Showing posts with label profitability. Show all posts

Thursday, 2 March 2023

THE EFFECT OF LIQUIDITY MANAGEMENT ON THE PROFITABILITY OF COMMERCIAL BANKS IN NIGERIA

THE EFFECT OF LIQUIDITY MANAGEMENT ON THE PROFITABILITY OF COMMERCIAL BANKS IN NIGERIA

(A case study of selected banks in Nigeria)

ABSTRACT

This work investigated the effect of liquidity on the profitability of bank in Nigeria. The work is necessitated by the need to find solution to liquidity management problems in Nigerian banking industry. Three banks were randomly selected to represent the entire banking industry in Nigeria. The proxies for liquidity management include cash and short term fund, bank balances and treasury bills and certificates, while profit after tax was the proxy for profitability. Elliot Rothenberg Stock (ERS) stationary test model was used to test the run association of the variables under study while regression analysis was used to test the hypothesis. The result of this study has shown that liquidity management is indeed a crucial problem in the Nigerian banking industry. The study therefore recommends that banks should engage competent and qualified personnel in order to ensure that right decision are adopted especially with the optimal level of liquidity and still maximize profit.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

In every system, there are major components that are very important for the survival of the system. This is also applicable to the financial system. The financial institution have contributed immensely to the growth of the entire financial system, as they offer an efficient institutional method through which resources can be mobilized and directed from less productive uses to more productive uses.

In performing these financial role, the financial institutions has proved to be an effective link between savers and borrowers, among the financial institutions that have partake in these important financial role are the commercial banks. The functions of the commercial banks have become the strong base for the two major functions of the commercial banks namely deposit mobilization and credit extension. Commercial banks have become a very important institution in the financial system as it helps in facilitating the movement of financial assets that are less desirable to the more desirable public who needed the financial assets. In view of this role and activities commercial banks play in the society, the commercial bank is selected as the main focus of this study.

An adequate financial intermediation requires the attention and focus of the bank management to the profitability and liquidity, which are the two conflicting objectives of the commercial banks. These objectives are parallel in the sense that an attempt for a bank to achieve higher profitability will gradually destroy its liquidity and solvency position and vice versa. Practically, profitability and liquidity are effective indicator of the corporate wealth and performance of not only commercial bank but to all profit oriented venture. These performance indicators are very important to the shareholders and depositors who are major publics of a bank. As the shareholders expect the bank to increase lending in order to give them maximum return in money invested while the depositor expect the bank to keep much idle cash in order to meet their demand. With profitability objective conflicting with that of liquidity, and with the interest of the shareholders conflicting with that of the depositors, there is the need for reconcile and harmonize these conflicting positions through effective liquidity management so as to ensure the survival and growth of the commercial banks.

1.2 Statement of Problem

Through these financial roles, the commercial banks use the idle funds borrowed from the lenders by investing such funds in other classes of financial assets investment. These business activities of the bank is not done without problem facing it, since these deposit which have been invested by the banks for profit maximization can be demanded for at any time. When the bank is not able to meet their financial obligations, the public begins to lose confidence and these will cause lot of competition to the financial sector. With the high increase of competition in the banking industry, every commercial bank should strive to operate on profit and at the same time meet the financial demand of its depositors by maintaining adequate liquidity. The problem then becomes how to select the optimum point at which commercial bank can maintain its assets in order to optimize these two objectives. These problems become more difficult as a large number of banks are basically engaged with profit maximization and tend to neglect the importance of liquidity management and these can lead to technical and legal insolvency.

This research work will also see to other problems such as the effect of excess liquidity and the problem of estimating the proportion of the deposits that can be demanded for at any specific time, selection of factors that will affect or influence the bank liquidity level and finally problem of satisfying the two major publics of the commercial bank simultaneously. With these solutions will be prescribe and recommendations will be made where necessary.

1.3 Objectives of the Study

The main objective of this study is to examine the effect of liquidity management on the profitability of commercial banks in Nigeria.

To examine the effect of bank cash asset on profitability.
To examine the effect of bank balance on profitability.
To examine the effect of Treasury bill and certificate on profitability.

1.4 Research Questions

The following research questions are given consideration in this work:

Does bank asset have any significant effect on profitability?
How can bank balance have effect on profitability?
What will be the effect of Treasury bill and certificate on profitability?

1.5 Statement of Hypothesis

From the statement of problem, objective of study and research questions of the study, the following hypotheses are formulated:

H_OI: There is no significant relationship between bank cash asset on profitability.

H_O2: There is a significant relationship between bank cash asset on profitability.

H_O3: There is no significant relationship between Treasury bill and certificate on profitability.

