Abstract

This study was taken to assess the management of Liquidity and it effect on the performance of an organization case study of Community Credit Company (CCC PLC) Bonaberi Douala. Poor liquidity management reduces the financial performance. Organization  have experienced huge financial losses due to poor liquidity management.

The study will be guided by the following objectives; to examine the determinants of the management of liquidity and the effect on the performance of CCC PLC Bonaberi Douala, to identify the different liquidity management practices in CCC PLC Bonaberi Douala. Primary and secondary data will be use for the analysis.

This study shall help the Government, general managers and other stakeholders to take concrete measures when it comes to decisions and policies concerning liquidity management. The target population for this study is 40 Employees of CCC PLC. The data collection instrument in this research are questionnaires. While data analysis will be done using Statistical Package for social science (SPSS).

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The recent financial crisis in the banking industry in is attributed to poor liquidity management (Sahudin, Abdullah, & Tukiman, 2012). To cite an example, it led to the collapse  banks. While many other institutions in the economy merged for a financial backing (Rickards, 2014). Commercial banks had to borrow billion in from the Central Bank’s overnight window to shore up their reserves as a liquidity management crisis hit the banking industry. The average cost of borrowing between banks (inter-bank rate) had raised 52 basis points to 5.97 per cent, as liquidity management in the money market contracted.

Liquidity management is inversely related to the performance banks (Bassey, 2015). A liquidity management crisis was evident in Global financial crisis of 2007–08 (Dullien, 2010). This was the worst financial crisis raising fundamental questions about liquidity management (Basel Committee on Banking Supervision, 2013).

During the crisis banks were hit hardest by liquidity management pressures cutting back sharply (Basel Committee on banking supervision, 2013). Major commercial collapsed. Other banks were bailed out by the governments. The impact on the stock market was very severe as stocks shed prices (Basel Committee on Banking Supervision, 2013).

In many areas the economy faced a huge financial blow, resulting in house evictions, foreclosures and prolonged unemployment (Basel Committee on Banking Supervision, 2013). The crisis underscored the role of liquidity management to commercial banks (Basel Committee on Banking Supervision, 2013). Very liquid assets have low risk and hence a low return. Therefore, must trade-off risk and return on liquidity (Basel Committee on Banking Supervision, 2016).

In absence of regulation it is expected that banks hold liquid assets to the extent they aid in maximizing the firm’s financial performance (Basel Committee on Banking Supervision, 2016). Beyond this policy maker has to impose on banks to hold larger liquid assets as a reserve (Alemayehu & Ndung’u, 2012). This ensures the stability of the overall financial system (Alemayehu & Ndung’u, 2012). Moreso, The liquidity of banks allow them to grant credits and consequently stimulate investment and growth. To Civelek and Al-Alami (1991), since commercial banks are the primary suppliers of funds to firms, the availability of bank credit at affordable rates is of crucial importance to firm investments and consequently to the health of the economy.

Following the matching principle, Banks and financial managers therefore need to determine the ideal or optimal level of liquidity which can satisfy their liabilities when they fall due without hurting the bank’s performance especially in terms of profits. A liquidity-profitability trade-off thus exist, since the more liquid an asset is, the less profitable the asset would be. Dittmar and Mahrt-Smith (2007) found that firms with good corporate governance quad their cash resources better. Whereas poor governance results in a quick misspend of excess cash in ways that significantly reduce operating performance.

Furthermore, the concept of Liquidity management therefore involves the strategic supply or withdrawal from the market or circulation of the amount of liquidity consistent with a desired level of short-term reserve of money without distorting the profit making ability and operations of the banks. It relies on the daily assessment of the liquidity conditions in banking system, so as to determine its liquidity needs and thus the volume of liquidity to allot or withdraw from the market. The liquidity needs of the banking system are usually defined by the sum of reserve requirement on banks by a monetary authority (CBN 2012).

Also, Liquidity and profitability as performance indicators are very important to the major stakeholders; shareholders, creditors and tax authorities. The shareholders are interested in the profitability of the bank because it determines their return on investment. Depositors are concerned with the liquidity position of their bank because it determines the ability to respond to their withdrawal needs, which are normally on demand or short-term notice as the case may be. The tax authorities are interested in the profitability of the bank in order to determine the appropriate tax obligation (Olagunji, et al, 2011). The above highlights the relevance and need for a careful liquidity management and monitoring by Commercial banks to reduce the uncertainties associated with financial instability and unsystematic risk.

Maintaining an  appropriate liquidity is the very vital  part of any  types  of  organization  for  their  day  to  day  operation. Liquidity of an organization means in what way effectively and quickly the current assets of the organization can convert into cash. In all kinds of business cash is the vital part, without cash  which  business  unit cannot  be  sustained  as well  as  it cannot  take the  benefit  of different  opportunities,  Retaining.

