Research Key

The effect of liquidity Management on the performance of commercial banks in Buea, case of ECOBANK

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Banking and Finance
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International: $20
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The main objective of this study is to examine the effects of liquidity management on the performance of commercial banks in Buea with case study of Ecobank. The study used a descriptive survey design using both secondary data obtained from the financial statement of Ecobank for a period of 5years from 2016 to 2020 and primary data obtained from a structured questionnaire. Data obtained was analyzed using correlation and Regression model and results obtained (r = 0.940) tested for significance using Kolmogorov Smornov test. From the results gotten it is seen that both cash planning and cash position have a negative relationship with the profitability (ROE).This is seen from the negative coefficients of -0.034 and -0.274 respectively. However, this study also concluded that, there is a significant negative relationship between liquidity holdings and profitability. This results are so because the variable relationships showed insignificant values, since the p-value was in all cases greater than 0.05, at 5% level of significance. The study recommends that banks should put strategies in place for monitoring, reporting and reviewing cash levels to ensure the long and short term stability of the entire systems. Also the surplus funds of the banks should be seasonally invested in short-term instruments of the money market.

KEYWORDS: Cash planning, Cash position, Performance, Commercial banks.



1.1 Background of the Study

The strength of the banking system in every economy is an essential requirement to ensure economic stability and growth (Halling and Hayden, 2006). Banks are the main part of the financial sector in any economy, performing valuable activities on both sides of the balance sheet. On the asset side, they enhance the flow of funds by lending to the cash starved users of funds, whereas they provide liquidity to savers on the liability side (Diamond and Rajan, 2001). Banks also facilitate the payments and the settlement systems and support the smooth transfer of goods and services. They ensure productive investment of capital to stimulate the economic growth and also help to develop new industries, thereby increasing employment and facilitating growth.

Commercial banks, being some of the most vital financial intermediaries of every financial system, performed the activities of collecting deposits and granting loans. The most valuable form of money at this era was gold and this portrayed money and wealth where the gold was kept by a merchant black smith. After some years lenders in Greece during the Roman Empire began to give loans and accepting deposits in the form of money. The activities were also carried out in China and India. The development of banking spread from Northern Italy throughout the Roman Empire and in the 15th and 16th century to northern Europe. The Bardi and Peruzzi families dominated banking in the 14th century in Florence establishing branches in many part of Europe (Bassey, 2015).

Globally, liquidity management is inversely related to the performance of commercial banks (Bassey, 2015). A liquidity management crisis was evident in global financial crisis of 2007 to 2008 (The Basle Committee, 2008).  It started with the great depression of 1992 to the Russian episode of 1998 and to the most recent global financial crisis.  Emerging Asia between 2007 and 2009 witnessed the spillover effects of the US subprime mortgage market ranging from a fall in Asian stock markets, depreciation of currencies and a decrease in international bank lending.  This was the worst financial crisis raising fundamental questions about liquidity management. During the crisis, banks such as Lehman brothers and Merrylnch collapsed in USA. This collapse was due to liquidity pressure and this resulted in the breakdown of world stock exchange banking sectors, housing sector and different business (Sulaiman et al, 2013). Research has shown that liquidity can affect the performance of the bank and the whole economy at large (Mehta, 2012). Hence companies have adopted complex and very rigorous management programs to manage their affairs since profitability is significantly influenced by liquidity (Adebayo et al, 2011). 

Furthermore, looking at the Canadian banks, they have the best banking system in world receiving a score of 6.8% out of the possible top seven banks. This was confirmed by a survey conducted by the world’s economic forum called the Global Competitiveness which reported 12000 co-operate executives in 2008 within the hit of that global crisis. However, Canada suffered from the crisis because it lead to the collapsed of Bear Stean’s this was because of liquidity pressure and also Canada was affected due to the collapsed of the USA stock exchange market. Furthermore, looking at the German banking system, it contributes to about 332% of Germany’s economy GDP unlike USA banking system which contributes to only 117% of the economies GDP. These banks are highly regulated by the government, but that no withstanding the economy depression of 2007 and 29008 greatly dealt with German banks. Banks such as Deustche bank and Commerz bank experienced large losses due to risky investments and off balance sheet activities which later led to liquidity crisis looking at the liquidity crisis African countries such as Nigeria and Cameroon were not excluded.

Also, Nigeria’s banking system is regulated through the central bank of Nigeria. In the Nigeria banking system deposits from public sectors and government owned agencies can be collected by the commercial banks in order to enhance their level of liquidity (banking reform of 2004). The global economic crisis was evident in Nigeria because the relationship between banking sector liquidity and banking sector prudential regulations in Nigeria were largely ignored (Fadare , 2011), hence this aggravated the importance of liquidity risk management.