1.6 Significance of the Study

For the fact that commercial banks operate on liquidity and profitability motives in the mind to satisfy their major publics, the shareholder and depositor, the need arise for them to bring into agreement these two public concurrently. With this, the commercial bank need effective and efficient liquidity management approaches and principles that will help them realize these motives. The result gotten from this study will reveal the level of attachment of the commercial banks to the monetary policies (Liquidity ratios) established by the government and these will help the government to set appropriate liquidity ratios and cash ratios that will not be harmful to the operation and survival of the commercial banks. It will also help banks operations and credit policy guideline which affect profitability level and finally minimize the effect of liquidity and help in providing effective liquidity formulations.

1.7 Scope of Study

This study examines the effect of liquidity management on commercial bank profitability. The variables used are liquidity management which was the proxies is bank cash asset, bank balance and treasury bill and certificates. Profitability which is the second variables was proxied by profit after tax.

1.8 Definition of Term

Liquidity: Ability with which asset can be easily converted into cash. It also determines a firm ability to meet its short-term obligation.
Liquidity management: The planning and control necessary to ensure that organization maintain liquid assets so as to meet its obligations to customers.
Profitability: Profit is the ultimate measure of overall performance that is the excess of income over cost.
Commercial bank: The business of receiving money from outside sources as deposits, irrespective of payment of interest and granting of money loan and acceptance of credit or purchase and sales of securities for the account of others or incurring of obligations to acquire claims in respect of loans prior to maturity.

THE EFFECT OF LIQUIDITY MANAGEMENT ON THE PROFITABILITY OF COMMERCIAL BANKS IN NIGERIA

(A case study of selected banks in Nigeria)

ABSTRACT

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

1.2 Statement of Problem

1.3 Objectives of the Study

The main objective of this study is to examine the effect of liquidity management on the profitability of commercial banks in Nigeria.

To examine the effect of bank cash asset on profitability.
To examine the effect of bank balance on profitability.
To examine the effect of Treasury bill and certificate on profitability.

1.4 Research Questions

The following research questions are given consideration in this work:

Does bank asset have any significant effect on profitability?
How can bank balance have effect on profitability?
What will be the effect of Treasury bill and certificate on profitability?

1.5 Statement of Hypothesis

From the statement of problem, objective of study and research questions of the study, the following hypotheses are formulated:

H_OI: There is no significant relationship between bank cash asset on profitability.

H_O2: There is a significant relationship between bank cash asset on profitability.

H_O3: There is no significant relationship between Treasury bill and certificate on profitability.

1.6 Significance of the Study

1.7 Scope of Study

1.8 Definition of Term

Liquidity: Ability with which asset can be easily converted into cash. It also determines a firm ability to meet its short-term obligation.
Liquidity management: The planning and control necessary to ensure that organization maintain liquid assets so as to meet its obligations to customers.
Profitability: Profit is the ultimate measure of overall performance that is the excess of income over cost.
Commercial bank: The business of receiving money from outside sources as deposits, irrespective of payment of interest and granting of money loan and acceptance of credit or purchase and sales of securities for the account of others or incurring of obligations to acquire claims in respect of loans prior to maturity.

Sunday, 5 June 2022

THE IMPACT OF CREDIT RISK MANAGEMENT ON PROFITABILITY OF COMMERCIAL BANKS

THE IMPACT OF CREDIT RISK MANAGEMENT ON PROFITABILITY OF COMMERCIAL BANKS

CHAPTER ONE:

OVERVIEW OF THE STUDY

1.1 Introduction

Credit risk management has significantly impacted on the profitability of commercial bank worldwide due to the nature of the banking sector and its operations. This issue has seen an extensive amount of empirical investigation in the recent years, at the heart of an economy’s financial system is the banking industry; which in developing countries; is the biggest player in the role of financial intermediation (Hawkins and Mihaljek, 2001). However, Mutukua (2016) postulates that all banks operate in an unstable and fragile environment and confront various risks which may, in one way or the other, lead to the closure of a commercial bank as a result of inability to meet its financial obligations. More importantly, Shah et al (2016) denotes that in the financial system, there are at least three broad categories of risks being; financial risk, business risk and operational risk.

Despite the perceived positive role of risk management on improving bank financial performance, studies in this area have offered inconsistent results. In one end of the spectrum are studies that assert a positive relationship and among others: Botswana (Maritim, 2013; Mwangi, 2010); Nigeria (Adeusi, Akeke, Adebisi & Oladunjoye, 2014; Olamide, Uwalomwa, and Ranti, 2015). The positive role of credit risk management on profitability of commercial banks could be seen in terms of better management of funds, and reducing unnecessary costs such as doubtful advances (Mutukua, 2016). At the opposite end are those studies that stress that a negative relationship exits: India (Shetty and Yadav, 2019); Kenya (Muteti, 2014). The negative relationship could be due to less leverage and risk taking, as risk management practices get tightened and this reduces bank profitability.

