Liquidity Management in Banks

Liquidity Management in Banks (Case Study of Union Bank Plc and Nise Community Bank)

THE FUNCTIONS OF COMMERCIAL BANKS AND COMMUNITY BANKS

Commercial banks are banks improved to strengthen economic activities of a nation in diverfied ways. Their operations are regulated by central bank of Nigeria (CBN) through various means while includes being the bankers bank lenders of last resort, open market operation moral suasion and directive mention but a few.

Community banks are also in line of strengthen economy and development of rural areas but were not controlled by any government of central bank of Nigeria (CBN)

Both banks are authorizing to carryout the function discussed below:

  • DEPOSITS ACCEPTANCE

Commercial and community banks accepted depravities from the house hold the business sector and the government. The deposits are kept in saving account, fixed deposits account and current amount. There are other types of accounts like wind fall ALC, Exclusive savers account, pica account PFP Account. This saving mobilized are employed for development project in the country.

  • GRANTING OF LOANS AND OVERDRAFTS

Some organizations that are going on economic deficit go to these banks to obtain loans and overdrafts for financing their business ventures. The banks changes interest for these service for certain duration and risk associated with them.

  • AGENCY SERVICES

Only commercial banks acts as agent to their customers by collecting proceed of payments for the account. Also the banks effect finds transfers on behalf of their customers. In return the commercial bank charge commission for rendering such a general services to their customers.

  • SAFE CUSTODY FACILITIES.

People that have valuable items like academic certificates, share certificates, gold, title deeds, and other valuables may keep then with the banks for sate custody. Commercial banks and some community banks provides facilities for securing the items on behalf of their owners. Some rewards and interest are changed for rendering such services.

  • PROVIDING STATUS REPORTS:

Bank write reports to answer to inquiries about the financial standing of their customers when the need arises. In writing the report, the banks must cross check their information and be sure of its accuracy and reliability. Negligent reports by bank may attract legal action on the banks.

  • STANDING ORDER:

It is standing instruction which customers leave with their banks to remit certain sum of money perdically to a named beneficiary. The bank customers have enough money in their account to cover the remittance.

  • CASHING CREDIT FACILITIES

The bank provides cashing facilities to the customer. This is an arrangement between a bank and its customers which enable the customer to cash his cheque at any branch of his bank, but these services are made with commercial banks only. Community banks don’t render such services. The facility saves the customer the risk of being attacked by robbers and saves him the inconvenience of carrying sums of money from one business centre to another.

  • PROVIDING NIGHT SAGE FACILITIES:

The night safe facilities are an arrangement that allows bank customers to deposit their money safely in the bank after the normal banking hours. Business men who close for business late in the day make use of these facilities, more rampantly but banks only do it for their customers, or registered / recognized individuals.

When the money deposited with the bank the depositor has to call on the bank the next day and after his particulars must have been verified, the bank makes available the money to the owner who car their deposit – it – formally into his account, during the normal banking hours.

  • INVESTMENT ADVICE:

Some times, commercial banks and community banks acts as investment advisers to their customers, some customers who have capital but are not knowledgeable above how to invest the fund properly may approach their banks for investment advice. The bank have to advise their customers, the most appropriate investment opportunities bearing in mined risk and return trade off.

  • BUYING AND SELLING OF SHARES TO CUSTOMERS

The banks may act as issuing houses for the purpose of selling share on behalf of their customers. Also the banks buy shares on behalf of their customers.

  • ISSUING OF FOREIGN EXCHANGE SERVICES

Travelers and businessmen obtain tarsiers cheques and foreign currencies from their bank. The banks by offering the need foreign exchange to their customer help to promote foreign trade like vigo.

  • ESTABLISHING AND BUILDING MARKET SITES

Some bank as now into setting markets and other investment for customers like various homes subsidiary of union banks are now building market locations for business men and making it compulsory that the people will bank with them, also union assurance union bank substitutes are into production of salts.

  • COMMERCIAL AND COMMUNITY BANKS ASSETS AND TITEORIES OF ASSETS MANAGEMENT

The assets of commercial bank are divided into from main categories.

