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This study is aimed at appraising the liquidity problems in commercial banking in Enugu state with a view of determining how these problems affects commercial banking business, as well as determining whether the policies imposed by the central bank has actually solved the liquidity problems of commercial banks or not.  In doing this, we want to classify the period under review (1980-1980) into want to pre-sfem period and the post-sfem period.  In order words, the study intends to discuss the pre-sefem and post-sfem experiences of banks and offer useful suggestions as to how their problems could be alleviated if not eradicated.

For this purpose, empirival survey and history research was carried out and the statistical tool used is percentages.  The source of data for this study are both primary and secondary where the primary soruce consists of questionnaires and oral interviews, the secondary source is in the form of books, journals and news papers.

The research revealed that prior to the introduction of the structural adjustment programme with the second tier foreign exchange market (sfem) as its main feature, the problem has been that of excess liquidity, however, the introduction of the structural adjustment programmes (SAP) brought about the present liquidity crunch in the banking system.  It was further found out that both excess liquidity and shortage of liquidity affect the banks loans and advances as well as their profits.  Further more, it was observed that the policies imposed by the central bank has not solved the (excess and shortage of) liquidity problems of commercial banks.

As a result of these, it is suggested, among others, it is suggested among others, that banks should intensity their efforts towards acquiring more deposits drive for deposits (as it is popularly known) in order to alleviate the present problem of liquidity shortage in the system.  Moreover, there should be effective supervision of the policies imposed by the central bank to combat the liquidity problems of commercial banks to ensure that the policies are adequately implemented.  Other measure to alleviate either the excess or shortage of liquidity problems include adjustment of interest rates, adjustment of liquidity ratio, diversification of commercial banking services, establishment of more rural banks to mobilize rural savings and so on.  The essence of these is to maintain adequate liquidity and at the same time make enough profit for the shareholders.








          As a matter of fact, a lot has been written on the liquidity problems in commercial banking in Enugu state.  The basic challenge of this text attempts to discuss the two experiences (Excess liquidity and shortage of liquidity) of commercial banked in Nigeria and on a final note offer useful suggestions as to how these problems could be alleviated if not eliminated.  It is true that liquidity and profitability are among the many problems with which bank management struggles constantly.  This is because of the need to balance the pursuit of profit will the need to remain liquid.

As indicated above, commercial banks in Enugu state have obviously experienced excess liquidity era and are presently going the specific experience or shortage of liquidity.  This study therefore aims to find out the ways of the two experiences on the profitability of commercial banks, whether the agencies imposed by the federal government of ten though the central bank have solved the problems or not and how the dual problems have affected commercial banks loans and advances to their customers.

In terms of chapter organization, the next is arranged into five chapters.  The first chapter is devoted to introduction and some fundamental issues related to the research work.  The second chapter contains the review of related literature to the research work.  Here, too, the exposition of the liquidity problems of commercial banks in Enugu state is carried out.  The approach used here is pre-sfem and post-sfem experiences of banks.  Discuss here also, is the policies introduced by the federal government, mostly through the central bank, in alleviating the liquidity problems of banks.  Pre-sfem policies and post-sfem policies approach has been used here too; chapter three deals with research design and methodology which include the sources of data, interview questions, samples used, methods of investigation and scope and limitations of the study.  Chapter four bears the presentations, interpretation, test and analysis of data.  Finally, in chapter five are the summary finding, conclusion and recommendations.  Recommendation are based on the two experiences of banks, although on the two experiences of banks, although situation since it is the prevailing situation of commercial banking system in Enugu state.





1.1            Background of study

1.2            Statement of the study

1.3            Objective of the study

1.4            Significance of the study

1.5            Scope and limitations of the study

1.6            Definition of terms




2.1            Liquidity ratio significance of liquidity ratio computation of liquidity ratio

2.2            Cash ratio

2.3            Liquidity risk

2.4            Liquidity requirements of commercial banks in Enugu state

2.5            Liquidity problems of commercial banks in Enugu state pre-SFEM Experience post-SFEM Experience

2.6            Policies introduced by the central banks of Nigeria in solving liquidity problems of commercial banks in Enugu state. Pre-SFEM policies post-SFEM policies



Summary of findings, conclusions, and recommendations

3.1            Summary of findings

3.2            Conclusions

3.3            Recommendation





1.1            BACKGROUND OF STUDY

Liquidity is the word that the banker uses to describe his ability to satisfy demand for cash in exchange for deposits.  It can also be defined as the capacity of the bank to meet promptly demands that it pays its obligation.

