Liquidity of banks means “The ease with which banks assets could be converted into cash”. The liquid assets include cash in the banks vault with the central banks and to their government securities that have not been used as these assets is cash.
There are many reasons why a bank should have 0reasonable liquid assets in it assets portfolio, these include to be able to meet prompt demands for deposits withdrawals, that is, the banks must maintain confidence and also be able to utilize profitable opportunities that may come out in future.
However, it should be noted that bank like most other business are profit oriented, operating to make profit for their shareholders. These profits could be realized only if there is enough deposits. The deposits will not come unless the depositors could be assured of the safety of their deposits to be assured. There has to be enough liquidity in the banks.
It is a known fact that action designed to make profit brings about illiquidity in the bank and vice versa.
Therefore, equilibrium has to be sought between the two. These two extreme cases have been the constant concern of bank management.
Liquidity management involves provision for deposits withdrawals, short-term cash requirement and cyclical and circular cash requirements. It also involves provisions to meet with legal requirements.
In Nigeria, the activities of the commercial banks are regulated by the banking act of 1970as amended under the control of central bank of Nigeria. The essence of these regulations was to maintain trust and confidence in banking systems, as well as to achieve a specific economic objective. Thus, in the period of mounting excess liquidity, as was the case in the 1970s, banks were equal to a certain percentage of their deposits in liquid for this is known as legal reserve requirement. The components of legal reserve requirements are: cash stabilizations securities issued by the central banks. The liquidity ratio requirement and special deposits.
The rational for the use of these instruments was to map out he excess liquidity in the economy and also to stop the inflationary trend in the economy. The excess liquidity I n the banking sector give rise to inefficiencies in banks operation.
Bank staff was no longer polite to their customers. They become arrogant since they had little outlets to invest money; banks have devised new method of attracting deposits from their customers thus, the recent innovations in the banking sector.
Table of contentsVI
1.2Definitions of terms5
1.3Significance of the study3
1.4Objectives of the study4
1.5Scope and limitations of the study5
2.1What is liquidity8
2.3Liquidity versus profitability in commercial banking11
2.4Significance of liquidity ratio12
2.5Rational for liquidity ratio requirement14
2.6Factors affecting liquidity in commercial bank federal government steps towards solving liquidity problems in commercial banking.16
3.1Summary of findings24
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