Abstract

This study determined the effects of liquidity management on the performance of commercial banks. The study applied a descriptive research design. The sample period was from 2011 to 2016. This study used secondary data that was obtained from the Central Bank. A regression model was used in data analysis. The findings are that there were fluctuations in financial performance while liquidity management and capital adequacy registered steady growth.

This shows that banks manage their liquid assets well to satisfy customers’ demands for cash. Moreover, commercial banks have the ability to absorb reasonable operational and functional losses without risking the institutions’ stability. Furthermore, the management of the commercial banks had the ability to meet the need for additional cash. The study found that ROE and liquidity management are positively correlated.

This relationship is also statistically significant. This means sufficient cash causes good financial results. Furthermore, the study showed that liquidity management explains 34% of the variability achieved in financial returns. These findings are similar to those of existing empirical literature (Olongo, 2013; Wanjohi, 2013; Kavale, 2016). However, the results contradict the findings of Bassey (2015), Molefe and Muzindutsi (2016), and Vintila and Nenu (2016) who found a negative relationship between the two variables.

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The international financial system has over many decades suffered from a severe liquidity crisis. This crisis started with the great depression of 1929 to the Russian default episode of 1998 and to the most recent 2007/2008 global financial crisis. Emerging Asia has for instance between 2007 and 2009 witnessed the spill-over effects of the US subprime mortgage market, ranging from a fall in Asian stock markets, depreciation of currencies, and a decrease in international bank lending.

In 2008, the Philippine stock exchange index fell by 48.3%, reflecting a decline in the ability of the stock market to raise new capital, cost of borrowing in both primary and secondary bond markets increased and liquidity increased from 29% to 30% in 2009 (Guiniqundo, 2009). The global financial meltdown which resulted in financial instability actually unveiled the inefficiencies in the management of liquidity risk in financial institutions.

Liquidity management is an important objective of Commercial Banks, not only because it prevents Banks from running into liquidity shortages but also because it determines their profits. Munyambonera (2010), Olweny and Ongore, and Kusa (2013), as cited in Lukorito et al (2014) have not only identified profitability as the primary objective pursued by Commercial Banks, but have also recognized it in this era of stiff competition in financial markets, and financial managers have committed to meeting that objective.

Though liquidity management has always been a priority in most Banks, the aftermath of the global financial crisis and lessons learned from it have renewed concerns on Bank’s liquidity issues. In a state of turmoil in banking markets, customers can withdraw their deposits at any time and this can lead to bank runs that can lead to costly liquidation of assets of even larger banks.

Moreso, the liquidity of banks allows 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 exists, 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 the 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 the 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 requirements 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 careful liquidity management and monitoring by Commercial banks to reduce the uncertainties associated with financial instability and unsystematic risk.

The commercial banking sector in Cameroon is still in its infancy and is dominated by the existence of foreign banks. By December 2009, there were twelve (12) commercial banks operating in Cameroon, with only three namely; National Financial Credit, Afriland First Bank, and Commercial Bank of Cameroon as indigenous banks.

This makes up 75%of foreign dominance. The financial landscape of Cameroon has however experienced some evolutions over the past decades, particularly in the financial sector, with the emergence of ECOBANK, where many other microfinance institutions have suffered. Commercial banking activities have equally increased in coverage and depth with the number of banks increasing from 9 in 1999 to 12 by January 2010 and to 14 in 2016 with branches all over the urban centers in the country.

Capital market development has in addition increased the intermediation role of banks within the financial landscape of Cameroon, although with only two companies quoted in the capital market. Commercial banks in Cameroon are gradually getting involved in the process of enabling companies to go public through the initial public offering (IPO)

More so, the International Monetary Fund (2016) has observed that there exists excess liquidity within the banking system of Cameroon generated from the oil surpluses which have been growing significantly since 2001. Banks holding reserves in excess of those mandated by the Bank of Central African States (BEAC) have had their reserve ratio increased significantly that is in Cameroon, the liquidity ratio trend as 157%, 198%, and 215% respectively in 2001, 2004, and 2005 (Saab and Vacher, 2007).

The percentage of liquid assets over short-term liabilities was mandated by BEAC to stand at 100%. However, this phenomenon was further exacerbated by the lack of well-functioning money, inter-bank, and capital markets as well as substantial lags in the monetary policy to address it.

Despite recent BEAC actions, excess liquidity has continued rising in Banks. In 2006 for example, excess liquidity rose by 37.5% from 489,038 million in 2005 to 672,363 million. in 2008, the upward trend persisted when it rose to the tune of 838,910 million FCFA, representing a 0.13% increase (COBAC report, 2008).

The recent build-up of excess liquidity in the Cameroon commercial banking sector signifies that little funds are actually from surplus units to deficit units to take advantage of profitable investment opportunities. Thus, the question, “How Liquidity management affects commercial banks’ performance in Cameroon” is very important.

1.2 Problem Statement

Liquidity management has a significant positive effect on financial performance. Banks and companies undergoing to achieve their goals have to consider liquidity management as their prior objective. Liquidity is the ability of the business to meet its cash obligations within a specific period.  For instance, Liquidity is best measured with cash flow statements or budget. Liquidity management plays a significant role in determining the success or failure of a firm in business performance due to its effect on a firm’s profitability (Eljelly, 2004).

In Cameroon, commercial banks are faced with challenges of financial performance. This is seen in the fact that the firms have problems with their financial performance they may defer their payments to creditors which is harmful for companies and can result in several consequences such as worse credit terms in the future.

This in the long run adversely affects profitability. When working capital is the money needed to finance the daily revenue-generating activities of the firm. So, if this continues it will cause a great number of problems to not only the firm that depends so much on this liquidity management but also the various stakeholders in the banking industry. It is evident that research in the area of liquidity management has not been done in a more comprehensive approach.

The study gap is demonstrated by a scarcity of empirical studies on determinants of liquidity management. Empirical studies (Flamini et al, 2009), and (Lokorito et al, 2014) were inadequate as they concentrated on liquidity management in other industries in the small and medium enterprises.

For banks to remain competitive emphasis should be made on liquidity management and profitability with regards to how their ability to manage financial performance and should be provided to the organizational achievement. This study will focus on the Effect of Liquidity management on Commercial Banks Performance in Cameroon.

1.3 Research Questions

The following research questions were raised following the objectives.

1. What is the relationship trend between Cash (Liquidity) and Return on Equity?
2. To what extent has the volume of cash at banks influenced banks’ profitability?
3. What are the constraints to the efficient resolution of the profit and liquidity dilemma of banks and how can they be resolved?

1.4 Objective of the study

The main objective of this research is to determine the effect of liquidity management on commercial banks’ performance in Cameroon with respect to the case study of ECOBANK.

The specific objectives focus on the following;

1. To determine the relationship existing between cash (liquidity) and Return on Equity
2. To ascertain the influence of cash balances on banks performance
3. To recommend policy options aimed at resolving the profitability problems of banks.

1.5 Hypothesis of the Study

The following hypothesis is considered relevant for the study;

H0: There is no positive relationship between cash (liquidity) and the Return on equity of the institution

H1: There is a positive relationship between cash (liquidity) and the Return on equity of the institution

 

Further Readings 

THE EFFECT OF LIQUIDITY MANAGEMENT ON THE PERFORMANCE OF FINANCIAL INSTITUTION CASE STUDY BICEC BANK