The Impact Of Liquidity Management On The Performance Of Deposit Money Banks In Nigeria

Globally, the maintenance of adequate liquidity level plays very crucial roles in the successful functioning of all organisations. Liquidity management is a concept that is receiving serious attention all over the world especially with the current financial situations and the state of the world economy, Ibe (2013). Some of the striking corporate goals include the need to maximize profit, maintain high level of liquidity in order to guarantee safety, attain the highest level of owner’s net worth coupled with the attainment of other corporate objectives. The importance of liquidity management as it affects corporate profitability in today’s business cannot be over emphasised. The crucial part in managing working capital is required maintenance of its liquidity in day-to-day operation to ensure its smooth running and meets its obligation (Eljelly, 2004). Liquidity plays a significant role in the successful functioning of a business firm. Therefore, a firm should ensure that it does not suffer from lack-of or excess liquidity to meet its short-term compulsions. A study of liquidity is of major importance to both the internal and the external analysts because of its close relationship with day-to-day operations of a business (Bhunia, 2012). Dilemma in liquidity management is to achieve desired trade-off between liquidity and profitability (Nahum et al. 2007).

The Basel committee, in response to the global financial crisis of 2007 – 2010, has proposed a new set of liquidity requirements to complement its revised framework of capital requirements. The primary and obvious motivation for the new interest in managing banks’ liquidity is concern about liquidity risk, which we define as the risk that a solvent bank may find itself unable to manage its current flow of withdrawals from its own stock of liquidity and access to borrowed funds from others, Calomiris et al (2012). As a result of the heavy reliance of banks on central bank lending during the crisis, policy makers understandably would like to reduce the dependence of deposit money banks on the lender of last resort, and thus encourage banks to limit or self-insure (through cash asset holdings) some of their liquidity risk.

This chapter present a review on related literature on the impact of liquidity management on the performance of deposit money banks. It seeks to review the works of scholars who has written on the topic and to effectively explain the conceptual and theoretical frameworks on the impact of liquidity management on banks’ performance.