Abstract

This study that is aimed at examining liquidity and profitability management on commercial banks with the case study of Afriland first bank, the study employed the use of secondary data for which data was extracted from the income statements and balance sheets of the institution. The method of analysis was trend analysis which covered a period of 10 years that is from 2002-2011.

The study also employs the use of tables and graphs for the presentation and analysis of data. The main results show that the various indicators impact either negatively or positively on liquidity and profitability management of Afriland’s first bank. Based on the results, we recommend that managers should undergo more training in their liquidity management and carry out more advertisements to increase profitability.

CHAPTER ONE

INTRODUCTION

1.0 Background Of The Study

In the wake of the recent financial crisis, numerous studies have emerged focusing on how best to manage liquidity in order to improve bank profitability. The recent financial crisis renewed researchers, politicians, and Economists’ interest in the ongoing debate. These researchers sought to assess the liquidity and profitability management of banks.

Many research works have been carried out on the liquidity, performance, and efficiency of commercial banks, Civelek and Al-Alami (1991); Agu (1992); Ali Abdula (1994); Chirwa (1997, 1998) Tabi et al (2000), J¨urgen Eichberger (2004), Ouarda M. and Jochen S. (2008) Hiroyuki Kiyota1 (2009). However, most previous research work on bank performance paid attention on comparing performance in relation to ownership structures. For example, Bonin, Hasan & Wachtel (2005) indicate that banks with a greater foreign ownership involvement are associated with a higher efficiency. Naceur & Omran (2010) recent study assesses performance in relation to reforms and regulations.

In recent years, the African banking system has become progressively integrated and liberalized on the path to greater product and service deregulation. The progressive process of financial integration has enhanced competition and emphasized the need for improved efficiency within the banking sector, which leads to an incentive of greater bank risk-taking and eventual exposure; adversely, regulators have tried to offset these incentives by giving capital adequacy a more prominent role in the banking regulatory process. As a result, most African banks act cautiously to boast their capitalization due to pressures from both regulatory and market sides.

The banking system in Cameroon is segmented into the formal, semi-formal, and informal Sectors. In the formal sector, there are few players with branch networks confine mostly to urban and semi-urban areas. As a result, the bulk of about 80% of the population that is rural makes very little use of the formal banking sector (Tameta Serge, 2011).

This location problem has led to the development of the semi-formal sector in the form of cooperative savings associations and savings and credit associations. In addition, the informal banking sector has proved vital for the rural population. However, the financial sector in Cameroon specializes in short-term credit as opposed to the long-term loans that are necessary for industrial development. The commercial banking subsector has for too long focused on short-term lending that historically has largely targeted the foreign trade sector and large enterprises, leaving a persistent unsatisfied demand for medium-term and long-term capital finance for both large and small-scale enterprises.

Banking business involves receiving funds from the public by accepting demand, time, and saving deposits or borrowing from the public or other banks, and using such funds in whole or in part for granting loans, advances, and credit facilities and for investing funds by other means.

The formal banking system in Cameroon can be divided into five markets: commercial banks, corporate banks, leasing finance, savings banks, and building societies. These form the core of the financial system in Cameroon.

There are fourteen commercial banks in Cameroon (Afriland First Bank, Banque Atlantique, Banque, International du Cameroun pour l’Epargne et le Crédit (BICEC), Citibank, Commercial Bank of Cameroon (CBC), Ecobank, National Financial Credit Bank (NFCB), Societe Commercial de Banque – Credit Agricole (SCB -CA), Societe Generale des Banques au Cameroun (SGBC), Standard Chartered Bank, Union Bank of Cameroon-Oceanic (UBC-Oceanic), United Bank for Africa, Attijariwafa bank from Morocco and the recent BGFI Bank, a Gabonese bank ). These banks accept deposits including checking accounts and offer credit services to both individuals and companies.

Commercial banks play the following economic functions: they facilitate the formation and allocation of capital, they transform the risk of financial assets, and they promote market efficiency (D. Carter, 2004) commercial banks are easily the largest and the most diversified of the financial intermediaries in terms of assets and liabilities. The only major asset that they do not hold is corporate stock, which law prohibits them from acquiring (Foundations of Banking, 2005).

1.2 Statement Of Research Problem

The turbulence in the credits and funding markets since 2007 is sufficient evidence that liquidity risk management in the banking system has been less effective than expected. According to the Financial Stability Review (FRS 2008), investors appear to have acquired risks, which they did not fully understand that major financial institutions were not able to manage these risks so much as transferring them into their own business lines resulting in an unintended concentration of risks on their own balance sheet.

Banks offer a menu of contracts to depositors and loans to firms that are intended to suit with expected liquidity needs of agents. In the study of impacts of liquidity constraints on bank lending policy, Webb (2000, p.70,71) points out that in advent of poor information of liquidity risk management from a bank, depositors of the fund will choose to withdraw a greater portion or even all of their deposits, causing liquidity shortfall, which banks will be unable to generate sufficient financing to embark on profitable projects and consequently affect performance ratios such as assets turnover and return on equity.

Recent research related to liquidity management reckons that managing liquidity risk requires banks to have sufficient liquidity to meet up with depositors’ and investors’ demand of funds (not too much, not too less but sufficient only). That bank creates liquidity by transforming illiquid loans into demand deposits which is given to investors in the forms of credits lines and loans commitment to investing in the markets of securities hence creating markets liquidity. Ford (2009, p.46, 47) argues that stress testing in analyzing the future possibility of liquidity exposure, management oversight, and contingency planning will help to mitigate the liquidity risk and ensure stability in the system.

Bikker and Hu (2002) revealed that African banks have not been widely studied and were therefore difficult to inform policy on readily efficient banks in the continent without sufficient data. A similar view was reached by Roland (1997), Eichengreen and Gibson, (2001), Goddard et al. (2004), Gibson (2005), Bonaccorsi di Patti. All these studies, among others, observed that more understanding of Cameroon’s banking sector performance was important. World Bank (2005) also emphasized the need to undertake a deeper analysis of financial sector performance in SSA, where performance has not been impressive.

1.3 Research Questions

This study however is structured to give answers to the following main questions:

1.3.1 Main Research Question

What is the role of liquidity and profitability management in commercial banks?

1.3.2 Specific Research Questions

The specific questions are:

1. What are the factors that affect liquidity and profitability of commercial banks?
2. What are the instruments of liquidity and profitability management in commercial banks?
3. What are the effects of liquidity and profitability management on commercial banks?

1.4 Objectives Of The Study

1.4.1 Main Objective

The main objective of this study is to investigate the liquidity and profitability management of commercial banks in Cameroon. This is supported by the following specific objectives.

1.4.2 Specific objectives

1. To examine the factors that affect the liquidity and profitability of commercial banks.
2. To investigate the instruments of liquidity and profitability management on commercial banks in Cameroon.
3. To examine the effects of liquidity and profitability management on commercial banks.
4. To give necessary recommendations.

1.5 Basic hypothesis

H1: There is a relationship between liquidity and profitability management in commercial banks.