IMPACT OF MONEY MARKET ON THE LIQUIDITY OF SOME SELECTED QUOTED BANKS IN NIGERIA

Abstract

Finance is a major key element in fostering growth and development of a company and financial managers look mainly to the money and capital market for various term funds. The Nigerian money market has lagged behind in performing its intermediation role in providing such needed funds to the companies thus limiting their operations. Against this background, this paper examines the impact of the Nigerian money market instruments on the liquidity of ten selected quoted banks. The study found that firms’ working capital and profitability have a significant impact on the money market instrument. Since the money market is very vital for financial managers to raise short-term funds, amongst others the study recommends that to improve the money market there should be adequate monitoring and surveillance of the activities of the market participants and also the introduction of new and flexible financial instruments.

TABLE OF CONTENT

Title page

Approval page

Dedication

Acknowledgment

Abstract

Table of content

CHAPETR ONE

1.0   INTRODUCTION 

1.1        Background of the study

1.2        Statement of problem

1.3        Objective of the study

1.4        Research Hypotheses

1.5        Significance of the study

1.6        Scope and limitation of the study

1.7       Definition of terms

1.8       Organization of the study

CHAPETR TWO

2.0   LITERATURE REVIEW

CHAPETR THREE

3.0        Research methodology

3.1    sources of data collection

3.3        Population of the study

3.4        Sampling and sampling distribution

3.5        Validation of research instrument

3.6        Method of data analysis

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS AND INTERPRETATION

4.1 Introductions

4.2 Data analysis

CHAPTER FIVE

5.1 Introduction

5.2 Summary

5.3 Conclusion

5.4 Recommendation

Appendix

CHAPTER ONE

INTRODUCTION

• Background of the study

The focus of this study is on Nigerian deposit money banks formerly called (commercial banks), and merchant banks which had been the target of recapitalization. With the implementation of Universal banking by the Central Bank of Nigeria (CBN) on January 2001 a level playing ground was created for all banks in Nigeria. The recapitalization policy is just one of about 13 issues announced in July 2004 by Central Bank of Nigeria (CBN) in order to sanitize the banking industry. Soludo, (2004) noted that the vision or prospect of the CBN and the Federal Government of Nigeria is a banking system that is part of the global change, and which is strong and reliable. It is a banking system which must be efficient, depositors can trust and investors can rely upon. Bank capitalization is the act of supplying long-term funds to a bank in order to place the bank on a good position to carry out the business of banking. Bank recapitalization is the act of beefing up the long-term capital of a bank to the level at least required by the monetary authorities and to ensure the security of shareholders fund (equity plus reserve). On the other side, capital cannot perform without good management by those at the top echelon of the organization. Capitalization in this study refers to a number of variables of interest which  are produced from the existence of funds for use in the process of intermediation. From these funds, obviously concepts such as Return on Capital (ROC) and Shareholders Fund (SHF) are derivatives from the use of funds. Management needs to employ the assets and capital of the bank judiciously for positive results. Absence of corporate governance has been attributed to the distress experienced in the banking industry in the past. The CBN Governor noted that the vision or prospect of the CBN and the Federal Government of Nigeria is a banking system that is part of the global change, and which is strong and reliable. It is a banking system which must be efficient, depositors can trust and investors can rely upon. This was the Consolidation era (2004- 2008). It was the era of “13-point Reform Agenda for Repositioning the CBN and the Financial System for the 21st Century”. The issue of bank capitalization in most economies today has been how to resolve the problem of unsound bank, enhance efficient management of the banking system, provide better funding for banks lending activities, reduce non-performing loans and advances, increase profitability, reduce risk, to ensure quality asset management and to put banks in a strong liquid position to meet customers obligation at all times. According to Ebimobowei and Sophia (2011), bank failures has been experienced since the 1990’s during which period one out of every two banks were distressed and in the early 2000’s when one out of every three banks were marginally or totally unsound. For instance, the distress that was pervasive in the Nigerian banking system in the mid-1990’s and early 2000 was due to amongst others, illiquidity in the banking system which led to the lost of customers confidence in the banking industry. According to Ajekigbe (2009: 2-8), from the classical and historical perspective, “Several factors led to the failure of banks between 1977 and earlier 2000. Some of the reasons advanced are poor asset quality, under capitalization, inexperienced personnel, illiquidity, inconsistent regulatory policies and supervision”. Tarek and Ibrahim (2013) found that the: “performance of the bank of Alexandria after privatization on average is significantly better at the level of capital adequacy and earnings. There has been substantial increase in the capital adequacy from 8% to 12%, which indicates that the bank is more protected against financial crises as well as its ability to attract and return customers and depositors. The mean of asset quality and the man of liquidity are lower after privatization but this stand for better performance as a result of substantial reduction of operating expenses and more investments”. The move by the CBN to raise the minimum paid up capital of banks to N25 billion in 2005 was aimed at strengthening the Nigerian banking industry. It is imperative that for banks to meet up the required level of capital for sound and safe banking. Capital adequacy is important for banks to absorb risks till banks are able to generate profit. However, banks that are able to exceed the capital requirement stand a better chance of luring customers and instilling confidence in the system. The Nigerian banking industry has been affected by inconsistent monetary policies, unstable macroeconomic variables such as exchange rate, interest rate and general inflation some of which have led to increase in prices of capital and consumer goods thus, lowering effective purchasing power of people and reduced aggregate demand. Like other sectors, this sub-sector is also faced with poor infrastructural facilities and poor performance of regulatory authorities. Deposit money banks contribute significantly to the effectiveness of the entire economic system. They do this by providing an efficient mechanism for the mobilization of resources and efficiently channeling them for productive investment (Wilner, 2000). However, efficient financial intermediation by a deposit money bank is a function of purposeful attention of the bank’s management to the conflicting goals of liquidity and profitability. According Olagunji, Adeyanju and Olabode (2011), both goals run in opposite directions in the sense that an attempt by a bank to achieve higher profitability will certainly take a toll on the liquidity level and solvency position and vice versa. Liquidity is the ability of a deposit money bank to pay its short-term obligations to its depositors and creditors. Liquidity ratios are broadly classified into Current Ratio, Liquid ratio, and Net working capital ratio. It is used to ascertain how liquid a firm is and its potentials in meeting maturing short term obligations (Umobong, 2015). On the other hand profitability is the measure of the difference between the bank’s operating expenses and income. Liquidity and profitability can be likened to two centrifugal forces with contradictory objectives which at all times threaten to pull the bank apart. This dilemma is not peculiar only to deposit money banks in Nigeria (Eljelly 2004). Profitability and liquidity as performance indicators are very important to all stakeholders: The shareholders are interested in the profitability of banks because it determines their returns on investment. Depositors are concerned with the liquidity position of their banks because it determines the ability to respond to their withdrawal needs, which are normally on demand or on a short notice as the case may be. The tax authorities are interested in the profitability of the banks in order to determine the appropriate tax obligation and size (Olagunji et al., 2011). Deposit money banks as business firms want to maximize profits. Their profits are primarily from interest on their assets, such as loans and investment even cash. However, most of their liabilities are deposits payable practically on demand. For that reason, managing healthy liquidity level while at the same time maximizing profit becomes central issues in banking.

