Abstract

Liquidity and profitability are considered as one of the serious concern and challenges for modern era banks. A bank having good assets quality, strong earnings and sufficient capital may fail if it is not maintaining adequate liquidity, which brings us to the purpose of this research which is to assess the Effect of liquidity and profitability of commercial banks with NFC as case study. The dependent and the independent variable were identified together with their variables affecting them.

This research employed a descriptive research design and a secondary a secondary source of data being used and data is collected from audited financial statements of NFC. From (2013-2015), and a simultaneous equation model is used to analyzing the data, regression, and correlation analysis are used to analyzes the data to answer the research objective. Multiple regression was conducted to develop the regression model relating to the study variables, the significance of the results was tested at a 5% significance level in a 2-tailed test.

The results of the findings reveal that all factors except operational efficiency which has a positive correlation have a negative correlation with profitability of NFC, which indicates that liquidity has a positive relationship with the profitability of NFC.

The results also reveal that liquidity of NFC, and their profitability has a correlation coefficient of -0.456 which shows a weak negative relationship and also assets quality and profitability of NFC has a weak negative correlation coefficient of -0.512. Capital adequacy with a correlation coefficient of -0.748 has a strong negative correlation. The operational efficiency of NFC was the only factor that had a positive correlation with their profitability. It has a correlation coefficient of 0.884 indicating a strong relationship.

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Generally, individuals acted as banks before the existence of banks in Cameroon. That is they performed the activities of collecting deposits and granting loans. The valuable form of money in this era was gold and this portrayed money and wealth where this gold was kept by a merchant blacksmith.

This was around 2000BC in Assyria and Sumeria. After some years, lenders in ancient Greece during the Roman Empire began to give loans in and accepting deposits in the form of money. This activity of money lending was also carried out in China and India. The historical positions of the banking systems in Italy especially during the mediaeval and renaissance period are a call for concern in particularly the affluent cities of Venice, Florence and Genoa.

The Bardi and Peruzzi families dominated banking in the 14th century in Florence establishing branches in many other parts of Europe. Globally, liquidity management is inversely related to the performance of commercial banking (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 banks like Lehman Brothers collapsed.

The crisis resulted in breakdown of world stock exchanges, banking sectors, housing sector and different businesses (Sulaiman et al, 2013). Businesses financing, especially in the wake of the global financial crisis, has become a major source of concern for business managers as bank loans are becoming too expensive to maintain as a result of fighting of both the local and international financial market and the reluctance of the public to invest in the share of company’s sequel to the crash of the capital market (Bashi, 2006). These situations compel business managers to device various strategies of managing internally generated revenue to enhance their chances of making profits and meeting existing shareholders’ expectations.

The banking sector in sub-Saharan Africa is nevertheless still extremely is nevertheless still extremely diverse, particularly in terms of banking concentration and the banking penetration rate, which ranges from more than 50% in South Africa to less than 10% in Francophone Africa.

Today commercial banks continue to dominate the financial systems of sub-Saharan Africa. After countries in the region gained independence the sector was essentially composed of state-owned banks and a few major banks of the former colonial powers. Over the past forty years, major changes have gradually overhauled Africa’s financial systems.

Overall, Africa’s banking sector is now regarded as robust. The widespread liquidity and solvency crisis of the 1970s and 1980s in Benin, Cameroon and Madagascar for example, which had impacted commercial banks and their supervisory bodies, are now gone. Practice improvements and structural changes were made, such as the creation of regional banking commissions in francophone Africa and improved supervision of counterpart risk at most commercial banks.

Sub-Saharan Africa has the shallowest financial depth among the various regions at 24% domestic credit to the private sector is about half the average ratio for North Africa and Latin America and the Caribbean and less than a quarter of that of OECD countries.

Within the sub-regions, west and east Africa record the lowest ratios of 20% and 21% respectively, while southern Africa records a relatively high ratio of 43% driven mainly by the high financial depth of south Africa. The ratio of liquid liabilities to GDP, a measure of monetary resources, serves as a comprehensive indicator of the level of financial intermediation by key financial players (central bank, deposit taking, and other financial intermediaries) and bank deposits as a percentage of GDP show a similar pattern of low financial depth for the West and East Africa.

The last state-owned bank in Cameroon was sold in January 2000; this was the last step in a Structural Adjustment Programme (SAP) recommended by the Bretton wood institutions or the country to reach the completion of the Highly Indebted Poor Countries Initiative (HIPC).

This initiative was recommended to re-launch the country’s economy after a decade of the economic crisis that seriously affected its banks. This crisis led to the liquidation of giants such as Cameroon bank, BanqueMeridien, Rural development fund the development bank, the split-winding of the bank of credit and commerce of Cameroon (BCCC), with the transfer of its good assets to standard Chartered Bank of Cameroon.

The failure of this institution was followed by a rising in the initial capital requirement of commercial banks from CFAF 300million to CFAF 1 billion (Kouassi, Akpapuna, et al, Soedeje, 2007). This operation sped up the logic of consolidation in the early 1990s; however the sharp devaluation of the CFA Francs in 1994 accelerated the reserve of French banks towards a Cameroonian economy struggling to emerge from a strict regime of the IMF (common wealth 2009)

Since this period the banking sector in the country has struggled to offer any substantive contribution to the growth of the economy, however, the last five years or so have offered some hope with the entry of more players in the sector bringing the number of commercial banks to 13 with more still expected.

