THE CAUSES AND EFFECTS OF LIQUIDITY PROBLEM ON THE NIGERIA BANKING INDUSTRY
The concept of liquidity has become a vital issue in the existence and operations of bank and other financial institution in the Nation. This is highly considered because of its effect to existing organization as well as the economy at large.
Emphasis in being laid in this regard because of the importance of banks in the economy, since the inception of deregulation which gave rise to the floating of numerous banks in the economy.
According to Orjih (2001) a bank said to be liquid when it is able to meet up its day-to-day financial responsibilities as they become due.
Hence, as far as bank are concerned, liquidity measure in very important because of their role of deposit acceptance and making such fund available as and demanded by their customers.
In the words of Udeh (2000) a firm should endeavor to have the problems of inadequate or excess liquidity. Inadequate liquidity may result to poor credit rating, loss of confidence on the part of the creditors, loss of corporate goodwill or even legal tussles that can lead to the closure of the business.
Excess liquidity on the other hand, will mean funds being unnecessarily and unprofitably tied up in current assets.
2.2 CAUSES OF LIQUIDITY PROBLEM
Mgbodille (2001)
To stated that a bank in said to be facing liquidity problem when it is not able to meet up its current obligations. Therefore, numerous banks are suffering from shortage of cash in its vault to meet current obligations.
This could be as a result of the following: fraud, loan default or bad debt and mismanagement as well as other adverse external development.
2.3 BANK FRAUD AND LIQUIDITY PROBLEM
Bank fraud can be described as a conscious or deliberate effort aimed at obtaining unlawful financial advantage at the detriment of another person who is the rightful owner of such find. In the words of Orjih (1998), increasing incidence of frauds and forgeries in our banks in recent years. If not arrested might pose certain threats to the stability and survival of individual banks and the performance of the industry as a whole.
However bank fraud emanates as a result of the following
- Lack of staff training
- Poor quality management
- Negligent employees
- Inadequate banking
- Undue exposure.
All mentioned above give rise to one form of fraud or the order, there by affecting the liquidity status of any given bank.
2.4 LOAN DEFAULT /BAD DEBT AND LIQUIDITY PROBLEM
Loan default /bad debt in another militating factor against liquidity position of a bank. According to Mgbdille (2001) loan default is said to have occurred when a borrower /debtor fails to pay bank as agreed on, intentionally or unintentionally. Therefore, lending is considered to be very risky because of the incidence of loan default. The operations of the banks are sources of risk because they are bound to face the possibilities of sudden and unexpected with drawls from depositors and like hood of default from debtors.
Many factors give rise to the occurrence of loan default and bad debt.
Notably of all are as them:
- Poor analysis of financial data
- Inadequate project monitoring
- Improper collaterization /connection lending
- Natural hazards
- Manipulation of account records by borrowers
- Incomplete knowledge of customers activities
2.5 LIQUIDITY RATIOS AND BANK PERFORMANCE
According to Anyanwu (1993) liquidity ratios measure the ability of the firm (bank) to meet its obligation as they become due. The liquidity ratios by establishing a relationship between cash and other current assets to current obligation provide a quick measure of liquidity .
An excess liquidity will result in bad credit rating and loss of confidence by creditors. Therefore, it is necessary to strike balance between liquidity and lack of liquidity. Two commonly used liquidity ratios are.
- Current ratio
- Acid test or Quick ratio
Current ration: this is completed by dividing current assets by current liabilities. Current assets include cash, marketable securities, accounts receivable and inventories etc. Current liabilities consist of accounts payable, note payable, accrued income and taxes, short-term loans etc.
Current ratio: Current Assets
Current Liabilities
ACID TEST OR QUICK RATIO: It is calculated by dedicating inventories from current asset and during the remainder by current liabilities.
Inventories are also referred to as stocks and they are then least liquid of a firm’s current assets
Quick Ratio: Current Assets-Inventories
Current Liabilities.
2.6 THE SIGNIFICANCE OF LIQUIDITY RATIO
The concept of liquidity ratio in a great important to the banking sector as well as the economy in general. Hence it would be of great importance to investigate the ration able for using liquidity as an instrument of monetary control.
However, the purpose of liquidity ratio was to provide bank with cash in some proportion to deposits, so as to ensure depositors of convertibility of their deposits to cash.
Conclusively, a fudicion and prudent bank management of fund requires that a certain minimum level of cash or other liquid assets, easily converted into cash be reserved the amount of such reserves will be such that it can support a given volume of deposit in proportion to its reserves. Management of fund requires that a certain minimum level of cash or other liquid assets, easily converted into cash be reserved the amount of such reserves will be such that it can support a given volume of deposit in proportion to its reserves.
