world of active money markets and
purchased, finding where the flow of fund can shift with considerable speed and
balance are hereby by dependent on the markets.
i. Commercial Bill Theory: This theory is also known as the rent Bill
Doctrine. It stated that bonds should principally be invested in short term self
liquidation loans for working capital purpose usually confined to financing the
movement of goods though the successive stage of production, cycle
production. Transportation. Storage distribution and consumption. This theory
has obvious limitation which include the following:
 It excludes long term loans
 It is inconsistent with the demands for economic development especially
in developing countries

19
 It emphasizes only the maturity of bank assets and not the marketability
of the assets
 It involves the fact that the need of trade on measured in normal forms
that rise in step with prices.
 It fails to reflect the normal stability of feasible to undertake long term
lending
 It assumes that repayment from the self liquidity assets would be
sufficient to provide for liquidity.
 These ignore the fact that seasonal deposit withdrawal and credit request
could exceed the liquidity position.
ii. Shift Ability Theory: This theory emphasizes the suitability
transferability or marketability of banks assets as better option for
investing bank funds the theory are:
 Recognize the long term more permanent types of financing by banks
 Acknowledges the diminished signification of short term self liquidating
loans
 The growing importance of investment banking is also implicitly
recognized.
 Recognized the marketability of bank assets
iii. Anticipated Income Theory: This theory emphasizes the carrying
power and credit worthiness of the borrower as the ultimate guarantee
for ensuring adequate liquidity. Nwankwo (1991) observe that the
anticipated income approach point to the movement towards self
amortizing commitments by banks and stressed that systematic
repayment schedules on many types of loans and serial maturity debts

20
 could provide an automatic liquidity scheduled out the repayment
capabilities of the borrowers.
iv. Liability management Theory: This focuses on the ability code of
the balance sheet for supplement liquidity. This theory argues that
since large bank can buy the entire fund they need. There is no need to
store liquidity on the assets. Side of the balance sheet. The theories.
 Assumes that increase interest rate offered for funds will lead to
increased supply of funds to the market.
 Assumes stable normal situation
 Assumes unshaken confidence of the condition of the markets on the
credit worthiness. Risibility and integrity of the borrowing bank.
2.4 Empirical Review
The nexus between liquidity measured and corporate performance has
undergone appreciable empiric-able empirical securities from many scholars. The
influx of liquidity management on the profitability of banks in Nigeria was
investigated using a simple of three randomly selected banks in Nigeria. The study
utilized cash and short term funds bank balance and treasury bills and certificate to
represent liquidity management, while profit after tax was the proxy for
profitability. Elliot Rothenberg stock (ERS) stationary test model was utilized to
test the run association of the hypothesis. The findings show the enormity of
challenge pose sly liquidity management in the Nigeria banking industry (Ibe,
2013) Kurawa & Abubakar (2014) examined the systematic of liquidity on banks
profitability In Nigeria. The systematic random sampling method was adopted to
select five banks over the period 2003-2012 the linear regression analysis was

21
used to reveal the absence of a significant impact between liquidity and
profitability among banks in Nigeria.
Aremu (2011) Investigated liquidity series of Nigeria banks to highlight
aspects of vulnerabilities. The study focused on the central banks lender of last
result (LOLR) policy may affect banking in the period of liquidity crises. Time
series data were extracted from the three biggest banks (in terms of assets. Capital
base, turn over and branch networks) for the study. The ordinary least square
(OLS). Johansen Co-integration, errors correction mechanism (ECM) and granger
causality tests were employed to show prima faces evidence that bank A and B are
more liquid than bank C because proxies of liquidity series and Tobin’s Q of the
banks are significant Raheman & Nasr (2007) revealed a negative relationship
between liquidity and profitability as well as a significant negative relationship
between debts used by the firms and its profitability in a study which had average
collection period, inventory turnover in days, average payment period, cash
conversation cycle, current ratio, size of firms, and financial assets to total assets
ratio as independent variables and net operating profits as the dependent.
Benjamin & Kamalallai (2006) had current ratio quick ratio, inventory
turnover ratio, ratio of current assets to total assets to operating income
comprehensive liquidity index. Net liquid balance and independent variables while
the dependent variable was return on investment (ROI) in an investigation that
revealed a negative association between ROI and current ratio, cash turnover ratio
current asset to operating income and leverage. There was a positive association
between ROI and quick ratio debtor’s turnover ratio current asset to total assets
and growth rate.
Saleem & Raehman (2011) examined the influences of liquidity ratios on
profitability. With return of equity (ROE) return on assets (ROA) and return on
22
investment (ROI) as exogenous variables. While the endogenous variables are
current ratio acid test ratio or quick and liquid ratio by adopting the linear
regression model, the study provided evidence that ROA is significant influenced
by liquidity ratio but ROE is unaffected by other liquidity ratios Agbada & Osuji
(2013) studied the efficiency of liquidity management and banking performance to
show evidence of a significant positive relationship between efficient liquidity
management and banking performance.
Zygmunt (2013) recognized the liquidity impact on profitability in a study
that consisted of all quoted polish companies for 9years (2003-2011) using
parsons product moment correlation and OLS regression model, to find that there
is statistically significant relationship between liquidity and profitability.
Niresh (2012) studied the trade-off between liquidity and profitability using
correlation analysis and descriptive the Colombo stock exchange (CSE) revealed
that there is no significant relationship between liquidity and profitability.
Thus concluded that manufacturing firms focus on maximizing profits
while preserving liquidity.
Bordeleau & Graham (2012) determined the impact of liquid assets holding
on bank profitability for a panel of Canadian and us banks over the period of 13
years (1997-2009) through econometric analysis. Result suggests increased
profitability for banks some quantum of liquid assets, however beyond a- point,
holiday further liquid assets diminish a bank’s profitability. Further empirical
evidence also suggests that the link between the duos is dependent on the banks
framework and the economy in general.
Imad et al., (2011) studied the link between bank profitability and liquidity
in Jordan from pool data for the period 2001 to 2010. Having ROA and ROE as
measure for profitability. The result shows that liquidity in Jordanian banks
23
significantly explains the variation in bank profitability. It also tends to be
associated with well-capitalized banks. High lending activities low credit risk and
the efficiency of credit management.

