Bank Liquidity – Strategies for Managing Bank Liquidity

Bank Liquidity – Strategies for Managing Bank Liquidity

Bank Liquidity –  Virtually, all economic units need liquidity, and banks are no exception. Demand deposits, which represent a major proportion of bank liabilities, constitute a large percentage of the nation’s money supply.

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Each bank must therefore maintain a substantial part of its assets in cash or in cash assets that can be converted into cash quickly. Since demand deposit represent a high proportion of bank’s liabilities, they at all times, try to prevent a rush on their liquid position. When therefore a bank is faced with infrequent loan demands, the banker is guided by what is known as liquidity ratio. The banker has to determine the ratio of loans to deposit cash ratio and legal requirements. The banker must be sure that at all times, it complies with the central bank of Nigeria liquidity requirements. The banks will put into consideration the ratio of loans to deposit liabilities. When the ratio of loan to deposit liabilities rises to a relatively high level bankers become less inclined to lend and to invest.

Commercial Banks employ different strategies to maintain adequate liquidity and these strategies include:

1.       Lending only for short term commercial purposes.

2.       Maintaining liquid assets, which ranges from cash to money at call and bills discounted.

3.       They also hold deposit at the central bank.

The combination of earning of liquid is especially relevant for commercial bank managements in Nigeria. This is because the ultimate objectives of a commercial bank is to make profits at all, the banker must maintain confidence, and to maintain confidence he must maintain an adequate degree of liquidity in highs assets.

It is therefore against this bank ground that the researcher wishes to examine the concept of liquidity management strategies adopted by First Bank of Nigeria Plc.



The major problem inherent in strategies for managing bank liquidity in this research work is how to determine the extent of liquidity holdings of a bank at a particular point in time in order to meet up the various financial obligations of the bank to their borrowing customers.

There is no doubt that for any bank to survive successfully and consequently maintain the public trust and confidence in their banking operations, it has to adopt strategies that shall put in place an adequate liquidity so that the various demand of customers shall always be met. If a bank fails to maintain enough liquid assets in their banking management, it stands the risk of jeopardizing their existence by loosing their various. Customers and public confidence in there banking operations.

To measure the liquidity that a bank needs at a particular points in time, it would require an accurate forecasting of cash needs and the expected level of liquid asset and cash receipts over a given period of time.

Besides, it is important to note that in view of maintaining enough liquidity, the central bank of Nigeria (CBN) have adopted some measures by stipulating that banks should be able to maintain a cash reserve ratio of 5% and liquidity ratio of 25%. Apart from this, the CBN strictly regulate the commercial banks’ activities through the banking act of 1969 and currently through the bank and other financial institutions decree of 1991.

The above hold attempts, were the various measures that have been taken so far by the regulatory authorities of our financial system to address this problem without success.



This study intends to achieve the followings:

1.       Find out the factors that are highly considered by banks in their liquidity needs.

2.       Evaluate the effectiveness of the bank liquidity management strategy adopted over the years.

3.       Find out the liquidity management need of banks.

4.       Identify problems that confront bank’s liquidity management strategy.

5.       Find out ways and means through which these problems can be solved.



This research work is carried out to ascertain how first Bank of Nigeria Plc have been able to maintain an adequate liquidity management over the years.

The research work will be of immense, since it is a partial fulfillment for the award of Higher National Diploma in Accountancy Department of the Institute or Management and Technology Enugu.

The findings will also be useful to researchers in the field, scholars and others in the banking industry.

Finally, the findings will be used by both the government, the Central Bank of Nigeria and then serve as an avenue for commercial banks to understand the criteria to be adopted in determining the level of liquidity to maintain the level of liquidity to maintain at any particular time so as to achieve its corporate goals.



This research work concentrated on the operational activities of the First bank of Nigeria Plc in managing it’s liquidity.

The period in review is between 1998-2004.

The researcher faced some limiting factors in the process of information gathering.

1.       Financial Constraints, Caused by the huge amount of money required.

2.       Time constraints, because of other numerous academic engagements.

3.       There is also the problem of death of data to obtain the needed information.

Nevertheless, these limitations were not sufficient enough to make the objective of the study unrealizable



In furtherance of this research, the following hypothesis are formulated and will be used in the analysis of the study.

1.       First Bank of Nigeria Plc considered it necessary to adopt  policies on liquidity management.

2.       Low liquidity has no impacts on the overall performance of the bank.



In all literature written on liquidity management, no author has failed to mention the fact that it is the conversion of an asset to a medium of exchange and the ability of a bank to determine for itself the appropriate level of cash to maintain at a particular point in time.

