ABSTRACT

This study investigates the effects of liquidity management on the financial performance of insurance companies in Cameroon specifically the South West region Buea. In a sector where timely claim settlements and investment stability are critical, effective liquidity management remains a pivotal component of operational efficiency and profitability. The research adopts a quantitative approach specifically the cross-sectional design over a specific period of time. Key liquidity indicators—such as the current ratio, quick ratio, and cash flow from operations—are examined in relation to financial performance metrics including return on assets (ROA), return on equity (ROE), and underwriting profit. Multiple regression analysis is employed to determine the strength and direction of these relationships. The findings reveal that efficient liquidity management has a statistically significant positive impact on financial performance, underscoring its importance in ensuring both solvency and competitive advantage in the insurance industry. The study recommends that insurance companies in Cameroon strengthen their liquidity policies and monitoring frameworks to optimize financial outcomes. These insights are valuable for financial managers, regulators, and policymakers seeking to enhance the stability and sustainability of the insurance sector.

CHAPER ONE

INRODUCTION

1.1 Introduction

This study is structured into Five chapters whereby Chapter One provides the general introduction to the research topic. It begins with background of the study which focuses on liquidity management and its usefulness to firms in these present times. Followed by the statement of the Problem which brings out the reason for the research. To achieve this, sub research questions are posed after the main question has been presented. Again, the objectives are presented which serve as a guide to our research showing what we intend to achieve. A guiding statement is presented in the form of a research hypothesis. This is the base of our decision in getting the place of the independent variable on the dependent variable. Chapter Two which is literature review constitutes other scholar’s articles, books and texts related to effects of liquidity management on financial performance of firms. This chapter of the study also focused on literature which helps highlights the objectives of the study and related theories. Chapter Three is methodology which on the industry or case study of the scope, research design, methods of data collection, instruments, sampling and methods of data analysis. Following this is Chapter Four which deals with data presentation and discussion of results and to test whether the theoretical framework explains the changes (liquidity and profitability). Chapter Five is a complete summary of findings in the proceeding chapter and the conclusion based on these findings that were made as well as limitations on the entire research process and finally

1.2 Background of the Study

Liquidity management is a concept that is gaining traction around the world, particularly in light of present financial circumstances and the health of the global economy. Business owners and managers throughout the world are concerned about devising a strategy for managing their day- to-day operations in order to satisfy their obligations as they become due while also increasing profitability and shareholder value (Don, 2020).

Liquidity management is a critical goal for financial organizations, not only because it keeps insurance companies from running out of cash, but also because it influences their earnings. In managing its assets and liabilities in the wake of uncertainties in cash flows, cost of funds, and return on investments, the institution must ascertain its trade-off between risk, return and liquidity (Mashok(Placeholder)o, 2020). Indeed, studies in other countries across the globe have attributed bank failures to poor liquidity management. This is because scholars argue that one of the major contributors to the Global Financial crisis of 2007-2008 was poor liquidity management (Adalsteinsson, 2014). This is large as a result of the collapse of Lehman Brothers, a leading investment bank which ended up spreading across the globe through the “contagion effect”. According to Choudhry (2011), liquidity management refers to the funding of deficits and investment of surpluses, managing and growing the balance sheet, as well as ensuring that the institution operates within regulatory and stipulated limits. Insurance companies indeed require liquidity since such a large proportion of their liabilities are payable on demand (premiums) but typically the more liquid an asset is, the less it yields. Hence, the decision to choose a particular combination of assets over another, taking into consideration the liability side of the institution, would have a massive effect on their liquidity management, profitability, and risk (Choudhry, 2012). In managing its assets and liabilities in the wake of uncertainties in cash flows, cost of funds, and return on investments, a company must ascertain its trade-off between risk, return and liquidity (Landskroner & Paroush, 2011). Sound liquidity management is an important objective of insurance companies, not only because it prevents them from running into liquidity shortages but also because it determines their profits. Though liquidity management has always been a priority in most institutions, the after math of the global financial crisis and lessons learned from it have renewed concerns on insurance company’s liquidity issues.

Sound liquidity management is an important objective of insurance companies, not only because it prevents insurers from running into liquidity shortages but also because it determines their profits. Munyambonera (2010), Olweny & Ongore, and Kusa (2013), as cited in Lukorito et al (2014) have not only identified profitability as the primary objective pursued by insurance companies, but have also recognized that profits are a necessity for successful banking in this era of stiff competition in financial markets, and financial managers are committed to meeting that objective.

The liquidity of insurers allows them to grant credits and consequently stimulate investment and growth. To Civelek & Al-Alami (1991), since insurance companies are the primary suppliers of funds to firms, the availability of bank credit at affordable rates is of crucial importance to firm investments, and consequently, to the health of the economy. During the 2007-2009 global financial crises several insurers experienced some difficulties because they failed to manage liquidity in a prudent manner. Thus, the crisis emphasized the importance of liquidity to the proper functioning of financial markets and the banking sector (Marozva, 2015).

