Abstract

This study was undertaken to assess the management of Liquidity and the effect on the performance of commercial banks in Cameroon with a case study of Afriland first bank Limbe. Poor liquidity management reduces the financial performance of an institution and commercial banks have experienced huge financial losses due to poor liquidity management.

The study was guided by the following objectives; To examine the determinants of the management of liquidity and the effect on the performance of Afriland First Bank Limbe, to identify the different liquidity management practices in Afriland First Bank Limbe.

Major findings were; Afriland First Bank Limbe ensures its borrowers do not default on loan payment agreements in order to avoid cash flow problems that may affect its liquidity position, they ensure that accrued reserves of liquidity assets are sufficient to withstand unexpected expenditure.

During this study, the following problems were encountered; Difficulty in obtaining financial reports from Afriland First Bank Limbe, the unwilling nature of some respondents to collect questionnaires for answers, lack of adequate finance to carry out the research.

From the findings the following recommendations were made; Commercial banks should adopt a general frame work for liquidity management to ensure sufficient liquidity for executing their works efficiently and bank officials should be trained in areas of liquidity management.

To conclude, the result of the study shows that liquidity is not a substantial determinant of microfinance bank performance. Capital adequacy, operational efficiency, and asset quality were also found to affect the performance of banks.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

In every system, there are major components that are very important for the survival of the system, this also applies to the financial system, the financial institutions have contributed immensely to the growth of the financial system, as they offer an efficient institution method through high resources can be mobilized and directed from less productive uses to more productive uses.

In performing this financial role, the financial institution that have to partaken in this important financial role are the commercial banks. The function of the commercial banks has become the strong base for the two major functions of commercial banks namely deposit mobilization and credit extension.

Commercial banks have become a very important institution in the financial system as it helps in facilitating the movement of financial assets. In view of these roles and activities, commercial banks play in society, commercial banks is selected as the main focus of the study.

The commercial banking sector in Cameroon is dominated by 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. Capital market development has in addition increased the intermediation role of banks within the financial landscape of Cameroon, although with only two companies to go public through the initial public offering (IPO).

More so, the international monetary fund (2016) has observed that the existing excess liquidity within the banking system of Cameroon is generated from 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 interbank 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 buildup of excess liquidity in the Cameroon commercial banking sector signifies that little funds from surplus units to deficit units take advantage of profitable investment opportunities. Thus, the question; “How liquidity management affects commercial banks performance in Cameroon”.

Poor liquidity management affects earnings and capital in extreme cases it leads to insolvency and bank failure (Alemayehu and Ndung’u, 2012), this   Eventually caused a decline in the bank’s earnings. Moreover, a bank may ration credit if it feels that the Liquidity management need of the bank is quite poor. Therefore, poor liquidity management reduces the capacity of the bank to effectively compete (Chaplin et al, 2000).

According to Greuning and Bratanovic, (2004) banking liquidity represents the capacity of the bank of finance itself efficiently transaction, the liquidity risk for a bank is the expression of the probability of losing the capacity of financing its transaction respectively of the probability that the bank cannot honor its clients (withdrawal of deposit, maturing of the other, and cover additional funding required for the loan portfolio and investment).

The management of the liquidity risk presents importance, at least from two points of view; primarily an inadequate level of liquidity may lead to the need to attract additional sources of finance with higher cost-reducing profitability of the bank that will lead ultimately to insolvency, liquidity management is an important objective of commercial banks not only because it prevents banks from running into liquidity shortage 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, is the aftermath of the global financial crisis and lessons learned from it have renewed concerns on banks’ 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 bank costly liquidation of assets of even larger banks.

More so, the liquidity of banks allows them to grant credits and consequently stimulate investment and growth. Civelek and Al-Alan (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 economy, following the matching principle banks and financial managers 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 exists since the more liquid an asset is the less profitable the asset would be.

Ditmar and Mahrt-Smith (2007) found that firms with good corporate governance guard their cash resources better than poor governance results in quick misspend of excess cash in ways that significantly reduce operating performance.

In addition, the concept of liquidity management, therefore, involves the strategic supply or withdrawal from the market or circulation if the amount of liquidity is consistent with the desired level of short reserve of money without distorting the profit-making ability and operations of the bank, it relies on the detailed 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).

Liquidity and profitability as performance indicators are very important to the ajar a stakeholder; 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 demines the ability to respond to their withdrawal needs which are normally on demand.

