ABSTRACT
This study examined cash and credit
management and commercial banks’ liquidity in Nigeria. The major aims of the
study were to find empirical evidence of the degree to which effective cash and
credit management affects the liquidity performance in commercial banks and how
commercial banks can prevent illiquidity by engaging in these practices.
Considering the nature of the survey, quantitative methods of research were
applied. In attempt to achieve the objectives of the study, several findings
were made through the analysis of the financial statement of various commercial
banks used as samples over a period of seven years. The data obtained from Secondary
sources were analyzed through with the use of panel data regression and
correlation co-efficient. A few hypothesis were formulated and were
statistically tested through panel regression model. Findings from the testing
of this hypothesis indicate that there is significant relationship between cash
and credit management and illiquidity. That means liquidity in commercial banks
is significantly influenced by credit and cash management. The study concluded
that for the success of operations and survival, commercial banks should not
compromise efficient and effective cash and credit management and that both
illiquidity and excess liquidity are "financial diseases". Also, that
cash and credit management are high important in order to avoid insolvency or illiquidity.
Finally the study recommends that banks should not neglect their responsibility
of cash management and focus mainly on credit management.
CHAPTER ONE
INTRODUCTION
1.1 Background Information
A bank is a financial intermediary and
money creator that creates money by lending money to a borrower, thereby
creating a corresponding deposit on the bank‟s statement of financial position.
Commercial Banks are
profit-making organizations acting as intermediaries between borrowers and
lenders attracting temporarily available resources from business and individual
customers as well as granting loans for those in need of financial support
(Drigă, 2012). Commercial banks can also refer to banks or a division of a bank
that mostly deals with deposits and loans from corporations or large
businesses. The health of a financial system plays a very important role in the
economic development of the country and it failure can have very tragic
consequences for such an economy. In developing countries like Nigeria,
commercial banks through their functions and activities aid the growth and
development of the economy and therefore, are very important to the efficiency
and success of the financial system. Traditionally, it is the belief of every
business that profit is a key indicator of success. This is very much true but
most business have failed to understand that there is more to profitability
than the large figure of retained earnings or reserves in the statement of
financial position.
Commercial banks accept deposits from
its customers and in turn, generate revenue by lending to individuals and
corporate organizations. The statement of financial position of a commercial
bank is constituent mostly of loans and advances and bonds as the majority of
its asset and deposits as it major liability. This implies that loans make up
the bulk of the bank‟s asset and this make it safe to say the life blood of a
commercial bank is credit. As a result of lending, credit risk is introduced
into the activities of the commercial bank and this is the most critical of all
risk faced by the banking institution. If the bank makes bad loans to firms or
consumers for example, the bank will be in a crisis if those loans are not
repaid (Mavhiki et al., 2012). As a matter of fact a bank cannot remain in
business if it neglects the credit function (Osayeme 2000). Credit risk is of
major concern to commercial banks; therefore, commercial banks need to put in
place risk management measures to help avoid the risk from blooming into
something greater than they are able to handle which ultimately is illiquidity.
Risk management is the human activity which integrates recognition of risk,
risk assessment, developing strategies to manage it, and mitigation of risk
using managerial resources, but credit risk is the risk of loss due to debtor‟s
non–payment of a loan or other line of credit (either the principal or interest
or both) (Campbell, 2007). There is need for commercial banks to adopt
appropriate credit appraisal techniques to minimize the possibility of loan
defaults since defaults on loan repayments leads to adverse effects such as the
depositors losing their money, loss of confidence in the banking system, and
financial instability (kithinji, 2010). Hence, credit management is made
necessary for both profitability and liquidity.