In developing economies, where financial sophistication is low, banks play the primary role of moving capital from households to businesses with productive purposes. It is, therefore, imperative that this role is efficient and is maximized to ensure growth in the economy. A large part of this role, therefore, is to assess credit risks of potential borrowers and taking appropriate decision, whilst making the investments worthwhile for the funding bank. Therefore, one of the bank’s biggest functions is striking the balance of correctly assessing and managing risk whilst creating sustainable profits and value for shareholders (Sinha, 2011).

1.2 Background of the study

Credit risk is the risk that promised cash flows from loans and securities and financial institutions may not be paid in full (Cornett (2003). Credit risk is recognized in today’s business as an integral part of good management practice. In its broadest sense, it entails the systematic application of management policies, procedures and practices to the tasks of identifying, analysing, assessing, treating and monitoring credit risks. Credit risk is important for the success of banks since they determine its profitability, liquidity, solvency and quality of the loan portfolio. When commercial bank managers are aware of the effect credit risk towards profitability, then they are bound to take care of their credit decision and adopt best credit risk mechanisms which will be good for the bank.

The importance of credit risk is increasing with time because of some reasons like; economic crises and stagnation, company bankruptcies, infraction of rules in company accounting and audits, growth of off-balance sheet derivatives, declining and volatile values of collateral, borrowing more easily of micro finance institutions.

A recent study by Sleimi (2020), emphasized that the components of risk management procedures had a good and significant influence on bank performance. These assertions have been extensively validated in the western contexts and emphasize the need for risk management in the diverse banking environment. According to Li & Zou 2014, banks face a variety of risks, all of which play a critical role in ensuring that their objectives of good banking management to earn maximum income for the benefit of shareholders and stakeholders are met. Banks’ management manages their various cash measurement tools to meet their daily financial requirement. In this essence Sleimi (2020) suggested that banks and financial institutions are facing various risks. These risks include interest rate risk, foreign exchange, political risk, market risk, operation risk, and credit risk (Cooperman, Gardener & Mills 2000). According to Harvett (2013), risk management is a continuous process that helps in minimizing the bad impact of unknown possible losses.

There are various processes of risk management which include measurement using better tools and control. Some researchers like Ngare (2008), Waweru and Kalani (2009), and Buchan (2011) explained various techniques which help managers to minimize risk management. Every organization, particularly banks and financial institutions, have to achieve their objectives and risk management helps these issues to minimize foreign exchange losses, effective control of cash flow, and earnings from the business at the time of business uncertainties (Chapman and Ward 2010). Survivals of the banks and financial institutions are in continuous growth due to increase in their incomes. Banking business otherwise is very much sensitive as almost 85% of bank liabilities comprise on deposit (Husted 2005).

However, emphasizing on banks credit management, Mbole (2004) determined that commercial banks accept deposits and then provide them to needy borrowers to stimulate the economy and to get income in the shape of interest/profit. In essence, the loan portfolio of the banks is very much important as unprofessional decisions may result in default risk which has a very much impact on the financial stability of banks and imprudent credit may result in losses which may also result in bankruptcy. Even in developing countries like Botswana, banking plays a critical role in economic development. Richard (2006) highlighted that the business community of Botswana is demanding various credits from banks and financial institutions but to meet the unforeseen default risk. The banking industry gathers useful information from its borrowers and creditors. Then each commercial bank has a capable risk management system to evaluate these demands. Kimondo, Serakwane, and Davel (2012) concluded that the banking industry is very cautious to reduce their expected losses in the shape of defaults. All the commercial banks are properly and effectively monitoring the risk management system to provide credit with minimum risk.

Botswana’s banking sector has not been immune to the above challenge of increased risk management. The regulatory and supervisory oversight by the Bank of Botswana, which is the regulator of all commercial banks and related institutions, continued to focus on ensuring good governance and appropriate risk-taking by regulated institutions. The banking sector was adequately capitalized, profitable and liquid as at December 31, 2021, and the industry’s compliance with the regulatory and prudential requirements was satisfactory (Bank of Botswana Annual Report, 2021).

