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The purpose of this study was to examine the management of liquidity and its effect on the performance of commercial banks in Cameroon, using Afriland’s first bank Limbe as a case study. Inadequate liquidity management impairs an institution’s financial performance, and commercial banks have suffered enormous financial losses as a result of poor liquidity management.

The study was led by the following objectives: to evaluate the factors of liquidity management and their impact on Afriland First Bank Limbe’s performance; and to identify the various liquidity management strategies employed by Afriland First Bank Limbe.

Significant findings included the following: Afriland First Bank Limbe ensures that its borrowers do not default on loan payment agreements in order to avoid cash flow problems that could affect its liquidity position; and they ensure that accrued liquidity asset reserves are sufficient to cover unexpected expenditure.

The following difficulties were experienced during this study: difficulty getting financial data from Afriland First Bank Limbe, refusal of some respondents to collect questionnaires for responses, and a lack of appropriate funding to conduct the research.

The following recommendations were made based on the findings: commercial banks should establish a general framework for liquidity management to ensure sufficient liquidity for efficient operations, and bank officials should get liquidity management training.

To summarize, the study’s findings indicate that liquidity is not a significant predictor of microfinance bank performance. Bank performance was also found to be influenced by capital sufficiency, operational efficiency, and asset quality.



1.1 The Study’s Context

Each system has critical components that are critical to the system’s survival; this is also true of the financial system. Financial institutions have made enormous contributions to the financial system’s growth by providing an efficient institution method through which large amounts of resources can be mobilized and directed away from less productive uses toward more productive ones.

Commercial banks are required to play this critical financial role in accomplishing this financial function. Commercial banks’ function has developed into a firm foundation for its two primary activities, deposit mobilization and credit extension.

Commercial banks have grown to be a critical component of the financial system due to their role in enabling the transfer of financial assets. Commercial banks were chosen as the primary subject of the study due to the functions and activities they play in society.

Foreign banks dominate the commercial banking sector in Cameroon; by December 2009, there were twelve (12) commercial banks operating in the country, with only three indigenous banks: National financial credit, Afriland first bank, and Commercial bank of Cameroon.

While this accounts for 75% of foreign dominance, Cameroon’s financial landscape has evolved significantly over the last decades, particularly in the financial sector. Additionally, capital market expansion has strengthened the intermediation role of banks in Cameroon’s financial environment, despite the fact that only two companies have gone public via an initial public offering (IPO).

Additionally, the international monetary fund (2016) highlighted that Cameroon’s financial sector currently has excess cash as a result of oil surpluses that have been expanding steadily since 2001.

Banks with reserves in excess of those mandated by the Bank of Central African States (BEAC) have had their reserve ratios dramatically boosted, with the liquidity ratio in Cameroon trending at 157 percent, 198 percent, and 215 percent in 2001, 2004, and 2005, respectively (Saab and Vacher, 2007).

BEAC dictated that the ratio of liquid assets to short-term obligations be 100%; however, this situation was worsened further by the absence of well-functioning money interbank and capital markets, as well as significant lags in monetary policy to address it.

Despite recent BEAC steps, excessive liquidity in banks has continued to grow. For example, excess liquidity increased by 37.5 percent in 2006, from 489,038 million in 2005 to 672,363 million in 2008. The increasing trend continued in 2008, when excess liquidity reached 838,910 million FCFA, a 0.13 percent rise (COBAC report, 2008).

The recent accumulation of excess liquidity in the commercial banking sector of Cameroon indicates that small amounts are being transferred from surplus to deficit units to take advantage of favorable investment possibilities. Thus, the question: “How does liquidity management affect the performance of commercial banks in Cameroon?”

Inadequate liquidity management has a negative impact on earnings and capital and, in extreme circumstances, results in insolvency and bank failure (Alemayehu and Ndung’u, 2012), which eventually results in a fall in the bank’s profitability. Additionally, a bank may restrict loans if it believes its liquidity management requirements are extremely low. As a result, ineffective liquidity management impairs the bank’s ability to compete successfully (Chaplin et al, 2000).

According to Greuning and Bratanovic (2004), banking liquidity refers to the bank’s ability to finance its transactions efficiently, while liquidity risk is the probability of the bank losing its ability to finance its transactions, or the probability of the bank failing to honor its clients (withdrawal of deposit, maturing of the other, and cover additional funding required for the loan portfolio and investment).

Liquidity risk management is critical from at least two perspectives; first, an insufficient level of liquidity may necessitate attracting additional sources of finance, reducing the bank’s profitability and ultimately resulting in insolvency.

Second, liquidity management is a critical objective of commercial banks not only because it prevents banks from running out of liquidity, but also because it determines their profits.

Munyambonera (2010), Olweny and Ongore (2013), and Kusa (2013), as cited in Lukorito et al. (2014), have not only identified profitability as the primary objective of commercial banks, but also recognized it in this era of fierce competition in financial markets, and financial managers have committed to meeting that objective.

Though liquidity management has always been a focus for the majority of banks, the global financial crisis’s aftermath and lessons learned have reignited worries about banks’ liquidity challenges. When banking markets are in turmoil, clients can withdraw their savings at any time, which can result in bank runs and the costly liquidation of the assets of even major banks.

Additionally, banks’ liquidity enables them to extend loans, which stimulates investment and growth. According to Civelek and Al-Alan (1991), because commercial banks are the primary source of funding for businesses, the availability of affordable bank credit is critical for firm investments and, consequently, the economy.

