Abstract

The primary objective of this study was to analyze the influence of liquidity management on the performance of commercial banks in the South West Region of Cameroon taking into consideration Kumba as the case study. Specifically, the research examines the impacts of liquidity management on the profitability and overall financial health of these banks.

Utilizing a descriptive statistical analysis of a sample comprising various commercial banks in the region, the findings reveal that effective liquidity management significantly enhances financial performance, indicating that adequate liquidity levels are crucial for meeting customer demands and maintaining operational stability.

Conversely, insufficient liquidity was found to negatively affect profitability and increase operational risks, highlighting the importance of liquidity in the banking sector. The study also identifies that regulatory compliance plays a key role in shaping liquidity practices, with banks that adhere to regulatory standards showing improved performance metrics.

Furthermore, the research emphasizes the necessity for banks to implement robust liquidity management strategies, including stress testing and diversified funding sources, to ensure financial resilience. The results underscore the critical role of liquidity in fostering the stability and sustainability of commercial banks in the region.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Liquidity management is an essential component of a bank’s financial stability and performance. This study examines the influence of liquidity management on the performance of commercial banks in the South West Region of Cameroon sound liquidity practices are important objectives of commercial banks. This is because it determines their profits (Njimanted,2017).

For long, the liquidity of commercial banks has been recognized as a crucial factor in their overall performance, and ability to serve their customers effectively. This relationship has been the subject of significant research and analysis over the past years, one of the seminal studies on this topic was conducted by Ngongang (2014), who examined the determinants of commercial bank liquidity in Cameroon using data from 2007 to 2012. The study found that factors such as bank size, capital adequacy, and the macroeconomic environment all had significant influence on bank liquidity. Additionally, Ngongang (2014) highlighted the importance of maintaining an optimal level of liquidity to balance the trade-off between profitability and risk. It should be noted that liquidity is very critical in the successful running of every commercial bank and it is the central foundation of cash management.

Liquidity is a crucial aspect in the banking sector, it refers to the ease with which an asset can be converted into cash without significantly affecting its market price and it affects both individual and institutional investors’ ability to meet the obligations especially the short-term obligations of customers. Liquidity also in the bank context refers to the ability of banks to meet their financial obligation and commitments within a given period and the life span of every commercial bank, therefore, depends on the amount of liquidity and its deterioration will lead to the mistrust of the level of the public (C.R Sathyamoorthi 2020). During the Lehman crisis from 2007 – 2008 in Europe, many commercial banks suffered liquidity crises and were unable to meet customer’s demands, these banks witnessed bank panic. Thus, the financial systems in both the United States and Western Europe which were on the brink of collapse in September and October 2008, suffered a difficult time.

Without sufficient liquidity commercial banks cannot survive because they depend on liquidity to meet customers’ obligations, payments of staff and also to meet the demand of the community in which they find themselves as a social cooperate responsibility. That is why cash which is the most liquid is the focal point of banks in other for them to still have trusted customers and to make profits for the owners of these banks.

In Cameroon. The South West Region is a growing economic with an increasing number of Commercial Banks. The Region has also experienced economic challenges arising from the Anglophone Crises that started in 2016 and affected these banks as they became scared to give out loans to customers due to the crises. COVID-19 is also another challenge on the path of commercial banks in the South West Region of Cameroon as a limited number of persons were allowed to have access to banks and all these have impacted bank performance. Commercial Banks in all societies play a great role in facilitating economic growth and increasing development in Cameroon, especially in the South West Region. As concerns Commercial Banks, liquidity management is very important to evaluate the performances of these banks in other to maintain public trust and also to maintain stability because banks are interrelated, the failure of one can automatically lead to the failure of another. The stability of this system has a significant impact on the performance and liquidity has a great impact on the customers or the public (Wasiuzzaman 2010).

More recently, Djoumessi and Mbakop (2021) conducted a comprehensive study on the impact of liquidity management on the financial performance of commercial banks in Cameroon. Their findings, based on data from 2016 to 2020, underscored the crucial role of effective liquidity management in ensuring the long-term sustainability and competitiveness of banks in the southwest region and beyond. The researchers emphasized the need for banks to strike a balance between maintaining sufficient liquidity and maximizing profitability. Also Building on this foundational work, Fotio and Tsafack (2017) investigated the relationship between bank liquidity and performance in the southwest region of Cameroon specifically. Their analysis, which covered the period from 2012 to 2016, revealed that increased liquidity was generally associated with higher profitability and lower risk for commercial banks in the region. However, the researchers also noted that excessive liquidity could lead to suboptimal resource allocation and decreased efficiency.

