ABSTRACT

 The objective of the study is to investigate the Effects of Liquidity Risk Management on the Financial Performance of Commercial Bank case of unics Bambili, establish the effects of cash reserves on the financial performance of unics bank Bambili, assess the effects of customers’ deposits on the financial performance of unics bank Bambili, determine the effects of non-performing loans on the financial performance of unics bank Bambili. The sample population was set to cover the employees of unics bank and the sample size of 20 was envisaged. Data was collected from both primary and secondary sources, as interviews and questionnaires were administered. The data was analyzed using descriptive statistics and the relationship between the variables was established using multiple regression analysis. The findings revealed that internal control has a positive effect on the financial performance of commercial banks directive and preventive control influencing cash reserves the most. It was then concluded that internal control has a positive relationship with the financial performance of commercial banks. The research made some recommendation that if implemented by commercial banks, it will help them to increase financial performance especially preventive control since it has a higher effect on preventing errors and frauds as proven by the research findings.

Keywords: Liquidity Risk, Financial Performance, UNICS PLC

CHAPTER ONE

INTRODUCTION

1. 1. Background of the Study

Liquidity is a bank’s capacity to fund increase in assets and meet both expected and unexpected cash and collateral obligations at reasonable cost and without incurring unacceptable losses. Liquidity risk is the inability of a bank to meet such obligations as they become due, without adversely affecting the bank’s financial condition. Effective liquidity risk management helps ensure a bank’s ability to meet its obligations as they fall due and reduces the probability of an adverse situation developing. This assures significance on account of the fact that liquidity crisis, even at a single situation, can have systematic implications.

Traditionally, liquidity has been defined as the capacity of financial institutions to finance increases in their assets and comply with their liabilities as they mature.

Bank liquidity has two distinct but interrelated dimensions: liability (or cash) liquidity which refers to the ability to obtain funding on the market and assets (or market) liquidity associated with the possibility of selling the assets. Both concepts are interrelated and the interaction between them tends towards their mutual reinforcement.

According to Davydenko (2011), the performance of the banking sector and other financial sectors, in the past years have been overall sound despite the global crisis, in part, into proactive supervision by the regulators who have heightened their supervisory activities to detect any immediate stress present in the system.

Banks in any economy play a vital role by enhancing transactions and providing finance to grow economy Seidler (2013). Commercial banks facilitate the flow of money in any economy and try to balance an easy transaction among businesses and organizations. Banks also enhance investment among the citizenry and investors from outside the country which promotes economic health and establishment of industries. Thus, banks should hold more liquid asset to help indemnify themselves from potential liquidity problems, Promono, (2012).

Liquidity problems impact adversely on the earnings, capital and in extreme circumstances, may even lead to the collapse of the bank. Akhtar, (2016) indicates that varied nature of functions performed by commercial banks expose them to the risk that a bank may not meet its obligations such as the depositors may call their funds at an inconvenient time, causing fire sale of assets thus negatively affecting profitability of the bank.

Anis, (2013) says that liquidity risk among commercial banks may not only affect the performance of a bank but also its reputation as customers may lose confidence if they cannot access their deposits when needed. Further, unfavorable liquidity position may cause penalties from their regulators. Therefore, it is imperative for a bank to maintain a sound liquidity arrangement. Liquidity risk has become a serious concern and challenge for the 21^st century banking system. This has been caused by high competition for consumer deposits, a wide array of funding products in wholesale and capital markets with technological advancement have changed the funding and risk management structure. A commercial bank having good asset quality, strong earnings and sufficient capital may fail if it is not maintaining adequate liquidity, James (2010). Muntheu, (2009) indicates that in banking theory and practice, there are no commonly accepted indicators measuring the liquidity of banks. However, deposit, cash reserves, non-performing loans and bank size can be used as quality indicators. Nyang’au (2014) says that non-performing loans are closely associated with banking crisis which should be considered as one of the main causes of global financial crisis which damaged economies and many countries. Therefore there is need to devise mechanisms to control the non-performing loan levels to avert the possibility of a breakdown in the financial system which may cause liquidity.

Nyang’au and Nyamasege (2016), studied the effects of bank liquidity on profitability of commercial banks in Kenya using a descriptive research design over 5 years from 2010 to 2014 relying on secondary data from the annual published financial statements. The study found that liquidity had a statistically significant and positive relationship to banks’ profitability and recommended that banks should invest heavily in assets if substantial gains had to be realized maintain adequate liquidity levels in the form of short term marketable securities in order to realize profit and aggressively identify viable investment opportunities and link such opportunities to customer deposits. This study used banks’ liquidity level as an internal factor to measure profitability of commercial banks and recommending banks to increase investment in assets would be expensive to commercial banks making commercial banks to miss lucrative opportunities simply by investing in assets.

1.2. Statement of the Problem

Liquidity plays a pivotal role in the successful operation of a banking business. Every stake holder has interest in the liquidity situation of a bank. Employees will review the bank’s liquidity to ascertain whether the bank covers its employee related obligations‒salary, pension etc. so banking firms should ensure that it does not suffer from lack‒of or excess liquidity to cover up its short term obligations. This is because, insufficient liquidity may spoil the bank’s good will, diminish bank’s credit standing and that may lead to forced liquidation of the bank’s assets. On the other hand, excessive liquidity undermines the probability through accumulation of wealth that does not bring back any profit for the firm.

Banks across the globe are facing with the liquidity crises because of the poor liquidity management. As every transaction or commitment has implications for banks liquidity, managing liquidity risk is paramount importance. Liquidity has become one of the most important elements in enterprise wide risk management framework. A banks liquidity framework should maintain sufficient liquidity to withstand all kinds of stress events that will be faced. Constant assessment of liquidity risk management framework and liquidity position is an important supervisory action that will ensure the proper functioning of the bank.

Liquidity risk has a spiraling effect and often tends to compound other risk such as credit risk and market risk. If a trading bank has a position in and illiquid assets it limited ability to liquidate that position at short will lead to market risk. A position can be hedged against market risk but still entailed liquidity risk

1.3. Research Question

1.3. 1. Main Research Question

What is the Effect of Liquidity Risk Management on the Financial Performance of Commercial Bank case of UNICS Bank Bambili?

1.3.2. Specific Research Question

The study was guided by the following specific research questions

• What is the effect of cash reserves on the financial performance of UNICS Bank Bambili?
• To what extent does customers’ deposit affect the financial performance of UNICS Bank Bambili?
• What is the effect of non-performing loans on the financial performance of UNICS Bank Bambili?

1.4. Objective of study

1.4. 1. Main Research Objective

The main research objective of the study is the Effect of Liquidity Risk Management on the Financial Performance of Commercial Bank case of UNICS Bank Bambili.

1.4.2. Specific Research Objective

The study was guided by the following specific objectives

• To establish the effects of cash reserves on the financial performance of UNICS Bank Bambili

·         To assess the effects of customer deposits on the financial performance of UNICS Bank Bambili

·         To determine the effects of nonperforming loans on the financial performance of UNICS Bank Bambili.