24
 CHAPTER THREE
3.0 RESEARCH METHODOLOGY
3.1 Introduction
The effect of liquidity on the profitability of commercial banks in Nigeria is
fast becoming more important with each passing day. This is attributable to the
increasing competition in the industry and changes in the macro-environment.
This chapter deals with the method used in collecting data for the project, it
is the section of the study that has adequately taken care of the research
procedures as possible bearing in mind that research finding should be valid and
reliable.
3.2 Research Design
For the purpose of this research work, the researcher had to ensure those
instrument used were designed in such away to elicit the data. The data needed to
solve research problem of the test. The hypothesis answered their research
questions achieve the research objectives to ensure the validity. Questionnaire
were administered, Personal interview were conducted with proper document of
word toward response of the respondent, also visiting there on a regular basis. The
main agreement research was conducted in the laboratory for related works.
3.3 Population Of The Study
The population of the study is represented by the staff of union bank of
Nigeria plc Ilorin branch, Kwara state. As at the time of this study the total staff of
the organization was thirty (30), there were 20 males and 10 females’ respondents
to the questionnaire.
3.4 Sample Size And Sampling Technique

25
 Systematic random sampling technique was used in the research work,
which was accurate and without based in selecting 30 respondents from the study
area consisting of staffs of union bank of Nigeria.
30 questionnaires were shared between the staffs and management of union
bank of Nigeria. For validity of the research instrument accreditation signature
was required and signed by respondents
3.5 Method Of Data Collection
Primary Data
It required qualitative techniques to get primary data for the research through
which comprise
 Questionnaire
 Interview
 Field observation
 Questionnaire
The questionnaire was prepared in English language the respondents were
informed about the purpose of the interview and were assured that the data
provided was strictly for the purpose of the research and would be kept
confidential.
 Interview
Interviews conducted face-to –face or by telephone. The range form in-
depth semi-structured to unstructured depending on the information being sought
non verbal data was used for. Collection of data through observation,
 Field Observation
This helped me to validate and ensure that the data was gathered correctly
and effectively.

26
Secondary Data
The secondary way to collection of data life existing document,
 Google maps
 News papers
 Journals
 Textbook related to marketing segmentation
 Internet search engine (Google, wikipedia, askme) e.tc
3.6 Method Of Data Analysis
A simple percentage was taken for respondents answer to each and the
results determined the effectiveness of the liquidity control. The simple average
compassion was used to analyze the data and made a comparison of the
relationships of the variables being tested in the hypothesis. The simple average
compassion was adopted because of the need to avoid complications.
3.7 Limitation Of The Study
The hypothesis that were tested are HI liquidity controls prevent bank
failure in Nigeria HZ the control weapon of CBN(reserve ratio) effect the
efficiency of commercial bank in Nigeria
The two hypothesis were tested from the questionnaire on contingency
formed form the observed frequencies.

27
 CHAPTER FOUR
4.0 DATA PRESENTATION, ANALYSIS AND INTERPRETATION
4.1 Introduction
The objective of this chapter is to analyze the data collected from the
respondents and then; test the hypothesis put forward in the research work. The
reticular and analysis of the data and information collected in this section showed
the trend and important of the regulatory powers of central bank of Nigeria
popularity of commercial bank in Nigeria.
It should be noted that the various data gathered and collected in the course
sof this study formed the basis of this analysis.
4.2 Data Presentation
Table 1: Distribution of the department of the respondent
Department Frequency Percentage (%)

Accounting 7 23.3

Marketing 5 16.6

Operation 5 16.6

Human resources 6 20

Administration 7 23.3

Total 30 100

Sources: Research Survey, 2022

The above chart shows that there are 7 respondents from accounting, 5
from Marketing, 5 from operation, 6 from human resources and 7 from
administration department
28
Table 2: Distribution on the sex of respondents
Sex Frequency Percentage (%)