A bank is considered to be liquid when it has sufficient cash and other liquid assets, together with the ability to raise funds quickly from other sources to enable it to meet its payment obligation and financial commitments in a timely manner.  In addition there should be a sufficient liquidity buffer to meet almost any financial emergency.

How much liquidity to hold and in what forms to hold it are a constant concern of bank management.  Banks are required to comply with legal reserve, requirements.  In addition, banks need liquidity to meet seasonal and unexpected loan demands and deposit fluctuations.  The majority of the transactions can be anticipated in advance and met from expected cash in flows from deposits, loan repayment or earnings.

Cash reserves also are needed to take advantage of unexpected profit opportunities, or for what might he termed aggressive purposes.  When a business firm that the bank has been working to secure as a customer finally presents a loan application, or a particularly desirable investment develops, the bank must have funds available to seize these opportunities.  During periods of expanding economic activity, banks are frequently presented with attractive loan situations which can only be met if banks maintain adequate liquidity. To determine the liquidity a bank needs at a particular time is to find the ratio of loans to deposits.  The higher the ratio is, the less willing banks will be in lending out and vice versa.

In Enugu State, commercial banks activities are regulated strictly by the banking act of 1969 as amended under the control of the central bank of Nigeria.  As a result of these regulation by the central bank, the commercial banks are required to hold specific assets equal to a certain percentage of their deposits and certain liabilities in liquid form.  This is known as the legal reserve requirement.  In the legal reserve requirements are liquidity ratio requirement, cash reserve requirements, stabilization securities issued by the central bank and special deposits.

Liquidity problems, for the purpose of this study, are looked at as the problems encountered by bank managers who are responsible for liquidity management, when there is either excess liquidity or liquidity squeeze in the banking system or in commercial banks.



There is no gain-saying, the fact that prior to the introduction of the structural adjustment programme (SAP) of which the second-tier foreign exchange market (SFEM) is the nucleus, the commercial banks in Enugu state have been wallowing in excess liquidity.  Consequently, they maintained excess liquidity ratios and were in the habit of refusing, deposits from the public.  These may be accountable to some deficiencies in the management policies of the central bank of Nigeria and the overall under developed nature of the entire economic system.  However, the structural adjustment programme with SFEM as the chief feature changed the trend.  The situation became that of shortage of liquidity or liquidity crunch, as it is popularly called.

In any case, for the purpose of this treatise, the liquidity problems of commercial banks have been identified from two perspective.

One is that they had excess liquidity before the advent of SFEM.

The other is that shortage of liquidity have been telling hard on them since the existence of SFEM under SAP.  In otherwords, this treatise takes a PRE-SFEM and posi-SFEM change on the liquidity problems of commercial banks.

With respect to the excess liquidity situation, this study intends to find out the effect of the excess liquidity in the banking system on the profitability of commercial banks, it investigates whether or not the policies imposed on the commercial banks by the central bank have succeeded in mopping up the excess liquidity in the banking system, and finally whether or not the excess liquidity in commercial banks affects loans and advances to their customers.

On the other hand, the shortage of liquidity perspective, focuses on its (shortage of liquidity) effect on the profit ability of commercial banks, whether or not the policies of the central bank can actually corrects the shortage of liquidity position of commercial banks, and above all how shortage of liquidity affects loans and advances to customers.


Having identified the problems to which this study addressed itself, the writers shall in this work make a critical insight into the dual problems of excess and shortage of liquidity in commercial banks in enugu state and determine the effect and reaction of the two situations on the following:

1).     The profitability of commercial banks in Enugu State.

2).     Their reaction to the various policies of the government through the CBN to correct the two anomalies.

3).     The overall impact of these two situation on loan advanced to customers of the commercial banks.



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