• STATEMENT OF THE PROBLEM

The importance of the money market to the growth and development of the Nigerian economy in general cannot be over-emphasized. This is because the market acts as intermediation to channel funds from the surplus side to the deficit side of the Nigerian population for short term investments mainly in trade and commerce. Thus, the development of the money market smoothens the progress of financial intermediation and boosts lending to economy (Ikpefan and Osabuohien, 2012).Money markets play a key role in banks’ liquidity management and the transmission of monetary policy, control of money supply and demand-pull inflation, determination of short-run interest rate (Ekmekcioglu, 2013). The study of Kehinde and Adejuwon (2011) showed that financial market is key to the development of the economy, therefore, the development of the money market is in stakeholders’ interests: the banking system itself, the Central Bank and the economy in general. It is in view of the above that the researcher intends to investigate the impact of money market on the liquidity of some selected quoted banks in Nigeria;

• OBJECTIVE OF THE STUDY

The main objective of this study is to ascertain the impact of money market on the liquidity of some selected quoted banks in Nigeria; but to aid the completion of the study, the researcher intends to achieve the following specific objectives;

1. To ascertain the effect of money market on the liquidity of quoted banks in Nigeria
2. To examine the impact of liquidity on the profitability of quoted banks in Nigeria

• To ascertain if there is a significant relationship between money market and liquidity of the banks

1. To ascertain the role of money market on the liquidity of deposit money banks in Nigeria
   • RESEARCH HYPOTHESES

To aid the successful completion of the study, the following research hypotheses were formulated by the researcher;

H₀: there is no significant relationship between money market and liquidity of the banks

H₁: there is a significant relationship between money market and liquidity of the banks

H₀²: money market does not have any significant impact on the liquidity and profitability of quoted banks in Nigeria

H₂: money market does have a significant impact on the liquidity and profitability of quoted banks in Nigeria

• SIGNIFICANCE OF THE STUDY

It is believed that at the completion of the study, the findings will be of great importance to the management of quoted banks in Nigeria, as the study seek to explore the role of money market as a source of financed for the operation of deposit money banks in Nigeria; the study will also be of importance to investors and potential investors as the study seek to explore the efficacy of management in ensuring liquidity and profitability of selected banks as this will serve as a driver for further investment, the study will also be useful to researchers who intend to embark on a similar topic as the study will serve as a reference point for further studies. Finally, the study will also be useful to academia’s, researchers, students, teachers, lecturers and the general public as the study will contribute to the pool of existing literature and contribute to knowledge.

• SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers the impact of money market on the liquidity of some selected quoted banks in Nigeria; but in the cause of the study, there were some factors that limited the scope of the study;

1. a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
2. b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
3. c) Finance: Limited Access to the required finance was a major constrain to the scope of the study.

1.7 OPERATIONAL DEFINITION OF TERMS

Money market

As money became a commodity, the money market became a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less

Liquidity

In business, economics or investment, market liquidity is a market’s feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset’s price.

Banks

A bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial stability of a country, banks are highly regulated in most countries.

1.8 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study

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