Liquidity as well as proper liquidity management controls the financial performances and progress of an organization. For maintaining liquidity the organization has to maintain proper level of working capital, as adequate or inadequate working capital will be a damaging situation to the smooth operations of the organization. Liquidity of organization is the ability to pay  its  current  obligations  and  which  can  be  measured  by different  financial  ratios.  The  financial  performance  of  an organization  depends upon  the proper  liquidity  management and  the capability  to generate  revenue in  addition to  profit.

The financial performances of an organization use to measure with different profitability ratios.  The  effective  liquidity management  of  a  company  comprises proper  planning  and monitoring its  current  assets  as  well  as    current liabilities. Which will help the company’s to minimize the risk.by meeting their current obligations and can maximize the profit by avoiding unnecessary investment in current asset

Probability can be affected by the consecutively out of cash in the presence of current assets.  In liquidity  position  requires enough  money  in  term  of  cash  for  meeting the  financial requirements  for  the day  to  day  operation. Otherwise in the

Circumstance with assets, this can be transformed in to cash easily. Financial  performance  or profitability  use  to measure for  a  particular  period  in  terms by  which, an organization’s income  exceeds  over  its  appropriate expenses.  Profitability and liquidity are the two points of a straight line.  In other words, there is a Tradeoff among profitability and liquidity.

Managing  liquidity  is  a  thought  that  is getting thoughtful consideration all over  the world  particularly with  the  present  financial  conditions  throughout  the  world economy. Owners and managers altogether over the world are to invent an approach of management of their operational activities (day-to-day operations) in order to fulfill their current obligations to maximize their profit and stockholder’s wealth.

Liquidity management, in maximum case use to consider from the outlook of working capital management as greatest indicator of calculating liquidity. Managing the liquidity is very crucial, by way  of  it  disturbs business profitability. The decisive part in handling working capital is compulsory for upholding its liquidity in day-to-day operation

To safeguard its smooth transformation as well as to meet the obligation which importantly effect on profitability of firms?

The  main  aim  of  this  study  is  to  examine  the  relationship between liquidity  and  profitability.  In  the  company  cash  is vital  thing,  lacking  cash  business  cannot  exist  and  to acquire benefit  of  company  opportunities,  it  is  essential  to preserve liquidity  situation to  overwhelm the  problems. The liquidity and profitability management measures vital role for achievement or disappointment of firm success. Therefore this study is to catch out the influence of Liquidity on Profitability on the company’s financial performance.

1.1.5 Statement of the Problem:

Despite the numerous measures put in place by Bankers, Governments, Non-Governmental Organizations (NGO) and other stake holders within the financial environment and sector, to see that liquidity is readily managed to enhance performance in this institution, it has been observed that liquidity management and Organizational Performance has often post a problem within society both in the long run and short run to an extent that policy makers have had to have a review of it to see into it that the impact of liquidity management on organizational performance is well felt.

The need for liquidity by any business or financial institution is just like the need for blood by the human system. adequate liquidity is good and will help the firm to meet depositors demand, carry out day to day operations, hedge cash flow problems, and also to make revenue payments just to name a few.

However, if liquidity is in excess or shortage, it poses a problem. Excess liquidity will cause the following problems for the central bank and the economy in general. It can reduce the effectiveness of the monetary transmission mechanism especially in affecting the demand site to reach the targeted inflation. Shortages in liquidity too will cause bankruptcy, liquidation, an increase in demand for cash by depositors and defaults etc.

Commercial banks wholly depend on deposits made by their clients or customers and most of their operations are carried out through the deposits. In situations where all the depositors withdraw their cash from accounts, the bank is likely to face a liquidity management trap. This may lead to borrowing funds from the central bank or other banks at very high-interest rates or cost which reduces profitability. This threatens the survival of commercial banks in Cameroon.

Due to this, commercial banks have tried to ensure that they hold adequate funds at all times so that they are able to meet the demand of depositors. It is for this reason that it is necessary to study the effect of liquidity management on the profitability of Organization in Cameroon, precisely Community Credit Company (CCC PLC) Bonaberi Douala.

Our specific research questions will be, with poor liquidity management banks and other financial institutions have to borrow at very high rates, thus increasing the cost of banks. Maina (2011) studied this issue among oil companies.

The results showed that liquidity management has no effect on the firm’s profitability. Moreover, Kweri (2011) examined the same problem among manufacturing firms. There is no study done so far on the effect of liquidity management on the performance of an organization. Therefore, this study aims at filling this gap by answering the following question:

1.2 Research Question:

The main research question is, does poor liquidity management affect the Final Financial Performance of an Organization (CCC PLC Bonaberi Douala)?

1. What is the effect of poor cash reserve ratio on the profitability of an organization (Community Credit Company PLC Bonaberi Douala?
2. What is the effect of poor loan-to-deposit ratio on organizational performance in the case of CCC PLC Bonaberi Douala?
3. How does the poor liquidity coverage ratio affect the organizational performance of CCC PLC Bonaberi Douala?

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