Again, Uganda’s banking sector has developed since 1906, when the National banking of India, became Grindlays bank, which was establish (Bategeka and Okumu, 2010). However, prior to independence in 1962, the banking sector in Uganda was dominated by foreign owned commercial banks (Beck and Hesse, 2006). In 1966, the bank of Uganda became the central bank, controlling all currency issues and foreign exchange management (Mutibwa, 2013). With the establishment of Uganda commercial bank and Uganda development bank in 1972, state owned banks dominated the banking sector, on top of East African Development bank which was established in 1967 (Bategeka and Okumu, 2010). The financial institutions in Uganda is regulated and supervised by the Bank of Uganda, according to Bank of Uganda status 1993.

Finally, in Cameroon, the liquidity of the whole financial system in Cameroon was 2% in 2004 and 0.58% in 2005 (CEMAC, surveillance report, 2005). The amount of non-performing loan was 13.1 billion in 2004 and increased in 2005 by 0.8 billion within 2004 and 2005 (COBAC 2005). Banks’ exposure to liquidity risk appears limited with banks in Cameroon being the most vulnerable. The withdrawal of all demand deposit by the government and half of their term deposits by the Central governments and half of their deposit would also have an effect. Liquidity is a pre-condition to ensure that firms are able to meet its short term obligations. The liquidity position is measured based on the ‘current ratio’ and ‘quick ratio’. The current ratio establishes the relationship between current asset and current liabilities. Supervisory authorities include COBAC and MINFI with BEAC being the main supervisory authority of 5 African state i.e. the Central bank and Commercial banks in Cameroon include AFRILAND FIRST BANK, ATLANTIC BANK CAMEROON,BIECE, BGF BANK,SCB BANK, CITI BANK, ECO BANK, COMMERCIAL BANK OF CAMEROON, NFC BANK, SGBC, UBC, UBA, ASCA. Against this background, the current study sought to establish how best the management of liquidity in commercial banks like ECOBANK Buea can be a key tool towards performance.

1.2 Statement of the Problem

The commercial banking sector in Cameroon is still at its infancy and is dominated the proliferation of foreign banks’. By December 2009, there were twelve commercial banks operating in Cameroon. This made about 75% of foreign dominance. The financial landscape of Cameroon however evolved with microfinance institutions surfacing from 400 to 652 progress of 10% compared to 2007. Commercial banking activities have increased from 9 in 1999 to 12 by January 2010 and to 14 in 2016 with many branches all over. The mismatch of bank’s balance sheet in terms of assets and liabilities causes financial losses leading to liquidity risk due to poor banks operation. Also, liquidity risk may also arise due to the breakdown in cash flow from lenders (Rajan & Diamond, 2005), hence our principal concern is to assess the relationship between liquidity risk management and financial performance of commercial banks in Cameroon (Eljelly, 2004).

Also, the varied nature of the functions performed by banks exposes them to liquidity risk, the risk that a bank may not meet its obligations (Jenkinson, 2008) as the depositors may call their funds at an inconvenient time, causing fire sale of assets, negatively affecting profitability of the bank (Chaplin et al., 2000).

Furthermore, the problem of liquidity trap is a call or concern. It’s a situation where depositors start withdrawing their deposits on bank at a rapid rate; this may be because of runs on banks or economic crisis. This can cause banks to borrow funds from the central bank of through interbank borrowing at a higher cost. Liquidity been an important element in a banking business has got less attention from researcher around the world since the subject matter seems to be a loophole.

However, it is important for a bank to understand the effect of each of the liquidity components on its profitability and also undertake deliberate measures to optimize its liquidity level. Liquidity risk may arise due to the breakdown or delays in cash flows from the borrowers or early termination of the projects (Diamond and Rajan, 2005). Moreover, liquidity risk may also originate from the very nature of banking: macro factors that are exogenous and financing and operating policies that are endogenous (Ali, 2004). As a result of this gap, this work is aimed at shading more light and filling the loopholes by answering the question; what is the effect of liquidity management on the performance of commercial banks in Buea case of ECOBANK?

1.3 Objective of the study

To provide answers to the above research question, we are guided by the following research objectives.

Main Objective

The main objective of this study is to establish the effect of liquidity management on the performance of commercial banks in Buea case of ECOBANK.

Specific Objectives

In order to answer the question, the following specific objectives will be considered:

  1. To evaluate the effect of cash planning and cash position on the profitability of commercial banks in Buea Municipality case of ECOBANK.
  2. To make recommendations
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