According to Pradhan and Shrestha (2016), the liquidity risk of insurers arises from the funding of long-term assets by short-term liabilities, thereby making the liabilities subject to rollover or refinancing risk. Further, the liquidity risk is usually of an individual nature, but in certain situations may compromise the liquidity of the financial system as well (Pradhan and Shrestha, 2016). Though liquidity management has always been a priority in most insurers, the aftermath of the global financial crisis and lessons learned from it have renewed concerns on bank’s liquidity issues. In a state of turmoil in banking markets, customers can withdraw their deposits at any time and this can lead to bank runs that can lead to costly liquidation of assets.

Liquidity management, therefore, involves the strategic supply or withdrawal from the market or circulation of the amount of liquidity consistent with the desired level of short-term reserve money without distorting the profit-making ability and operations of the bank. It relies on the daily assessment of the liquidity conditions in the banking system, so as to determine its liquidity needs and thus the volume of liquidity to allot or withdraw from the market. The liquidity needs of the banking system are usually defined by the sum of reserve requirements imposed on insurers by a monetary authority (Njimanted et al., 2017). The relationship between liquidity and performance is critical to insurers. It is generally understood that efficiently monitored liquidity levels lead to good financial results. Effective liquidity management creates good public confidence in the financial system of a country and consequently in the liquidity state of insurers.

This can lead to a better return on the bank’s assets. Ibrahim and Aqeel (2017) underscored the need to make optimum use of liquid funds for investments to enhance profitability, keeping aside adequate funds for meeting operational commitments. Excessive levels of liquid funds will negatively affect profitability, while low levels of liquidity can adversely affect the smooth functioning of insurers (Ware, 2015). This means that insurers should make trade between liquidity and profitability in order to boost business profit (Bagh, Razzaq, Azad, Liaqat & Khan, 2017).

According to Nwankwo (2004), adequate liquidity enables a bank to meet three risks. First is the funding risk – the ability to replace net outflows either through withdrawals of retail deposits or nonrenewal of wholesale funds. Secondly, adequate liquidity is needed to enable the bank to compensate for the non-receipt of the inflow of funds if the borrower or borrowers fail to meet their commitments. The third risk arises from calls to honor maturity obligations or from requests for funds from important customers. Adequate liquidity enables the bank to find new funds to honour the maturity obligations such as a sudden upsurge in borrowing under atomic or agreed lines of credit or to be able to undertake new lending when desirable. For instance, a request from a highly valued customer. Adequate liquidity is also needed to avoid forced sale of asset at unfavorable market conditions and a heavy loss.

Adequate liquidity serves as a vehicle for profitable operations especially to sustain the confidence of depositors in meeting short-run obligations. Finally, adequate liquidity guides against involuntary or non-voluntary borrowing from the regulatory authorities where there is a serious liquidity crisis, the bank is placed at the mercy of the Central Bank, and hence the control of its destiny may be handed over. The importance of liquidity management as it affects corporate profitability in today’s business cannot be over emphasise. The crucial part in managing working capital is required to maintain its liquidity in day-to-day operation to ensure its smooth running and meets its obligation. Liquidity plays a significant role in the successful functioning of a business firm.

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 internal and external analysts because of its close relationship with the day-to-day operations of a business (Musaed, 2020). The dilemma in liquidity management is to achieve the desired tradeoff between liquidity and profitability (Raheman, 2007). The liquidity requirement of a firm depends on the peculiar nature of the firm and there is no specific rule on determining the optimal level of liquidity that a firm can maintain in order to ensure a positive impact on its profitability.

The Financial institution sector in Cameroon is still in its infancy and is dominated by the proliferation of foreign insurers. By December 2009, there were twelve financial institutions operating in Cameroon, with only three names, National Financial Credit, Afriland First Bank, and Financial institution of Cameroon as indigenous insurers. This makes up about 75% of foreign dominance. The financial landscape of Cameroon has however experienced some evolution over the past decades, particularly in the financial institution’s sector, where many microfinance institutions have surfaced. According to Njimanted et al (2017) From 400 to about 652 microfinance establishments in the country at the end of 2008, a progress of 10% compared to 2007 of this number, the Cameroon Cooperative Credit Union League (CamCCUL) occupies a relatively large proportion; 177 credit unions.

According to Dawar, (2014); and Wahlen et al., (2015), in their study on the effects of working capital management practices on the financial performance they postulate that working capital management routines were low amongst most financial institutions as they had not envisaged formal working capital management practices. The findings also postulate that there is a positive relationship between working capital management practices and financial performance. The study was taken by Dawar, (2014) attempted to assess the factors that determine the financial performance of insurance companies. The study focused on twenty-eight different variables. With this study, the weighted influence of a particular determinant is hard to establish. The study undertaken has been broad and focusing on a wide range of issues without narrowing down to specifics like Dawar, (2014). Most of the studies carried out advocates for further research on the factors that have continued to cause poor financial performance of insurance companies in the Sub-Saharan region which has a higher poverty index. Most of the evidence regarding insurance companies performance largely focuses on the developed economies and the findings are not necessarily relevant to the sub-region’s needs. Some of the problems faced by insurance companies in Buea are poor management, lack of resource due to its poor management, inadequate donor funding, insufficient support from government, high taxes and funds shortages. This has brought a lot of anxiety and uncertainty in the financial market especially the banking sector.