The players include the following; P SocieteGenerale des banque au Cameroun (SGBC), SCB Credit Lyonnais du Cameroun (SCB-CL), Amity bank Cameroon PLC, Ecobank, Afriland first bank, national financial credit bank (NFCB), commercial Bank of Cameroon (CBC), union bank of Cameroon (UBC), Citibank, banque international du Cameroun pour L’Eparge et du credit (BICEC), standard chartered bank Cameroon (SCBC), oceanic bank, united bank for Africa (UBA), and national financial credit bank (NFCB).

Banks in Cameroon, both domestic and foreign-owned have been found to offer loans only to a few high net worth individuals and corporate, with a narrow range of product offering. This state of affairs has left most of Cameroon without any contact with the financial world. Even though one can point fingers to banks for not offering credit to ordinary Cameroon despite having excess liquidity on their balance sheet, the high number of nonperforming loans and difficulties in recovering loans through the courts are major difficulties face by banks in this country Cameroon’s financial system is not fully developed and the absence of a vibrant credit market has been found to hinder more dynamic economic growth.

Most analysts see growth opportunities in offering financial services to the “unbanked” and tapping the potential of the vast informal sector, which comprises approximately 45% of the economy, (Cameroon wealth 2009).

Most banks in Cameroon especially the locally-owned banks are considered as being heavily undercapitalized, (IMF 2009), as they have a capital adequacy ratio of less than 8%. Even though the minimum capital was recently increased from $200000 to $400000 observers still consider Cameroonian banks as being undercapitalized as most have an average ratio below 5%.

The importance of capital to the soundness of any banks cannot be overemphasize here, capital (especially equity) help fight moral hazard by ensuring that banks have much to loss when they involve themselves in any risky behaviors. Capital also functions as a cushion when bad shacks do occur, making it less likely that the financial institutions will fail, thereby directly adding to the safety and soundness of financial institutions, (Mishkin2010).

Without comprehensive legislation to handle the undercapitalized nature of these banks, the regulatory authorities will be overwhelmed by many banks which will be seeking financial assistance and exhaust their “lender of last resort” funds. To avoid this situation, the regulatory authorities should undertake extensive research to determine the appropriate capital level that will place banks in the country in a safe capital position and set the scene for them to make their rightful contribution to the country’s economy.

In stipulating capital requirement for banks, regulatory authorities in Cameroon must also take into consideration the risk-based capital requirement as stated in the Basel Committee on supervision, which ties capital to the risk level of banks. Considering the limitation of the Basel I accord, regulators must ensure that they follow the never-ending work of the Basel Committee on banks’ capital requirement.

The banking sector in Cameroon is controlled and supervised by the BEAC. It I of the Central bank for all Central African countries. It originated from the bank of Senegal which was opened in 1853 and by 1920 extended its activities to all French territories. In 1941 the “CaisseCentrale de la France Libre” to take over activities. It was authorized to undertake money exchange and transmission between France and all its territories.

In 2005, 7 of 11 banks were found to be in good or solid standing. Furthermore, the liquidity ratio of the whole financial system in Cameroon was 2% in 2004 and 0.58% in 2005 (CEMAC, surveillance report, 2005). However, the amount of bad or non-performing loans was 13.1 billion in 2004 and an increase in 2005 (COBAC 2005), and an increase in the amount from 2004 to 2005 by 0.8 billion.

1.2 Statement of the Problem

The commercial bank plays their mediation role by absorbing financial surpluses and put them at the disposal of investors to be directed toward various investment channels. This investment activity carries out by the bank is hardly devoid of risk and problem, because the bank is seeking to maximized it expected profits on these investments and this requires optimum utilization of the available resources since the bank is exposed at any moment to meet the obligations of it clients and depositors who want to withdraw their savings and so the bank should be ready to meet these demands at any time.

However, the problem the problem arises when the bank is not able to meet these demand, especially those unexpected ones, which may embarrass the bank with it clients and may lose their trust over the time, in light of the intensive competition in the banking sector resulting from the increasing number of local banks as well as intensive competition from their from the foreign banks that work in the local banking market [Mutibwa2013]

Therefore each commercial bank has to work to maximize it profit and at the same time be able to meet the financial requirements of its depositors by holding a sufficient amount of liquidity, in order to achieve a balance between the optimal amount of cash that enable them in achieving a balance between profitability and liquidity together, because each level of liquidity has a different effect on the of profitability and the problem arises when the commercial banks try to maximize their profit at the expense of neglecting liquidity effect, which may cause a technical and financial hardship with the consequent to withdraw of deposit.

The current study, therefore, seek to determine the impact of liquidity management, liquidity indicators affect banks performance as well as the limitation that may hinder the achievement of the required balance between liquidity and performance and how to overcame the limitations, taking NFC BANK CAMEROON as a case study

1.3 Objective of the study

The main objective of this study is to determine the effects of liquidity management on the performance of commercial banks in Cameroon.

1. To identify the source of bank liquidity
2. To identify the problem associated with bank liquidity
3. And finally to make recommendations base on the findings

1.4 Hypothesis

H0: liquidity management has no effect on the performance of commercial banks in Cameroon

H1: liquidity management has an effect on the performance of commercial banks in Cameroon

Further Readings

THE EFFECT OF LIQUIDITY MANAGEMENT ON THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS CASE STUDY OF ECOBANK CAMEROON