  • Cash and short time funds.
  • Security investment treasury bills, treasuring certificate.
  • Loans and advancers
  • Fixed asset, (premise, building, equipment etc

All these are shown in the typical balance sheet of commercial banks.

In strutting a bank is assets as shown above, certain factors have to be considered.

  • The operating statutory situation credit control.
  • Market environment
  • The prevailing economic situation
  • The organizations philosophy and objective of the bank
  • The bank customers relationship
  • The deal obligation of printability and liquidity of the banks.

The management of bank assets centimes on –the location of funds among the first three categories of assets.

In assets management, made concern is not given to fixed asset because management does not get itself concerned with the purchase of equipment as a priority. Most commercial banks assets are financial claims commercial banks have investing in land and buildings where as of cash and has relatively large investment in inventors and fixed assets. A manifesting form’s financial claim is almost limited to accounts receivable and temporary investment surplus cash. The compositor of a bank’s assets and that of an industrial final result from difference in the nature of their liabilities and the character of the profit making activities in which the firm engages.

A manufacturing firm makes most of its profits from goods sold. Lending of goods, required maintenance of a large furnished investing and manufacturer requires maintenance of raw materials. Stock as well as the installation of expensive equipment.

On the contrary, the profits of a bank are gained from lending and investing and results in holding note, bone and other financial instruct indicating the account to be paid in the future.

  • COMMERCIAL AND COMMUNITY BANKS INVESTMENT MANAGEMENT.
  1. For liquidity
  2. To augment income
  3. To save as collateral for deposit liability to federal, state and local governments.

LIQUIDITY:

Liquidity requires that bank should be able to pay cash immediately when called upon to do so for all of its demand deposit liabilities. When banks buys treasury bills or another short tem securities they can as easily convert those assets into cash within a short period of time to provide liquidity.

TO AUGMENT INCOME:

From loan and advances banks make their profits, hence bank have to invest in them to satisfy the obligation their shareholders profitability.

LOAN INVESTMENT

The most profitability activity of commercial banks is loan investments. It is the principal activity of commercial banks when allocating banks fund to loan portfolio. The primary objective is do learn income, while at the same time, share the credit needs of the communities. In deciding loan portfolio the banker should consider what percentage of loan that will be allocated to cash type of loan. This is assessed based on which sector of the economy that will yield the greatest project.

  • THE LIQUIDITY APPROACH TO COMMERCIAL BANK MANAGEMENT.

THE LIQUIDITY / PROFITABILITY DILEMMA.

Over the years the problems of liquidity and profitability has been a theory issue in banking. This is formed by the fact for a bank to continue in business. It must maintain enough liquidity to meet unexpected cash demand from its customers is well as provides enough profits to retain the confidence of its shareholders.

Banks acts as mediator between the supplies spenders and deficit spenders. They collect deposit from depositors and pay interest on such deposit. In time, they lend these deposits, to borrows (deficit spenders) from which they earn income. It may the ask how do banks earn income since they may interest on deposits? Usually loans made out by banks attract more interest than that paid on deposits. But in pursuance of profit motive, commercial banks do not loss sight of the need to have enough cash to customers the effect of unannounced with drawals. For this reason, the assets of commercial bank are divided into earring assets and non-earning assets.

In the group of earring assets are loans and investment while fixed assets, total resave the vault cash, deposit with CBN constitute non-earring assets. Earring assets provide project where as liquidity can be provided earring assets of short tem nature such as treasury certificate, Non earring assets like vault cash and balance with central bank of Nigeria (CBN)

Also liabilities (borrowed fund) can provide liquidity. The deposits of customers are money lent to the bank. Since it is realized that not all the deposits are with drawn are the same time. Bank makes provision for possible demands by way of keeping the remainder to borrowers high network customers of the bank.

Note that some of the assets are highly liquid with low risk attract low interest rate while those with higher yields are more riskily but less liquid.

A precise and stated method of how this compromising balancing if achieved among commercial banks are reflected on the maturity table of the banks investment and degree of liquidity and profitability

This article was extracted from a Project Research Work Topic
“LIQUIDITY MANAGEMENT IN BANKS”
(CASE STUDY OF UNION BANK PLC AND NISE COMMUNITY BANK).”

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