CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The world nowadays has changed due to the growing aim of companies to maximize profit to improve the value of their firm, preserving high liquidity level to attain the highest level of net worth for the shareholders of the organization, together with the achievement of other aims and objectives. Therefore, the liquidity management in an organization is very important due to the role it plays in their success. Liquidity management is very critical to the survival and growth of any financial system. Numerous studies have been conducted on this concept in some organizations over the years, therefore its importance cannot be overemphasized in terms of the baking sector particularly the deposit money banks in Nigeria. The significance of having effective liquidity management cannot be overemphasized when it comes to financial systems like deposit money banks. The Importance of liquidity management came about during the global financial crisis of 2007 through 2008, when the banking industry was affected by serious liquidity strain. The global financial crisis revealed the fact that liquidity can disappear in a thin air like a mirage; so also, it can stay for a longer time (Terseer, Henry, & Mkuma, 2010). Liquidity management in all organizations is their ability to effectively convert current business assets to cash. Cash is usually considered very important in any intuition because it ensures that business components are sustained (Patjoshi, 2016). On the other hand, liquidity in banking is the ability of a bank to make funds that can be used to pay for obligation as it progressively becomes due (Onyekwelu, Chukwuani, & Onyeka, 2018). If working capital is managed properly in any organization, it makes it easy to maintain liquidity which guarantees daily operation and meeting of business obligations without any hindrance (Ibe, 2013). One of the major challenges affecting the continuous survival of many businesses or financial organizations is credit risk. The likelihood that the credit clients of a bank whether in organization or person will not meet up with payment of loan as it gets due is referred to as credit risk.

        Credit risk can also be referred to as “the risk of default” (Gambo, Bambale, Ibrahim, & Sulaiman, 2019). Banks can fall into loan default when they give out credit and don’t monitor it, to ensure that is paid back. Banks mainly make use of money deposits to create loans for borrowers. If these loans go to default, the banks are exposed to default risk which can lead to financial crisis (Nwude & Okeke, 2018). Proper management of credit risk through its careful assessment and weighing can reduce the negative it might have on the performance of an organization. So also, effective credit management serves as source of income for banks and when it managed properly it leads to their survival and robust growth. Though, credit risk plays a vital role on the growth of commercial banks because it accounts for a large portion of its profits through the interest rates being charged form the loans granted. However, the interest can be linked directly to credit risk; this means that when interest rate is higher it can lead to nonpayment of loan.

1.2   Statement of the Problem

The main aim of listed deposit money banks of maximizing profit is to is to enable them accept cash from customers such as deposit to give it out as credit. When there is increase in the amount of credits borrowed out to customers who in turn refuse to pay, it might affect the cash balance of the bank by resulting in a decrease which can weaken liquidity level. Therefore, attaining balance between liquidity and credit risk is of major importance. When banking sector is performing well financially in any economy, it promotes growth and development in that economy. Any financial institution that is strong financially can be able to withstand all forms of crisis that can emerge, and its financial strength can also strengthen other sectors or institutions by providing financial aid. According to Rajkumar and Hanitha (2015), the Assessment of financial performance of any organization that can generate resources from daily operations at given time is done through cash from operations and net income. Therefore, liquidity management is understood as important variable to the financial performance of banks. The inclusion of suitable strategy to effectively manage both variables will help banks in the long term to better serve its customers and ensure growth. Furthermore, despite the significance of liquidity management on financial performance of Nigerian banks, there is very little existing literature in accounting and finance that can be use adequately to investigate the effect of liquidity management on the financial performance of listed banks in Nigeria. It is against this backdrop the current study is designed.

1.3   Research Questions

This study provides answers to the following research questions:

1. To what extent does deposit to total asset ratio impact on the return on assets (ROA) of first city monument bank of Nigeria?
2. How does loans to deposit ratio impact on financial performance of first city monument bank of Nigeria?
3. What is the impact of current ratio on return on equity (ROE) of first city monument bank of Nigeria?

1.4   Objectives of the Study

The main aim of this study is to examine the impact of liquidity on financial performance of deposit money banks in Nigeria. The specific objectives of this study are to:

1. determine the impact of deposit to total asset ratio on return on assets (ROA) of first city monument bank of Nigeria.
2. Ascertain the relationship between loans to deposit ratio and financial performance of first city monument bank of Nigeria.
3. determine the impact of current ratio on return on equity (ROE) of first city monument bank of Nigeria.

1.5    Statement of the Hypotheses

The following hypotheses are tested to achieve the research objectives:

Ho1: deposit to total asset ratio has no significant impact on return on assets (ROA) of first city monument bank of Nigeria.

Ho2: loans to deposit ratio has no significant relations between financial performances of first city monument bank of Nigeria.

Ho3: current ratio has no significant impact on equity ratio of first city monument bank of Nigeria.

1.6   Significance of the Study

This study will be of immense benefit to other researchers who intend to know more on this topic and can also be used by non-researchers to build more on their work.

This study contributes to knowledge and could serve as a bench mark or guide for other work or study. It avails individuals with information about the impact of liquidity on financial performance of deposit money banks in Nigeria

1.7   Scope of the Study

This study is limited to the impact of liquidity on financial performance of commercial banks in Nigeria. The boundary of the study is limited to first city monument bank plc, Nigeria. The time frame of this study is a period of nine years, covering the period of 2000 -2024. This period is chosen because it will enable researchers and commercial banks to see the variation in financial performance of first city monument banks Plc.