However, by 2015, there were 418 accredited microfinance institutions in the country (Ministry of Finance (MINFI), 2015). Financial institution activities have equally increased in coverage and depth with the number of insurers increasing from 9 in 1999 to 12 by January 2010 and to 14 in 2016 with branches all over the urban centers in the country. Capital market development has in addition increased the intermediation role of insurers within the financial landscape of Cameroon although, with only two companies quoted in the capital market, financial institutions in Cameroon are gradually getting involved in the process of enabling companies to go public through the Initial Public Offering (IPO). Historically, insurers must face a certain degree or type of risk which may have a severe impact on the economy or financial system and economic system as a whole. This is why insurers, governmental entities, and private industries have tried to understand liquidity management and implement public policy, regulations, and risk assessment policies to mitigate this risk of liquidity

1.3 Statement of the Problem

Generally, in Buea there has been an exponential increase in delinquent loans in Insurance companies over the last few years. This has led to an increase in liquidity problems in insurers thus negatively impacting the investment decisions of insurance companies leading to poor financial performance since they are not able to meet a majority of their financial obligations. The original cause of liquidity risk is the maturity imbalance between assets and liabilities. The majority of the assets are funded by deposits most of which are short-term in nature with a possibility to be called at any time leading to an imbalance between short-term assets and short- term liabilities. This imbalance can be evaluated with the aid of the maturity gap between assets and liabilities. A higher liquidity gap might create liquidity risk for most Insurance companies in Buea.

Also, Liquidity management and financial performance are very vital in the development, survival, sustainability, growth and profitability of financial institutions. Several studies have found that an insurance company’s liquidity condition has a significant impact on its performance. Other research, on the other hand, has found the opposite. It’s against the backdrop of the fact that there are only few focal studies on this topic matter, the unsatisfactory results of comprehensive studies that evaluate the impact of liquidity (among other variables) on insurance company profitability, and the stable liquidity among Cameroon’s financial institutions, a more focused study measuring liquidity (in isolation) and utilizing more recent data be done to provide more definite proof. For a financial institution to remain competitive and liquid, it must pay attention to liquidity management and financial performance with regards to how its ability to manage financial performance can contribute to its organizational achievement. Liquidity management is the ability of a business to meet its cash obligations at a stipulated time period, liquidity plays a big role in determining the success or failure of a firm in business performance due to its effect on the firm’s profitability. According to Mashoko (2020), the issue of liquidity management and financial institution performance has been called for concern in the banking and insurance sector. Financial institutions absorbing financial surpluses from their customers (depositors) and put them at the disposal of investors (borrowers) to be directed towards investment channels. This investment activity carried out by insurance companies goes with risks and problems, because the business is seeing to maximize is expected profits on these investments, and this requires optimum utilization of the available resources, since the business is exposed at any moment to meet the obligations of its clients and so it has to meet these demands at any time.

The problem comes when the insurance company is not able to meet these demands, especially those unexpected ones, which may embarrass the bank with its clients and may lose their trust over time, in light of intensive competition in the insurance sector resulting from the increasing number of local insurers, as well as intense competition from the foreign companies that work in the local insurance market.

1.4 Research Questions

The research questions for this study are as follows

1.4.1Main Research Question

What are the effects of liquidity management on the performance of insurance companies in Cameroon.

1.4.2Specific Questions

In line with this, the following sub-research questions will contribute to getting an answer to the main research question.

• What effect does current ratio have on the financial performance of insurance companies in Cameroon?
• What effect does Quick ratio have on the financial performance of insurance companies in Cameroon?
• What effect does Cash ratio have on the financial performance of insurance companies in Cameroon?

1.5Research Objectives

      1.5.1Main Objective

To investigate the effects of liquidity management on the financial performance of insurance companies in Cameroon.

1.5.2 Specific Research Objectives

• To evaluate the effect of current ratio on the financial performance of insurance companies in Cameroon.
• To evaluate the effect of quick ratio on the financial performance of insurance companies in Cameroon.
• To evaluate the effect of cash ratio on the financial performance of insurance companies in Cameroon.

1.6 Hypothesis

According to our research questions and objectives, we have derived two hypothesis that will be measured using the null form.

H01: Current ratio does not have an effect on the financial performance of insurance companies in Cameroon.

H02: Cash ratio does not have an effect on the financial performance of insurance companies in Cameroon.

H03: Quick ratio does not have an effect on the financial performance of insurance companies in Cameroon.