The purpose of this review is to understand the factors that are highly considered by banks in their liquidity needs.

In this review also, steps in liquidity management are analyzed, also issues relating to the objectives of this research will be discussed.



The rational behind the definition of terms is to eliminate or minimize the confusion and ambiguity in application of certain terms used in the project and as such the researcher considered it necessary to defined the following terms.

ACCOUNTING: The process of identifying measuring and communicating economic information to permit informed judgment and decisions by users of the information. Also it involves the whole process of planning for identifying, recording summarizing, interpreting and drawing objective conclusions and advice from a whole gamut of business events and activities with the   aim of aiding management to provide a more rational and systematic execution of their duty of managing the organization. Accounting refers to the activities required in the process above.

STATEMENT: Peculiar way of doing things. It can also be defined as a clever plan for winning or achieving something.

MANAGEMENT: General: The individual or group of individual responsible for studying analyzing, formulating for decision and initiating appropriate actions for the benefit of an organization administration. It is the function of planning, coordinating and directing the activities of an organization.

LIQUIDITY: This is the ability to use an asset directly as a means of payment or readily converted to money, and remains free in nominal value.

EFFICIENCY: It refers to how firms management effectively utilizes assets, credits and assets policies including human to generate profit.

SOLVENCY: It refers to the ability to discharge  ones liabilities as they fall due.


Many authors have variously defined the term liquidity. However numerous definitions of the terms points to the fact that it means payment of a firms debt through sales of its assets to raise money.

According to Ranlett (1982) defined liquidity to simply mean the ability of an assets to be converted into spend able form, promptly without risk of loss to the holder. He went further to include certain element or conditions, which are involved in the property of liquidity, that is when he stressed that the conversion must be without risk or loss.

According to Gorge Smith (1982) liquidity refers to how easily an asset can be converted into a medium of exchange. Here, he only mentioned the conversion of assets into medium of exchange and never considered other elements like risk of loss to the holder as mentioned by Ranlett above.

Dolan Lindsely (1988) defined liquidity to mean an assets ability to be used directly as a means of payment or readily converted to money, and remind free in nominal value. He said that no other asset is as liquid as money. By this definition, it means that  any perfectly liquid asset is a form of money. His point of view, means that no other asset is as liquid as money.

Adekanye (1984) deviated somehow from the above mentioned authors, by introducing elements of risk to the discussion of liquidity. He defined liquidity risk as the risk that funds may not be available to meet deposit with drawls, loan drawdowns, maturities of borrowing and other cash outflows.

Emmanuel N. Roussakis (1977) in his contributions went on to say that liquidity management is the ability of the bank to manage the liquidity position, so that neither the liquidity nor profitability will suffer. He went on to say that an inverse relationship exists between liquidity and profitability. Thus from the onset, it is clear that liability and profitability requirements of banks determine the behaviours of assets and liquidities of banks to a change in their reserves.

Ahaiwe and Odiogor in their write up “healthy banks thrive on attractive products (1996)” stated that in Nigeria, we have become more innovative in the packaging of financial products as ingenious means to attract funds and shore up their deposit base in an economy without a saving culture. Which according to them, the marketing of their products has taken an aggressive drive in the face of the distress syndrome in the banking industry.

Nwankwo G.O (1985) stated that liquid assets are made up of cash, money at cal and bills discounted cash include money at hand, cash in the till of commercial banks and balance of the Central Banks. All these the stated are sources of Commercial bank Liquidity.

Nemmers (1978) mentioned that assets of Commercial Bank such as bills discounter and money at call are regarded as liquid assets as a result of their capacity of being exchanged for money at a stable value, quickly and at a low cost of disposal. Money itself is completely stable and is available for immediate use without any conversion cost other assets are liquid to the extent that they shore these attributes. The liquidity of an asset depends partly on the nature of the assets itself and partly on institutional arrangements in the market.

Pandy (1981) went beyond mere definition of a firms liquidity position which is liquidity ratio, as a measure of a firms liquidity position, which is the measure of a firm’s ability to meet its current obligations.

He went further to say that a firm should ensure that it neither suffers from lack of liquidity nor liquidity, nor invest more than necessary in the liquidity or liquid assets………………………………………….………………………….


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Bank Liquidity – Strategies for Managing Bank Liquidity

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