Another aspect fundamental to the
survival of a commercial bank is its working capital. The major concern of
working capital is cash. Though, cash holds the smallest unit of the total current
asset, like the blood stream of the human body, it gives strength and vitality
to the business enterprise. Cash is king and this hold true irrespective of the
business size. The availability of cash balances is a key determinant of a
bank‟s competitive ability because it provides the means to invest in people,
technology and assets. Cash is both the beginning and end of working capital
cycle which keeps the business going. Hence, every enterprise has to hold
necessary cash for its existence. Moreover, steady and healthy circulation of
cash throughout the entire business operations is the basis of business
solvency. Now-a-days, non-availability and high cost of money have created a
serious problem for industry. Nevertheless, cash like any other asset of a
company is treated as a tool of profit. Further, the emphasis is on the right
amount of cash, at the right time, at the right place and at the right cost. In
the words of R.R. Bari, "Maintenance of surplus cash by a company unless
there are special reasons for doing so, is regarded as a bad sigh of cash
management as the holding of cash balance has an implicit cost in the form of
its opportunity cost.
Cash may be interpreted under two
concepts. In narrow sense, “Cash is a very important business asset, but
although coin and paper currency can be inspected and handled, the major part
of the cash of most businesses is in the form of bank checking accounts, which
represent claims to money rather than tangible property.” While in broader
sense, “Cash consists of legal tender, cheques, bank drafts, money orders and
demand deposits in banks. Thus, we may conclude that in narrow sense cash means
cash in hand and at bank but in wider sense, it is the deposit in banks,
currency, cheques, bank draft etc. In addition to cash in hand and at bank,
"Cash management includes management of marketable securities also,
because in modern terminology money comprises marketable securities and actual
cash in hand or in bank." Cash management in a commercial bank is therefore
indispensable.
1.2 Statement of the problem
One of the major and most crucial
problems faced by commercial banks now-a-days is liquidation even after these
commercial banks have recorded a high level of profit. It is very disturbing
that a commercial bank that seems fine suddenly winds-up and this always leaves
the customers wondering “How” and “Why.”
Researches carried out over the course
of the past few years on the very devastating financial crisis that rocked the
banking industry as a whole in 2008-09 have all shown that most commercial
banks ran out of cash as bad debts, lack of short-term financing and poor
profitable opportunities combined to cause the most severe crisis in the
financial sector for decades. But then the question is; how do banks that are
already profitable run out of cash? Or how do banks that are already in
business not put in place all possible measures to ensure continuous
profitability and liquidity?
As a result of these, the major
problem identified by this research work as the reason for the failure of these
commercial banks is poor management of their finance (cash and credit). In
light of the above, the problems identified by this research work are
summarized as follows:
1. The level of exposure to and the
impact of credit risk by commercial banks are not met by proper strategies and
tactics that will help manage this risk effectively for control purposes.
2. Every time a commercial bank
performs it lending function, it introduces credit risk into the business. The
exposure to this risk is inversely related to the liquidity position of these
banks but they have failed to see how each credit risk they are exposed to has
affected their liquidity performance over the years.
3. In order to avoid the high cost
associated with holding cash whose opportunity cost is the cost of lost
interest, commercial banks keep cash balances which are below the target cash
balance.
4. Banks add the amount of cash
required to satisfy its transaction needs to that needed satisfy its compensatory
balances to produce a target cash balance. This result to surplus cash which if
left idle will cause the firm to lose the profit it would have earned if it had
been invested.
1.3 Objectives of the study
In the light of problems that have
been identified as the major factors that are responsible for the failure of
commercial banks in Nigeria, this research work would be used to examine the
challenges so as to achieve some specific objectives. The general objective of
this study is establishing a relationship between cash and credit risk
management and the liquidity of commercial banks. The more specific objectives
are:
1. To examine the impact of
non-performing loans on the liquidity position of commercial banks.
2. To carefully investigate the influence
of effective credit risk management put in place by these banks on their
liquidity performance.
3. To show the credit risk exposure
and liquidity performance trends of Nigerian commercial banks over a given
period of time.
4. To develop, explore and evaluate
ways in which commercial banks can achieve their target cash balances to meet
their various needs so as to avoid insolvency and aid profitability.
TOPIC: CASH AND CREDIT MANAGEMENT AS A PANACEA FOR ILLIQUIDITY IN COMMERCIAL BANKS IN NIGERIA
Format: MS Word
Chapters: 1 - 5
Delivery: Email
Delivery: Email
Number of Pages: 90
Price: 3000 NGN
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