Male 25 83.3

Female 5 16.6

Total 30 100

Sources: Research Survey, 2022

The above chart reveals that we have higher number of male respondents
who are 25 than the female respondents who are 5
Table 3: Distribution on the age of the respondents
Age Frequency Percentage (%)

21-30 20 66.6

31-40 5 16.6

41 and above 5 16.6

Total 30 100

Sources: Research Survey, 2022

Table 4: Distribution On The Marital Status Of The Respondents

Marital Frequency Percentage (%)

Married 8 26.6

29
 Single 22 33.5

Total 30 100

Sources: Research Survey, 2022

The illustration above shows the distribution on the marital status of the
respondents where 8 are married while the remaining 22 respondents are single
Table 5: Distribution on the length of service of the respondents
Length of service Frequency Percentage (%)

Less than 10yrs 15 50

11-20 10 33.3

21-30 5 16.6

31yrs above 0 0

Total 30 100

Sources: Research Survey, 2022

The above illustration shows that is respondents were less than 10yrs in the
length of service 10 are 11-20yrs 5 are 21-30yrs and the length of service of 31yrs
and above are 0

Table 6: Distribution of the present position of the respondents:

Present position Frequency Percentage (%)

Top management 15 50

30
 Middle management 10 33.3

Junior 5 16.6

Total 30 100

Sources: Research Survey, 2022

The above table illustration shows that 15 respondents were top
management 10 are mid did management 5 are junior staff.
SECTION B
Table 1: Does the amount of loans and advances granted to customers
significantly determine the profitability level
OPTION FREQUENCY PERCENTAGE (%)

YES 25 83.3

NO 5 16.6

TOTAL 30 100

Sources: Research Survey, 2022

The above table shows that out of 30 respondents, 25 respondent
representing 83.3% choose yes, while 5 respondent representing 16.6% choose
yes.

Table 2: is there any significant relationship between liquidity situation in a

bank and related profitability?
OPTION FREQUENCY PERCENTAGE (%)

YES 30 100

31
 NO 0 0

TOTAL 30 100

Sources: Research Survey, 2022

The above table shows that out of 30 respondents, 30 respondent choose
No, this shows that all the respondents agree with the above statement

32
 CHAPTER FIVE

5.0 SUMMARY, CONCLUSTION AND RECOMMENDATION

5.1 Summary Of Finding
Based on the analysis of the work, the following results were found:
The banks huge cash balance are not effective and efficiently invested
because of the fear of liquidity which can sequent limits the profitability of banks
there was a weak demand for loan by eligible banks. Adequate but not excessive
as not to hurt project making.
The CBN controls are inevitable for the survival of commercial banks in
hurt Nigeria as banks strived to reconcile liquidity and profitability dilemma.
5.2 Conclusion
In the height of the revelation made by this study the following conclusion
can be drawn the asset selection on commercial banks was not optimal.
The actual gross caring recorded at the end of each financial year was not
optimal due to poor asset selection.
The need for senior management of banks in Nigeria to recognize the
superiority of scientific approach to decision making over decision based only on
experience or human judgment cannot be over emphasized as banking business in
Nigeria is becoming more competitive every passing day. There is the line for
Nigeria banks to introduce scientific methods to manage their resource effectively.
5.3 RECOMMENDATIONS
From the result obtained from the hypothesis tested. If can be concluded
that liquidity and profitability are rivalry variable of which are inevitable to banks
management.

33
i) Having shown that both portfolio management and earning are sub-
optional using the present method (i.e. D. OFA and A. A. A), the
researcher recommended full implementation of linear programming
techniques which has been discussed in chapter two of this study. They
believe is that this will result in higher returns in more diversified
portfolio and better compliances with credit guidelines
ii) The present position of banks cash balance is unacceptance it is
relatively too high and requires immediate top management attention
(inventory theoretic model cash management should be used to find the
optional level of cash holding annually based on demand for cash).
The huge surplus balance of banks could have been more profitability used for
increase investment in treasure bill; treasure certificate etc. if proper cash
management system has been in use.
iii) There is excess liquidity position for Nigeria banks. This is an
indication that demands for loanable fund do not necessary expand their
lending in order to bring this serve or liquidity ratio to the stipulated
minimum. This can be overcome by inventing excess assets in the
prepared section of the economy without contravening the laws. The
yields on these asset are relatively high and CBN does not place
restriction on the omission maximum but stipulate the maximum that
must be invested.

34
 REFERENCES
Amarachukwu, (2003). Obstacle in Liquidity Management Business Day
Newspaper Lagos Nigeria Plc.
Asika, N (2000). Research Methodology in Behavioral science, Lagos:
Longman Published Nigeria PLC.
Aijelly, A.M (2004), Liquidity profitability trade off: An Empirical
Investigation in an Emerging Market Int. Commerce Manager Lagos:
Longman Publisher Nigeria PLC.
Kehinde, O. (2003). Issue in Bank Management, Business Day Newspaper
Lagos Nigeria PLC.
Olorunshola, A. (2002). Measuring Short Term Liquidity Lagos: Longman
Published Nigeria. PLC.
Wilner, B (2000). The exploitation of relationships distress: the case of trade
case of trade credit published in business day newspaper Lagos Nigeria plc.

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