Empirical Study of the Liquidity Management Practices of Nigerian Banks

TLDR: In this paper, the authors investigated the liquidity management practices of selected Nigerian banks by evaluating the relevance of treasury objectives in bank portfolio management, causes of asset-liability mismatch in banks, 4) incidence of treasury risk, 5) adequacy or appropriateness of liquidity risk management techniques, 6) liquidity planning practices of Nigerian banks, and 7) extent of liquidity exposure in banks.

Abstract: This study investigates the liquidity management practices of selected Nigerian banks by evaluating 1) the relevance of treasury objectives in bank portfolio management, 2) causes of asset-liability mismatch in banks, 3) causes of liquidity crisis, 4) incidence of treasury risk, 5) adequacy or appropriateness of liquidity risk management techniques, 6) liquidity planning practices of Nigerian banks, and 7) extent of liquidity exposure in banks. The rampant reported cases of liquidity crisis and financial distress in the Nigerian banking industry have necessitated a study on how to manage the bank's liquidity exposure. To achieve these objectives, eighty copies of semi-structured questionnaire were administered on bankers charged with liquidity and risk management. With a response rate of 57.5 percent complemented by an analysis of the liquidity ratios of the selected banks, we found among others that most banks fall somewhere between purchased liquidity and stored liquidity strategies in managing their liquidity risk. However, their liquidity plans do not always detail a sequencing of assets for disposal in anticipation of various degrees or intensities of deposit/fund withdrawals. To survive the turbulence that follows the emerging reforms in the banking industry, bankers need contingence liquidity plans for their contingency liquidity needs. Otherwise sudden unexpected surge in net deposit withdrawals risks triggering a possible bank run which could eventually force a bank into insolvency.