Using the matching principle, banks and financial managers must determine the ideal or optimal level of liquidity that will allow them to meet their liabilities when they mature without jeopardizing their performance, particularly in terms of profits. There is a liquidity-profitability trade-off since the more liquid an asset is, the less profitable it is.

Ditmar and Mahrt-Smith (2007) discovered that organizations with sound corporate governance protect their cash resources more effectively, whereas inadequate governance resulted in rapid misappropriation of extra cash, severely impairing operating performance.

Additionally, the concept of liquidity management entails the strategic supply or withdrawal of liquidity from the market or circulation if the amount of liquidity is consistent with the desired level of short-term reserve money without distorting the bank’s profit-making ability or operations. It is based on a detailed assessment of the liquidity conditions in the banking system in order to determine the banking system’s liquidity needs and thus the volume of liquidity to allocate or withdraw. The banking system’s liquidity requirements are typically defined by the sum of the reserve requirements imposed on banks by a monetary authority (CBN 2012).

Liquidity and profitability as performance indicators are critical to all stakeholders, including shareholders, creditors, and tax authorities. Shareholders are concerned with the bank’s profitability since it affects their return on investment. Depositors are concerned about their bank’s liquidity position since it affects the bank’s capacity to meet their withdrawal requests, which are often on demand.

The tax authorities are concerned with the bank’s profitability in order to assess the proper tax liability (Olaguji, et al, 2011). The preceding emphasizes the need and necessity of commercial banks exercising prudent liquidity management and monitoring in order to mitigate the uncertainties associated with financial instability and unsystematic risk.

Excess liquidity can result in a drop in the rate of return on assets and, as a result, poor financial performance. A bank’s ability to collect funds quickly and at a fair cost is a true art of bank management. Mismanagement of liquidity is mostly caused by a mismatch or refinancing risk (Saunders and Cornet, 2005). Poor liquidity management is indicated by a decline in asset prices and limited marketability of assets (Saunders and Cornet, 2005). As a result, many commercial banks face lower profitability (Alemyehu and Ndung’u 2012).

Additionally, the profitability and performance efficiency of banks have been extensively studied in the scientific literature; they have also been considered in a variety of theoretical, empirical, and empirical works of various types.

However, return on assets (ROA) and return on equity (ROE) have historically been cited as key indices of bank performance. Bourke (1989) was one of the first two researchers to demonstrate that internal bank performance factors such as net income before and after taxes relative to total assets and capital reserve factors have the greatest impact on profitability indicators; in turn, studies conducted in the United States and Europe demonstrated that a high concentration of banks and financial institutions outperforms profitability.

According to Koskela and Stanbaka (2002), commercial banks are profit-seeking entities whose capacity to produce profit is contingent on their portfolio management. While banks are concerned with profit, they are also concerned with liquidity and security. Indeed, the primary objectives of monetary policy are profitability, liquidity, and safety.

A commercial bank must produce a profit while also meeting its customers’ withdrawal needs. (Richard and Laughkilin, 1980) suggested that the importance of liquidity status for investors and managers in evaluating company futures, estimating investment risk and return, and stock price, on the one hand, and the necessity of eliminating weaknesses and defects in traditional liquidity indices (current and liquid ratio) on the other, persuade financial researchers.

1.2 Statement of the Problem

Commercial banks have sustained significant financial losses as a result of ineffective liquidity management (Vintila and Nenu, 2016).

Banks face significant liquidity management challenges, which can have a detrimental effect on their capital structure and earnings. If not managed properly, liquidity management can result in severe consequences for the institution (Narozva, 2015).

Poor liquidity management impairs an institution’s financial performance. However, because the default rate is the primary driver of a bank’s financial success, the majority of financial institutions, particularly banks, have collapsed as a result of growing inefficiency in liquidity management.

Due to insufficient liquidity management, banks and other financial institutions are forced to borrow at extremely high rates, raising bank costs.

Banks are entirely reliant on client deposits, and the majority of their activities are conducted utilizing client deposits ( Vintila and Nenu 2016). If all depositors withdraw funds from their accounts simultaneously, the bank is likely to get into a liquidity management trap.

This may necessitate borrowing funds from the central bank or other institutions at exorbitant interest rates (Vintila and Nenu, 2016).

Commercial banks have attempted to address this issue by ensuring that they keep an acceptable level of cash at all times in order to meet the demand of their depositors; nevertheless, maintaining this level of funds within the organization has proven exceedingly costly.

This is because banks are required to maintain a sizable cash reserve in their accounts. This may result not just in revenue loss, but also in a high opportunity cost associated with storing huge sums of cash.

The primary issue with liquidity management in this institution is a mismatch between assets and liabilities, which is quantified by the maturity mismatch gap. The greater the financial gap, the more likely a liquidity management crisis may occur.

– Inadequate liquid assets.

– Inadequate internal control over liquid assets.

– Inadequate segmentation of roles.

1.2.1 Research Issues

Several reasons include the following:

What factors influence liquidity management and how does this affect Afriland First Bank Limbe’s performance?

What are Afriland First Bank Limbe’s liquidity management practices?

What are the various liquidity factors at Afriland First Bank Limbe?

1.3 The Study’s Objectives

The study’s primary purpose is to investigate the drivers of liquidity management and their impact on the performance of Afriland First Bank Limbe.

The study’s specific purpose is to

discover Afriland First Bank Limbe’s liquidity management practices

To investigate the factors that influence liquidity in Afriland First Bank Limbe.

1.4 Testing Hypotheses

HO: liquidity has no bearing on First Bank Limbe’s performance.

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