The tax authorities are interested in the profitability of the bank in order to determine the appropriate tax obligation (Olaguji, et al, 2011). The above-mentioned highlights the importance and need for careful liquidity management and monitoring by commercial banks to reduce the uncertainties associated with financial instability and unsystematic risk.

An excessive liquidity may lead to a decrease of the return on assets and in consequence poor financial performance. A bank has the potential of appropriate liquidities when in its conditions to obtain the funds immediately and at reasonable optimum liquidity is a real art of bank management. Liquidity mismanagement is mainly caused by a mismatch or refinancing risk (Saunders and Cornet, 2005). The indicators of poor liquidity management are; a fall in asset prices, low marketability of assets (Saunders and Cornet, 2005),  many commercial banks as a result face the challenge of reduced profitability (Alemyehu and Ndung’u 2012).

Also, the issue of bank profitability and performance efficiency has been widely discussed in the scientific literature; it has also been considered in the number of theoretical and empirical and empirical researches of different kinds.

However, return of assets (ROA) and return on equity (ROE) have always been mentioned amongst the main indicators characterizing bank performance. Bourke (1989) as one of the first two who discovered in the research that exactly the internal factors of bank performance such as net income before and after-tax against total assets and capital reserve factors have the greatest impact on profitability indicators, in turn, the studies conducted in the USA and Europe demonstrated that a great concentration of banks and financial institutions surpass profitability

According to Koskela and stanbaka (2002), commercial banks are profit-seeking organizations and the ability of a bank to earn profit depends upon its portfolio management, while making a profit, banks are also concerned about liquidity and safety. In fact, profitability, liquidity, and safety are the main objectives of a   monetary policy.

A commercial bank has to earn profit and at the same time satisfy the withdrawal needs of its customers. (Richard and Laughkilin, 1980) suggested that the importance of liquidity status for investors and managers for evaluating company future, estimating investing risk and return and stock price is one hand and the necessity of removing weakness and defects of traditional liquidity indices (current and liquid ratio) on the other hand persuade the financial researchers.

1.2 Problem Statement

Commercial banks have experienced huge financial losses due to poor liquidity management (Vintila and Nenu, 2016). Banks pose major liquidity management which adversely affects their capital structure and earnings if not properly managed,  liquidity management may lead to severe consequences in the institution (Narozva, 2015).

Poor liquidity management reduces the financial performance of an institution. However, the default rate is the main determinant of the financial performance of a bank, most financial institutions especially banks have failed due to increased poor liquidity management. With poor liquidity management, banks and other financial institutions have to borrow at very high rates thus increasing costs for banks.

Banks wholly depend on deposits made by their clients and most of their operations are carried out using the deposits ( Vintila and Nenu 2016). In a situation where all the depositors withdraw their cash from their 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 a very high cost due to high-interest charges (Vintila and Nenu, 2016).

Due to this problem, commercial banks have tried to ensure that they hold adequate funds at all times so that they are able to meet the demand of their depositors, however, maintaining this amount of funds in the organization has proved extremely expensive. This is due to the fact that the bank has to maintain a large mandatory cash reserve in their accounts. This may not only lead to the loss of revenue but also high opportunity cost associated with holding large amounts of cash. Generally, the main problem of Liquidity management in this institution is a mismatch between the assets and the liabilities, this is measured using the maturity mismatch gap. The larger the funding gap, the higher the probability of a Liquidity management crisis.

–           Lack of adequate liquid resources.

–           Inadequate internal control on liquid resources.

–           Lack of adequate segregation of duties.

1.2.1    Research Questions

Some of the reasons are:

1. What are the determinants of the management of liquidity and the effect on the performance of Afriland First Bank Limbe?
2. What are the liquidity management practices in Afriland First Bank Limbe?
3. What are the different determinants of liquidity in Afriland First Bank Limbe?

 1.3 Objectives of the Study

The main objective of the study is to examine the determinants of the Management of liquidity and the effect on the performance of Afriland First bank Limbe.

The specific objective of the study is to

1. identify liquidity management practice in Afriland First Bank Limbe
2. To examine the determinant of liquidity in Afriland First Bank Limbe

1.4 Hypothesis Testing

HO: liquidity has no relationship with the performance of First Bank Limbe.

HI: liquidity has a relationship with the performance of Afriland First Bank