Universal banks generally provide
avenues for savings to those who have surplus funds. The bulk of such
funds are then lent out to needy personnel and business customers in
loans and overdrafts, its has been widely appreciated that more that
half of the total gross earnings of universal banks is earned from
interest on loans and advances, which constitute the single must
importance assets of the banks. Demands savings and time deposited
constitute the major source of banks profitability, it has to be
aggression in its lending function. At the same time, it has to be
liquid to meets the depositors request and maintain public confidence.
It therefore, has to strike a balance between liquidity and
profitability. As lending is one of the most intricate services provide
by banks, this paper will examine in 8rme details many theories
emanating from developed environment and their effect on the operation
of universal banks especially the credit, lending activities. They
include the consumer loans theory, and the anticipated income theory.
Those theories will thus be evaluated to measure the extents to which
they guide the lending activity of the first bank of Nigeria Plc in a
developing environment. This is a with a view of highlighting the degree
of compliance to these theories by the universal banks and also proffer
solutions and recommendations to resolve the liquidity and
profitability position in a developing economy such as Nigeria.
1.1 BACKGROUND OF THE STUDY
Liquidity management seeks to
ensure the attainment of short term objectives of monetary policy, which
means maintenance of dose rue monetary aggregate. It is very important
aspect of monetary policy implementation and control.
Universal banks create money
every day, but when the quantity created is compatible with the
absorption capacity of the economy macro economic instability may
result. In order to maintain relative macroeconomics stability, mush
reliance is placed on liquidity, growth in the banking system.
Lending and investment
operation of universal banks have been widely and extensively discussed
in various literatures. It has also been stated that anyone who expects
to borrow from the universal banks should be most concerned with the
loans investment policy and techniques. The concept profit making
activity of a universal bank is making loan available to its customers.
It faces uncertainties and therefore risk of many kinds. A bank does not
consider earning alone instead it seeks some optimum combination of
earning; liquidity and safely.
For example to gather higher
earnings, a bank has to increase more risk and liquidity and vice versa.
However, universal banks are limited in their ability to assure risks
because of the very high ratio of their liability to their total assets.
Commercial banking in Nigeria
into the nineteenth century started as a means to facilitate the
slipping business of a British shipping line Elder Dempster agencies
operating in the Nigeria territory. The chairman of the company, Mr.
Alfred Jones perceiving the advantages that were acquirable, and its
agents in Nigeria Mr. George William Neville to establish a bank in
This was how the First Bank of Nigeria Plc was opened in Lagos in 1894.
1.2 STATEMENT OF THE PROBLEM
Liquidity and credit
management have implication on bank profitability and the authorities’
depositors and shareholders. It could trigger off mass cash withdrawal
thus plunging the bank into deeper crisis. In analyzing the credit and
liquidity management of First Bank of Nigeria Plc, I shall examine its
assets quality, which includes its performing and non – performing
loans. In addition efforts would be made to look into the bank’s capital
adequacy ratio and its shocks of risk assets different measures of
liquidity and solvency.
1.3 JUSTIFICATION OF THE STUDY STATEMENT OF RESEARCH HYPOTHESIS
The following hypothesis is developed and tasked to ensure a more effective and result oriented research work.
Hi: the liquidity of universal banks could be determined efficiently from the effectiveness of its credit management.
Ho: the liquidity of a universal bank could not be determined efficiently from the effectiveness of its credit management.
Hi: lending and investment operations of universal banks depend widely and extensively on its liquidity.
Ho: Lending and investment operations of universal bank does not depend widely and extensively on its liquidity.
1.4 OBJECTIVE OF THE STUDY
A bank is considered liquid it
has sufficient cash and other liquid assets in its portfolio together
with the ability to raise fund quickly from other sources to enable it
meet its payment obligations and financial commitment in a timely
manner, therefore the main purpose is to highlight how liquidity and
credit management in this Nigeria Banking Industry is being discovered
and the extent to which First Bank of Nigeria Plc is guided in the
management of its lending functions.
1.5 SCOPE OR DELIMITATION OF THE STUDY
Universal banks act as
intermediaries by collecting deposits and paying interest on them and
granting loan charging the borrowers interest at the higher rate.
Improving these services to borrowers and the depositors the main goal
of the bank is to make profit. Apart from granting loans bank also
generate profit on investments. In order to maximize their earnings
every bank attempts to structure its assets and liabilities such a
manner as to yield the highest returns, subject to some constraints.
A bank is considered liquid if
it has sufficient cash and other liquid assets in its portfolio,
together with the ability to raise fund quickly from other sources to
enable. It meets its payment obligation and financial commitments in a
timely manner. This study therefore aims to cover the extent to which
First Bank of Nigeria, Plc is guided by the above enumerated theories in
t he management of it lending functions and know now it has been able
to survive over years in spite of the global liquidity problems to
supplement his effort the lending practices and procedure of the bank
will also be evaluated.
1.6 ORGANIZATION OF THE STUDY
Liquidity is defined in its broadest
sense as the ability to meet cash quickly and at a reasonable cost.
Credit management is the way universal bank, lend money out to
borrowers. However, this study tends to reveal the problems that one
involved in the liquidity is essentially that of having sufficient fund
to meet at all times this demand of money that may be made on a bank.
Bank must be maintain adequate liquidity in order to provided for and
line in deposit for and other liabilities, to satisfy unforeseen
increased investment in particular desirable earning assets when such
opportunities arises the liquidity requirement of any bank out of the
bank. It is the responsibility of management to measure these
requirements and to anticipate them on a current and continuous
1.7 LIMITATIONS OF THE STUDY
The research was faced with
many problems in the course of collecting information relating to this
project, as many staff is not willing to divulge related information.
The directions at various departments dealing with credit management and
liquidity in first bank refuse to disclose detail information relating
to liquidity and credit management. Access to departmental ledger
account was denied through verbal information relating to questions,
asked was given another limitation was the inability to cover various
branches of Nigerian banks, which are throughout the federation. This
was mainly due to the financial and logistical difficulties that such
exercise of this would entail.
1.8 DEFINITION OF TERMS
Functions of universal banks the services offered by universal banks are numerous and they include;
- Mobilization of savings: - universal banks perform a
very important function to all sectors of the economy by providing
facilities for the mobilization of savings and making the available for
investing purpose by the process of granting credit facilities to other
customers. In this may those funds are made available to business to
enable them expand their productivity capacity and to individuals and
household to facilitate consumptions.
- Extension of credit facilities:- According to read
(1984). He establish that the primary function of universal banks is the
extension of credit to commuting borrowers. In making credit available,
universal banks are rendering great social service through their
actions production is increased capital investments are expanded and
higher standard of living is realized.
Banks make it possible for industries to
produces a larger quantity of goods, which may remain the stock as
inventory before eventually being sold or reprocessed into another from.
A good example is the food industry where the quantity produced may be
far in express of what can be consume immediately.
- Transfer of fund:- universal banks serve as medium
for transfer funds they facilitates payment by enabling business,
government and consumers to transact without cash, cheques and credit
cards which are used for bulk purchases as measured by naira amount of
transaction cheques drawn and deposited at the bank merely indicated
transfer of fund from one account to the other.
- Creating money:- universal banks create money used
to expand productive facilities otherwise there would be a short down of
economic activity generally as business would be forced to wait until
sufficient profits are made before they could expand. However, the money
create activity of universal banks is kept under the control by the
monetary to ensure that it is not excessive.
- International trade services:- all universal banks
are involved in the financial aspect of international trade and
services required supporting this important part of the country’s
economy, such include bill for collection, documentary credit and open
account which are investment used in import and export trade.