The Efficacy of Liquidity Management and Banking Performance in Nigeria

IntroductionBank Liquidity simply means the ability of the bank to maintain sufficient funds to pay for its maturing obligations. It is the bank's ability to immediately meet cash, cheques, other withdrawals obligations and legitimate new loan demand while abiding by existing reserve requirements. Liquidity management therefore involves the strategic supply or withdrawal from the market or circulation the amount of liquidity consistent with a desired level of short-term reserve money without distorting the profit making ability and operations of the bank. It relies on the daily assessment of the liquidity conditions in the 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 requirements imposed on banks by a monetary authority (CBN 2012). To guide Bank's Management on the expected level of liquidity in the system over a period of time, liquidity management which involves the planning and control of cash and other liquid assets, may be supported by daily liquidity forecasting by the Central bank so that appropriate measures are taken to prevent undesirable market developments that may negatively impact on the objective of price stability.Bhattacharyya and Sahoo (2011), argued that Liquidity management by Central banks typically refers to the framework, set of instruments, and the rules that the monetary authority follows in managing systemic liquidity, consistent with the ultimate goals of monetary policy. In this regard, central banks modulate liquidity conditions by varying both the level of short-term interest rates and influencing the supply of bank reserves in the interbank market. While Central bank liquidity management has short-term effects in financial markets, its long-term implications for the real sector and on price level are more profound. Effective liquidity management is a key factor that helps sustain bank profits and concurrently keeps the banking institution and the financial system generally from illiquidity and perhaps, insolvency. Strategic bank management aims prominently at keeping the bank solvent and liquid in order to earn good profits and remain sound. In order to maintain public confidence on the financial system of the country, Banks are required to maintain adequate amount of cash and near cash assets such as securities to meet withdrawal obligations. It is paramount for the survival of the totality of the financial system of a country and the banks in particular whose core function of financial intermediation depend on the availability of adequate liquidity.In Nigeria, the challenges of inefficient liquidity management in banks were brought to the fore during the liquidation and distress era of 1980s and 1990s. The negative cumulative effects of banking system liquidity crisis from the 1980s and 1990s lingered up to the re-capitalization era in 2005 in which banks were mandated to increase their capital base from N2 billion to an astronomical high N25 billion. This move by the apex bank was believed would stabilize and rectify liquidity problems that were prevalent in the economy. Barely five years of what was applauded and considered as a fortified repositioning of banks against liquidity shortage, Central Bank of Nigeria (CBN) in 2009 came on a rescue mission to save five illiquid banks. The global financial crisis of 2008 also had its claws on the already ailing banks and to contain the crisis of confidence and ease financial conditions, CBN used both conventional and unconventional measures to inject liquidity into the system. In its rescue mission in 2009, CBN injected N620b to save the affected five banks that were operating on negative shareholder's funds. The use of unconventional measures became necessary as the regular monetary policy transmission mechanism got seriously impaired by the liquidity crisis that warranted the setting up an agency, Asset Management Corporation of Nigeria (AMCON) to buy out the bad debts of affected banks. …