EFFECTS OF LIQUIDITY PROBLEMS ON COMMERCIAL BANKING IN NIGERIA

The business of modern banking started in Nigeria in 1892 with the incorporation of African Banking Corporation. British Bank of West Africa later absorbed this bank in 1894. The early period of commercial banking in Nigeria was characterized by a lack of legislation which made it an all-comers affair.

With the absence of any banking legislation in 1892, when the first bank was established in Nigeria (African Banking Corporation) anybody could set up a banking company provided the bank is registered under the Ordinance Act which section 2(i) prohibited the formation of a banking company or partnership consisting of more than ten (10) persons for the purpose of carrying on a banking business, unless it was registered as a company, hence it was referred to as the “free banking era”.

This period also saw the establishment of three foreign banks and two indigenous banks. The foreign banks were; The British Bank of West Africa Limited in 1894 (now known as First Bank Plc), the Barclays Bank Dominion colonial and overseas in 1917 (now known as Union Bank Plc) and the British and French Bank, in 1949 (now known as United Bank for Africa Plc). The two indigenous banks were the National Bank of Nigeria in 1933 and the Agbonmagbe Bank (now known as Wema Bank Plc), as well as the African Continental Bank Limited in 1947.

The appointment of the Paten commission of inquiry on 7th September 1948 was another feature of this free banking era. It was to inquire generally into the business of banking in Nigeria and make a recommendation to the government on the form and extent of control, which should be introduced into the banking system.

Based on the report of this commission, the first-ever banking legislation in the country was promulgated in 1952. An increase in the number of indigenous banks in the country was another major event during this period. However, some banks established during this period could not survive.

The second phase (i.e. the second era) in the origin of commercial banking in the country opened with the establishment of the Central Bank Plc (CBN) in 1959. After the establishment of the Central Bank and prior to independence in 1960, new commercial banks were established. 1959 to 1962 saw the enactment and amendments of banking legislation. These were the 1958 Banking Ordinance which became effective in 1959, then 1961, 1962 and 1964 amendment and the Banking Decree.

The evolution of commercial banking in Nigeria brought about the Financial System Review Committee set up by the Federal Government under the chairmanship of a distinguished economist; Dr. Pius Okigbo. The committee known as the Okigbo committee was to review the Nigerian Financial System. Consequently, in a white paper published on the committee with respect to the commercial banks (the establishment of a state bank in each state and the amalgamation of the three biggest indigenous banks into one entity). The Okigbo report, and the white paper on it nevertheless, marked a new era in the evolution of the commercial banking system in Nigeria (Yunisa and Kehinde2010 ).

1.2 STATEMENT OF THE PROBLEM

There are very brilliants ideas, projects, concepts, businesses that are viable, feasible and bankable still waiting for angel investors. There seems to be a lack of faith in the Nigeria Entrepreneur, bank and financial institution business owners by custodians of loanable funds i.e. banks and other financial institutions. Therefore the statement of the problem is how all these business owners can have access to establishing this type of business. More so, inventors find it difficult to access credit.

1.3 OBJECTIVES OF THE STUDY

The main objective of this study is to focus on the problems of liquidity in commercial banks in Nigeria so as to provide the information required to make decisions as to how the fund should be mobilized effectively and one such decisions is made, to provide the data necessary to adequately manage the available fund. Other objectives of this study include;

To determine whether fund mobilization has an effect on liquidity problems. To find out whether illiquidity holds the customer to lose confidence in commercial banking.

1.4 RESEARCH QUESTIONS

1. Does fund mobilization has an effect on liquidity problem?

2. Does illiquidity hold the customer to lose confidence in the commercial banks?

1.5 RESEARCH HYPOTHESES

Ho: Fund mobilization has effect on problems of liquidity.

Hi: Fund mobilization does not have any effect on problems of liquidity.

Ho: Illiquidity holds the customers to lose confidence in the commercial banking system.

Hi: Illiquidity does not hold the customers to lose confidence in the commercial banking system.

1.6 SCOPE OF THE STUDY

The scope of this study is restricted to the effect of liquidity problems on the commercial banking system in Nigeria with the United Bank for Africa Plc. (UBA) as the case study. The research work is limited to the staff and customers of the bank only.

1.7 SIGNIFICANCE OF THE STUDY

A study of this kind is expected to make a significant contribution to the organization’s development. The study will provide the basis for scrutiny for liquidity problems on commercial banking in Nigeria, which aids banks under study (United Bank for Africa) and other commercial banks to solve the problems faced in the area of liquidity and mobilization of funds. It will assist other banks to solve similar problems. It also provides various indicators and methods used to measure organizational performance.

1.8. LIMITATION OF THE STUDY

As expected this study may not be without its limitations.

The study was limited by a number of factors, which include the following:

i. Insufficient numbers of recent literature on the subject topic.

ii. Inadequate time and financial resources to carry out the study extensively.

iii. Inaccessibility of some relevant data.

1.9 DEFINITION OF TERMS

1. Liquidity: The liquidity of an organization is measured by the ability of that organization to meet its short term debt and liabilities.

Liquidity can be measured through the following ratios:

(a) Current ratio: current asset

Current liabilities (in which the ratio is 2:1)

(b) Acid test ratio: Current asset – stock

Current liability

(in which the ideal acid test ratio is 1:1)

(c) Fixed interest ratio: Profit before interest and tax

Fixed interest rate

(d) Return on Capital Employed (ROCE):

Profit before interest and tax

Capital Employed

(e) Earning per share ratio:

Profit after tax

No of ordinary share issued

2. Illiquidity: An establishment or bank is said to be illiquid when it can no longer meet its depositor's demands or its obligations as at when due. It is a numinous sign of insolvency and when the problem of illiquidity persists for a very long time, it could lead to the forceful sale of assets below their market value.

3. Commercial Banks: Commercial banks are institutions where people, corporate bodies, statutory corporation etc keep money and other valuables for security reasons.

4. Insolvency: An establishment or bank is said to be insolvency when the value of its realizable assets is less than the total value of its liabilities.