The performance of any Commercial Bank depends on its level of liquidity. Banks with very low liquidity levels will tend to witness low performance because they will never be able to meet the public demands and this can also affect the staff performance, Commercial banks’ majority sole profits come from credit creation and if they lack adequate liquidity to create profit, it will affect performance and might lead to collapse and liquidation of the set bank. During the collapse of FIFA bank Cameroon, the institution was unable to perform well due to liquidity crises which arose from the mismanagement of funds, theft by staff and later the bank got liquidated. That is why, It is very important to manage the liquidity of the banking sector.

Liquidity management plays a vital role in the banking sector and enables banks to meet their functions to customers without incurring losses. It brings about stability in the banking sector. Also, through effective management banks can manage their day-to-day operations, because a well-managed liquidity position enhances banks to work smoothly without disruptions and also ensures that the is enough liquidity to support lending activities which is the giving out of loans to customers.

Moreover, a bank that fails to manage its liquidity will face solvency crises and this will lead to loss of confidence among depositors and high investors as was seen in the Lehman crisis that affected the European banks in 2007 – 2008 which saw the collapse of many banks.  Several risks affect the banking sector including interest rate risk, credit risk and liquidity risk good liquidity management is a foundation of a bank’s overall framework and bringing in liquidity risk measurement tools, such as stress testing can identify some liquidity issues and implement some strategies to avoid or mitigate such risks.

Liquidity management aids in operational stability, it impacts the bank’s profitability and thus helps a bank to find the balance between holding sufficient liquid assets which yield lower returns and investing in higher and more –yield which yields less liquid assets. A more effective liquidity management strategy can help banks to optimize return on assets while minimizing risks.

On the other hand, liquidity management plays a significant role in regulatory compliance, as banks are required to obey various regulatory standards such as the liquidity coverage ratio and the net stable funding ratio as stated in the Basel III accord. Such regulations mandate that banks should maintain sufficient liquid assets that will aid to withstand sufficient stress, making liquidity management a legal requirement and this helps regulators to closely monitor liquidity positions to prevent bank failures to prevent systematic crises.

The financial system in Cameroon is one of the highly regulated systems, the government in her path understands that the banking business is full of risk arising principally from the instability in the world economy and from human errors and misjudgment. The Government put in place certain laws just to ensure increase performance from commercial banks because had been the hook wire of the economic development of nations and they serve as mobilisers of economy resources (Md Shafiquel 2023). They also distribute the currency of the nation and their performance has an influence on the entire economy and to sustain them, laws like the COBAC law of 1990 that seeks to regulate banking activities in Cameroon through Entry. The law states that before a commercial bank comes into existence in the nation, it must have a maximum capital which is a liquidity of Ten Billion Francs (10,000,000,000FCFA), all this is to prevent demises of banks in the long run because the performance depends on the liquidity.

The second regulation is stability to ensure good performance, the government through the Ministry of Finance ensure that after entry, these banks can meet their liabilities because experience has shown that the withdrawals of customers from financial institutions terms negative in performance, a bank that maintains adequate margins by making available funds to their clients has the required liquidity.

The 1992 convection imposes conditions which restrict entry into the banking profession and also implement the Bureaucratic conditions that before anybody establishes a bank in Cameroon, they must join the Trade and Property Credit Registrar (TPPCR), Article 14 sub-1, this approval can be accorded only after COBAC has studied the application and given a favourable opinion in this regard. As mentioned above, adequate capital boosts performance and for the banks to have longevity.

Previous studies also have shown that liquidity affects bank performance, by influencing their ability to lend, invest and generate profits. There is limited research on the specific context of commercial banks in Cameroon, especially in the South West Region. This region has a unique economic profile with a wide range of mix agricultural, industrial with service-based activities which can impact bank liquidity and performance.

Liquidity management plays a serious role within the banking industry, balancing the need to meet short-term obligations to maximize profitability. However, it often presents conflicting positions that can complicate decision-making for bank management. This theoretical framework explores the inherent tensions in liquidity management, drawing on relevant literature to explain this conflict. The conflicting Positions in liquidity management ensure, that banks must sustain a sufficient level of liquidity to meet withdrawal demands and regulatory requirements. However, holding high levels of liquid assets, such as cash or government securities, typically yields lower returns compared to other investment opportunities (BIS, 2013). This creates a conflict between ensuring adequate liquidity and maximizing profitability.

Supervisory Compliance and market competitiveness aid regulatory frameworks, such as Basel III, which impose strict liquidity requirements on banks. While these regulations aim to enhance financial stability, they may also limit a bank’s ability to compete in the market by restricting the availability of funds for lending and investment purposes (Vasiljevs, 2019). This tension can lead banks to adopt riskier strategies in an attempt to maintain competitive returns.  Actual liquidity management requires a focus on both short-term cash flows and long-term cash strategies. Banks often face the challenge of aligning these time horizons, as short-term liquidity needs may conflict with the longer-term investment strategies that drive profitability (Schmidt & Jankowitsch, 2017). This discrepancy can result in suboptimal decision-making regarding asset allocation.

