1.0 Introduction
There was a time when trade by barter was the order of the day, come to think of that, there was nothing like money rather than liquidity problems. But when money (cash) was introduced and there was operations of banks in so many places in the country, liquidity problems emanated. However the purpose of this work is to state the effect of liquidity problems in Nigerian commercial banks with reference to the effectiveness of government policies and to the banks profit.
1.1 Background Of Study.
According to oxford advanced learners dictionary liquidity means the state of owning things of value that can be easily changed into cash. EBELE OGAMBA in his book BANKING LENDING AND LOAN ADMINISTRATION SECOND EDITION, define liquidity as the ease and speed with which an assets can be converted or transformed into cash. In other word liquidity of bank simply means “the ease with which banks assets could be converted into cash”. These assets include cash in the banks vault, cash with the central bank and other government securities that have not been used as collaterals for loans. But the most liquid of all these assets is cash.
The balance of the bank account and cash on hand are of curse perfectly liquid where as debtors are near liquid. Stock is not as liquid as debtors because it has to go through the process before it becomes cash. In any business certain liabilities have to paid off in very future and part of the interpretation procedure must be in seeing that payment which are due can infact be meet. This is one of the reasons why banks will be liquidity enough. There are so many other reasons why a bank should have reasonable liquid assets in its assets portfolio. These include to be able to meet promptly demands for deposit withdrawals that is the banks must maintain confidence and also be able to use profitable opportunities that may come out in future.
It should be noted that banks like most other business are profit oriented, for instance operating to make profit for their shareholders. The profit could be realized if there is enough deposits. And the deposits will not come unless the deposition could be assured of the safety of their deposits, there has to be enough liquidity in the bank. However it is the fact that action designed to make more profit brings about liquidity in the bank and vice versa. In Nigeria, the activities of the commercial banks are regulated by the banking act of 1979 as amended under the control of central bank of Nigeria. The important of these regulations were to maintain trust and confidence in banking systems as well as to achieve a specific economic objective.
Thus in the period of mounting excess liquidity as was the case in the 1970’s, banks were excepted to hold some of their assets equal to a certain percentage of their deposits in liquid form. This is know as LEGAL RESERVE REQUIREMENT. The rationale for the use of this instruments was to map out the to stop the inflationary trend in the economy. The excess liquidity in the ecomy and also to stop the inflationary trend in the economy. The excess liquidity in the banking sector gave rise to inefficiencies in banking operation. Banks staffs were no longer polite to their customer, they become arrogant since they had little outlets to invest their money. Banks however have devise new method of attracting deposits from customers.
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