ABSTRACT
Banking business is a very risky business. The operation of banks include; the mobilization of
deposit and the extension of credit. A bank can be defined as the instrumental agency through
which debt and credit are converted and changed between. Banks also act as intermediaries, they
mobilize deposit and pay interest on them and make loans and receive interest thereof.
Management of liquidity occupies strategic positions in the management of banks in Nigeria. The
purpose of this project work arose from the need to know the problem inherent in the management
of liquid assets otherwise known as liquidity management. Primary data were collected through
the administration of questionnaires and oral interviews on members of staff of the selected banks.
The data captured in the questionnaire, which are on perception of banks liquidity management,
were analyzed using percentages which then facilitated inferential statistical analysis using chisquare.
The study revealed that there are two types of problems inherent in the management of
liquidity. They are the problems of excess liquidity and shortage of liquidity. It also showed that
profitability will be optimized only when liquidity is effectively and efficiently managed. Based on
these, the study suggested that banks should not solely concentrate on the profit maximization
concept but should also adopt measures that will ensure effective liquidity management which will
help to minimise or avoid cases of excessive and deficient liquidity as their effects. Also banks
should schedule the maturity periods of their secondary reserve assets to correspond to the period
in which the funds will be needed.

CHAPTHER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Liquidity is necessary for banks to compensate for expected and unexpected balance sheet
fluctuation and to provide funds for growth. It also represents a bank‟s ability to efficiently
accommodate the redemption of deposits and other liabilities and to cover funding increases in the
loan and investment portfolio (Grueving and Bratanovic 2003).
A bank has adequate liquidity potential when it can obtain needed funds (by increasing liabilities,
securitizing or selling assets) promptly and at a reasonable cost.
Sayers (1960:59), asserts that the perfectly liquid asset is of course cash itself. The more the cash a
banker holds the more obviously can he exchange for deposits. But cash is an „‟idle asset‟‟, it earns
no income at all. To make a profit, the banker must hold some assets which are imperfectly liquid.
What should be the nature (other than income earning) of the imperfectly liquid assets of a bank?
The answer which bankers have given to this question has generally left an ambiguity about the
word „‟liquidity‟‟, an ambiguity that has its root in the banking conditions of earlier years.
According to Olagunju, Adeyanju and Olabode, (2011), liquidity is the ability of the company to
meet its short term obligations. It is the ability of the company to convert its assets into cash.
According to Nwankwo (2004), in banking, liquidity management simply means being able to meet
every financial commitment when due, whether it is withdrawing from a current account, maturing
euro or interbank deposit or a maturing issue of commercial paper. Bank liquidity refers to as the
ability of a bank or banks to raise certain amount of funds at a certain cost within a certain period of
time to discharge obligations as they fall due. It follows, therefore, that quantity, that is, amount,
time and cost, are at the heart of liquidity management. The greater the amount of funds a bank can
raise in a certain time at a specified cost, the more liquid it is. Similarly, the sooner a bank can raise
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a given amount of fund at a certain cost, the greater is its liquidity; and the less it costs a bank to
raise a given amount of funds in a certain period of time, the more liquid it is. This has two
implications to be effective, liquidity management must contribute tom the achievement of the
overall corporate funds management objective of attaining and maintaining a balance of
profitability, solvency and liquidity.
To satisfy depositor‟s claims, a bank must be able to convert its assets into cash quickly. But this is
not all, if the depositor‟s claims are to be fully satisfied, the banker‟s assets must be converted into
cash without loss. When bankers have said that they aim at liquidity, they have generally included
both these attributes
According to Ariyo (2005), in a non-barter economy (like that of Nigeria), money serves as the
measure and store of value. It also oils the wheels of the economy by serving as the means of
exchange. In this regard, one unit of physical output or service rendered need to be backed up with a
similar unit of currency to ensure parity in value between the real output and the unit of currency.
Regulatory agencies like Central Bank of Nigeria (CBN) and Nigerian Deposit Insurance
Corporation (NDIC) were normally established to ensure appropriate liquidity. Bindseil (2000:1),
asserts that „‟liquidity management” of a Central bank is defined as the frame work, set of
instruments and especially the rules the Central bank follows in steering the amount of bank
reserves in order to follow their price ( i.e., short term interest rates) consistently with its ultimate
goals (e.g., price stability).
Practically, profitability and liquidity are effective indicators of the corporate health and
performance of not only the commercial banks (Eljelly, 2004), but all profit oriented ventures.
These performance indicators are very important to the shareholders and depositors who are major
publics of a bank. (Olagunju, Adeyanju and Olabode, 2011)
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1.2 STATEMENT OF THE PROBLEM
Just as a bank is a going concern, so is the problem of management of liquidity of Nigerian banks.
In particular, the liquidity management is a continuing dilemma. A significant proportion of the
problem facing banks are attributable to their inability to manage the liquidity/profitability conflicts.
In fact, there is a short trade off between liquidity and profitability by banks which is currently
giving some concern to the regulatory authorities like the CBN and the NDIC.
Given that poor banking habits has been the bane of the Nigerian society, how could the liquidity
and hence profitability position of Nigerian banks maintain acceptable level or standard in
developing banking culture.
Though it has been established that excess liquidity entails the risk of low earnings or less earning,
on the other hand, liquidity problems bring about a loss of faith and confidence in the Nigerian
banks. So banks must strike a balance between the two (in excess liquidity and shortage of
liquidity).
1.3 OBJECTIVE OF THE STUDY
All over the world, banks are subjected to varying degrees of regulations because of their sensitive
nature as custodians of funds and their ability to create money. However, in the Nigeria context,
these controls are mainly direct and administrative resulting invariably in less efficiency in the
management and allocation of resources. Through the use of the instruments of the monetary policy,
the Central Bank of Nigeria, directly changes the levels of banks cash reserves and indirectly
induces changes in the terms and availability of credit and ultimately money supply and general
economic activities. Managing liquidity therefore entails striking a balance between the customer‟s
need for liquidity and the demand to optimizing interest earning by tying down deposits in other
less liquid assets such as loans and advances.
The summary of the objective of the study can be stated as follows;
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i. To examine how excess liquidity affects the profitability of Nigerian banks.
ii. To examine how shortage of liquidity affects the profitability of Nigerian banks.
iii. To show whether loans and advances do affect the profitability of Nigerian banks.
1.4 RESEARCH QUESTIONS
i. To what extent does excess liquidity affect the profitability of Nigerian banks?
ii. To what extent does shortage in liquidity have significant effect on profitability of the
Nigerian banks?
iii. How do loans and advances affect the profitability of Nigerian banks?
1.5 HYPOTHESES OF THE STUDY
On the basis of the above views, the researcher hereby proposes the following hypothesis:
Ho1. Excess liquidity does not have a significant impact on the profitability of Nigeria banks
Ho2. Shortage in liquidity does not have a significant impact on the profitability of Nigerian banks
Ho3. Loans and advances do not have significant impact on the profitability of Nigerian banks.
1.6 SCOPE OF THE STUDY