According to Banking Supervision Annual Report (2018), the number of licensed commercial and statutory banks remained at ten and three, respectively, in 2021 and has continued to improve products and service offerings to remain relevant to the demands of the economy and sustain viable and profitable operations due to increased competition in the banking sector, along with evolving customer needs. Overall, though the banking sector is sound, there are still issues of high credit risk, banking sector being relatively small in relation to GDP, and that the overall estimation shows that the degree of financial sector development and depth has been largely static in the past five years. Thus the needs to carry an examination of the impact of credit risk management on profitability of commercial banks in Botswana.

1.3 Statement of the problem

Banks are exposed to various business risks by providing financial services and other related matters exposed to some financial risks including foreign exchange risk, volatility risk, operation risk, and credit risk, etc. (Alloyo, 2010). Commercial banks have encountered various problems and issues over some years, but the major reason and problem area were terms as serious financial regularities which affect standardized credit borrowings and poor monitoring of such borrowings. Among other risks faced by banks, credit risk plays an important role on banks’ financial performance since a large chunk of banks’ revenue accrues from loans from which interest margin is derived (Kolapo, Ayeni & Oke, 2012).

Despite all efforts put in place by commercial banks in Botswana, their credit risk in the form of nonperforming loans still exists on their bank’s loan portfolio. In addition, the credit experts of these banks sometimes have overlapping functions, which result to them being mixed up with the type of risk to focus on, since other types of risks such as interest rate risk, market risk, liquidity risk, currency risk and operational risk also exist. Also, with the information asymmetry that exists between borrowers and lenders, it had led to credit experts to be more likely to select projects that are dubious than those that will succeed to grant financing. Based on the above problems, the following problems are being examined:

i. What are the credit risk challenges faced by commercial banks in Botswana?

ii. What are the techniques used by commercial banks in the management of credit risk?

iii. What is the relationship between credit risk management and profitability of commercial banks in Botswana?

1.4 Research Objectives

The main objective of the study is examine the impact of credit risk management on profitability of commercial banks in Botswana banking sector. The specific objectives were:

i. To identify credit risk challenges faced by commercial banks in Botswana.

ii. To evaluate the techniques used by commercial banks in the management of credit risk

iii. To investigate the relationship between credit risk management and profitability of commercial banks in Botswana.

1.5 Research Questions

iv. What are the credit risk challenges faced by commercial banks in Botswana?

v. What are the techniques used by commercial banks in the management of credit risk?

vi. What is the relationship between credit risk management and profitability of commercial banks in Botswana?

1.7 Significance of the study

The findings of this study on the impact of credit risk management on profitability of commercial banks have both managerial and academic implications. It is important as it examine the impact of credit risk management on the profitability of commercial banks in Botswana.

Bank Management: The study will be of great benefit to management, as it will assist in identifying and controlling the components of credit risks that affect the profitability of the commercial banks.

Policy Makers: The study will also help policy makers, as it will throw light on critical components that impact financial performance of the selected financial institutions, thereby enabling formulation of relevant policies.

Stakeholders: The findings will be of assistance to stakeholders and prospective investors as the study explains critical risk components that influence organizations’ profitability.

Researchers: Finally, this study my serve as a literature review to other researchers, and students conducting their academic studies in the area of credit risk management in commercial banks.

1.8 Assumptions

An assumption is an unexamined belief: what we think without realizing we think it. Our inferences (also called conclusions) are often based on assumptions that we haven't thought about critically. According to Hoch (2000), assumptions are propositions accepted to be true based upon the belief without preponderance of the facts.

The researcher assumes that the respondents will honestly answer the research questionnaire and that he will get all the questionnaires back within the shortest period of time possible.

1.9 Limitations

Mosha (2007) explains limitations as things beyond the researcher’s control that may get in the way of the research. The study is limited by the following:

1. Uncooperative staffs, there was a challenge of some staffs not willing to give out some information which was beneficial to this research study. To resolve this, I promised them about the confidentiality of their information.

2. Limited time, there being a limited time to conduct this research I prepared a work plan which I strictly followed.

3. There was a financial constraint which I resolved by giving priority to the most important activities related to the research study..

1.10 Delimitations

Delimitation is simply how the researcher will narrow the limitations of the research, explains Rapley (2007). This research specifically focuses on the impact of credit risk management on profitability of commercial banks in Botswana with particular reference to Chartered Bank of Botswana.

1.11 Ethical Considerations

Bearing in mind the ethical issues, the researcher provided the respondents with the necessary information as regards the main purpose of the research, expecting duration and procedures to following, and be in position to keep privacy and not disclose the confidentiality of respondents and researchers responsibility.

1.12 Chapter Summary

This chapter has provided the introductory aspect of the study which centered on the background information, the problem statement, the study objectives, research questions, significance, limitation and delimitations of the study.