The Management Of Liquidity And The Effect On The Performance Of Commercial Banks In Cameroon With The Case Of Afriland First Bank Limbe
Department: Accounting
No of Pages: 48
Project Code: ACC4
References: Yes
Cost: 5,000XAF Cameroonian
: $15 for International students
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 agreement inorder to avoid cash flow problems which 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 Fiurst Bank Limbe, the unwilling nature of some
respondents to collect questionaires for answer, 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 a 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 micro finance bank performance. Capital adequacy, operational
efficiency and asset quality were also found to affect performance of banks.
CHAPTER ONE
INTRODUCTION
1.1 Background to the
Study
In
every system, there are major component that are very important for the
survival of the system, this also applicable 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 partake 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 very important institution in the financial system as it
helps in facilitating the movement of financial assets. In view of these role
and activities, commercial banks play in the 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 exist excess
liquidity within the banking system of Cameroon generated from oil surpluses
which have been growing significantly since 2001.
Banks
holding reserve 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.
The
recent build-up of excess liquidity in 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 represent the capacity of the bank of finance itself efficiently the 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 requirement 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 in to 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, are he after math of 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 specially in terms of profits.
A
liquidity-profitability trade off this exist, 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 reduces 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 a desired level of short reserve of money without distorting the profit making ability and operations of the
bank, it relies on the detail assessment of the Liquidity conditions in 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
requirement on banks by a monetary authority (CBN 2012). Liquidity and
profitability as performance indicators are very important to the ajar a stake
holder; shareholders, creditors and tax authorities, the shareholders are
interested in the profit ability 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 a e normally on demand. The
tax authorities are interested in the profit ability of the bank in order to
determine the appropriate tax obligation (Olaguji, et al, 2011).
The
above mentioned highlights the importance and need for a 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 potential of
appropriate liquidities when in its
conditions to obtain the funds immediately and at a 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 efficiently has been widely
discussed in 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) has 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 not 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 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 poses major liquidity management which adversely
affect 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 cost 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 have to
maintain 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 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.
1.3.1 Research Questions
Some
of the reasons are:
- What are the determinants of the management of liquidity and the effect on the performance of Afriland First Bank Limbe?
- What are the liquidity management practices in Afriland First Bank Limbe?
- 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.
Specific Objective
- The specific objective of the study is to identify liquidity management practices in Afriland First Bank Limbe
- To examine the determinant of liquidity in Afriland First Bank Limbe
Other objectives include:
- To access the Liquidity position of Afriland’s first bank Limbe.
- To identify the source of Liquidity.
- To ascertain factors affecting liquidity
- And finally to make recommendations based on the findings.