The conflicting situations in liquidity management within the banking industry highlight the complexities that financial institutions face in balancing liquidity needs with profitability, regulatory compliance, and stakeholder interests. Understanding these tensions is crucial for bank management to develop effective liquidity strategies that align with both short-term demands and long-term objectives. Future research should continue to explore the implications of these conflicts, particularly in the context of evolving regulatory landscapes and market dynamics.

Furthermore, as mentioned above, the regulatory environment in Cameroon has undergone significant changes in recent times, by introducing new liquidity requirements and capital adequacy standards. Thus, these changes aim to strengthen the banking sector and promote financial stability, increasing performance and also impacting the bank’s liquidity.

As the banking landscape continues to evolve, further research in this area will be crucial for informing policy decisions and guiding the development of the financial sector in Cameroon. Lastly, understanding the relationship that exists between liquidity and commercial bank performance is so crucial for bank managers, regulators and policy makers to develop strategies that promote financial stability and economic growth in the region. This study aims to address this knowledge gap by examining the Influence of Liquidity on Commercial bank’s performance in the South West Region of Cameroon.

1.2 Statement of the Problem

According to statistics carried out and published on the 23rd Feb 2024. In Cameroon, according to the International Monetary Fund (IMF), 19 commercial banks exist and they have CFA 5,300 billion in assets representing over 27% of the nation’s GDP. The majority of the banks are foreign and just a few are domestic like the Afriland bank. Every economy develops as a result of sufficient banks as they serve as a ladder for investment and intermediary between depositors and borrowers and a bank that can meet the obligations of the public or customers is seen as liable and viable. Every customer expects to rush to the bank for a loan and it should be at his or her disposal but the reverse is the case, especially in the South West Region of Cameroon. Loans are not given on time to customers and also the process takes a longer time with a lot of paper work and promises most times the customer ends up not getting credit.

Despite the role of commercial banks, these banks in the South West Region of Cameroon face adequate liquidity problems and challenges because of the high demand for credit, many individuals need loans and according to statistics, the borrowers’ demand is more than the available funds. The is also limited access to funding sources and some commercial banks like Standard Chartered Bank, Eco bank according to Trade Financing published on the 23rd Feb 2024 complained that receiving finance from foreign transactions which are supposed to be provided within 48 hours, takes several weeks and this can also be the results and effects that has affected banks from meeting with customer’s needs for a loan.

The Anglophone crises that began in 2016 gave rise to economic uncertainty and challenges as commercial banks tend highly to suffer from low-performance, increased unpaid loans from debtors greatly reduced bank performance and thus led to decreased lending to the general public.

Conventionally knowledge on its part like the coming of the 12  representatives leading industrial nations ( USA, Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, United Kingdom and Luxemburg) met in Switzerland  under the auspices  of the Bank for International Settlement in 1987-1988 to decide the amount of capital to be applicable in all the banking systems and this is known as  Basle Agreement  and under this agreement the amount of liquid to be held or capital for liquidity to operate was divided into :

Tier 1 Capital (Core Capital) includes common stock and surplus, preferred stock, and retained earnings.

Tier 2 Capital (Supplemental Capital) includes reserves for loans, preferred stock with unpaid dividends and equity notes.

All of the above was to keep banks viable, also from Cameroon’s text, the government through the Ministry of Finance on their part had struggled to solve the issue of liquidity for banks to have sufficient cash to solve customers’ needs. The Central Banking Committee (COBAC)  housed in BEAC’s offices and Yaounde, regulates all banking sectors in CEMAC and since Cameroon is part of it, it makes the banking sector one of the highly regulated systems in Cameroon.

Firstly before operating a commercial bank in Cameroon, it requires a capital of ten billion and must obtain approval of the monetary authority which is the ministry of finance in Cameroon and COBAC in other to avoid banks that might collapse secondly, they must register with the National Credit Council (NCC) and will join Trade and Personal Property Credit Registrar (TPPCR) Article 14 sub 1 this approval can be accorded only after COBAC has studied the application and given a favourable opinion in this regard.

Commercial banks are expected to have reserves with BEAC that serve as an umbrella and also lenders to commercial banks can borrow from them to meet customers’ demands.

Despite all the efforts to maintain high liquidity stable banking environment and improve bank performance in south west region of Cameroon, it’s still at its prime. So, my study is out to bring out more liquidity management strategies and solutions that can give access to customers to easily get loans and also increase performance in Commercial banks found in the South West Region of Cameroon.

1.3 Research Question

1. What is the impact of the current ratio on bank performance?
2. What is the impact of the cash ratio on performance?
3. How does loan to loan-to-deposit ratio impact bank performance?
4. In what way does the liquidity coverage ratio affect bank performance?

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