Liquidity Management Practice at First Bank of Nigeria



As the name implies, commercial banks are banks empowered to strengthen the economic activity of a nation in diversified ways. Their operation are regulated by the central bank of Nigeria through various means which include open market operation, moral sedation and directives to mention but few. Commercial banks are authorized to carry out the function mention below

  1. Deposit acceptance: Commercial bank accepts deposit from the household, business sector and the government. The deposits are kept in the saving account, current account and fixed deposit account. The saving so mobilized is employed for the development of the country.
  2. Granting of loan and overdraft facility: Economic deficit unit go the commercial bank to obtain loan and overdraft for financing their business ventures. The bank charge some interest on the loan based on the duration and risk associated with such facilities.
  • Agency service: Commercial bank acts as an agent of their costumer by collecting proceeds of payment for the accounts. Also the bank effect processed of transfer on the behalf of their costumers. In return, the commercial bank charge commission for rendering such agent service to their costumers.
  1. Safe custody facility: People who have valuable items such as academic certificate, gold, title deeds and other valuables may keep them with the bank for safe costurdy. The bank provides facility for securing the items on the behalf of their costumers. Some reward is played to the bank for rendering such services.
  2. Providing the status report: Bank writes report or answer to the financial standing of there costumers when the need arises. In writing the report, the bank must crosscheck their information and be sure of its accuracy and liability. Negligent report by banks may attract legal action against the bank.
  3. Standing order: This is standing instruction, which the costumers leave with their bank to remit certain sum of money periodically to a named beneficiary. The bank continues to render such service as long as the costumer has a enough money in his account to cover the remittance.
  • Cash credit facility: The bank provides cashing facility to their costumer. This is an arrangement between a bank and its costumer, which enable the costumer to cash his cheque at any branch of the bank. The facility serves the costumer the risk of being robe of his fund and also the inconveniency of carrying huge sum of money from one business center to another.
  • Providing nigh safe facility: The night safe facility is an arrangement that enable bank customers to deposit their money safely in the bank after the normal banking hours. Businessmen who close their business late in the day make use of this facility rampantly. When the money Is deposited in the bank, the depositor has to call on the bank the next day and often his particulars have to be verified, the bank make available for the owner who can then deposit it formally into his account during the normal banking hours.
  1. Investment advice: The commercial bank of time act as investment adviser to their costumers. Some customers who has capital but are not knowledgeable on how to invest the fund properly may have to approach their bank for investment advice. The bank has to advice their costumer on the most appropriate investment opportunity bearing in mind risk and return trade off.
  2. Buying and selling of shares to costumers: The bank may act as issuing house for the purpose of selling shares on the behalf of the costumers. Also the banks buy shares on behalf of their costumers. Traveler and business obtain travvlelers cheque and foreign currencies from their bank. The bank by offering the needed foreign exchange to their costumers help to promote the foreign trade.


The asset of the commercial bank are divided into four main categories:

  1. Cash and short time fund
  2. Security investment (treasuring bills, treasuring certificates)
  3. Loans and advances
  4. Fixed asset (premises, building, equipments). These are known as the typical balance sheet of the commercial bank.

In structuring a bank asset as showed above, certain factor has to be considered

  1. The operating statutory credit control
  2. Market environment
  3. The prevailing economic situation
  4. The organizational philosophy and the objective of the bank
  5. The bank costumers relationship
  6. The deal obligation of profitability ant liquidity of the banks.

The management of the bank asset centers on the allocation of fund among and within the first three mentioned categories of the assets.

In asset management, much concern is not giving to fixed asset because the management dose not get itself concerned with the purchase of equipment as priority. Must commercial bank asset are financial claims. Commercial banks have relatively large balance of cash and relatively small investment in land and buildings, whereas a typical manufacturing firm require a small balance of cash and has relatively large investment in inventories and fixed assets.

The manufacturing forms financial claims, which are almost limited to the account receeivevable and temporally investment surplus cash. The composition of a bank asset and that of an industrial firm result form the difference in the nature of their liability and the character of the profit making activity in which the firm is engaged. A manufacturing firm makes most of its profited form the goods soled, lending of goods required maintenance of a lager finished inventory and manufacture require a maintenance raw material. Stock as well as the installation of the expensive equipments. On the contrary, lending and investing and the result in holding note bone and other fnancial instruments indicating the amount to be repayed in future gain the profit of a bank.


Commercial bank purchase security for different purpose. This purpose includes;

  1. For liquidity
  2. For augment income
  3. To serve as collateral for deposit liability to federal, state, and local government.


Liquidity required that bank should be able to pay cash immediately when they are required to do so for all of its demand deposit liability. When banks buy Treasury bill or another short-term security, they can as well easily convert those asset or security into cash with a short period of time to provide liquidity.


Form loan and advances, banks makes their income, hence banks have to invest in them to certify the obligation of their shareholder profitability.


The most profitable activity of the commercial bank is loan investments. It is the principal activity of the commercial bank when allocation bank fund to loan portfolio. The primary objective is earning income while at the same time serve the credit need of the community.  In descending loan portfolio, the banker should consider what percentage of loan should be allocated to cash type of loan. This is assessed base on which sector of the economy will yield the greatest profit.


The Liquidity/Profitability Dilemma

Over the years, the problem of liquidity and profitability issue has developed a theory in banking. This is formed by the fact that for a bank to continue in business, is must maintain enough liquidity to meet unexpected cash demand from its costumers as well as providing enough profit to retain the confidence of its shareholders. Banks act as mediator between the surplus spender and deficit spender (borrower) they collect deposit from depositors and pay interest on such deposit. In turn they lend this deposit to borrowers (deficit spenders) form, which they earn income. You may then ask how the bank earns income since hey pay interest on deposit, usually loan made out by banks attract more interest than that paid on deposit.


But in pursuance of profit motive, commercial bank dose not lose the sight to have enough cash to caution the effect of unannounced withdrawal. Fore this reason, the asset of the commercial bank are divided into earning asset and non-earning assets.

In the group of earning asset are the loans and the investment while fixed asset, total reserve and the vault cash, deposit with the CBN constitute the non-earning asset. Earning asset provide profit whereas liquidity can be provided by earning asset of short-term nature such as treasury certificate to mention a few. Non-earning asset such as vault cash and balance sheet with the central bank of Nigeria (CBN).


Also liabilities (borrowed fund) can provide liquidity. The deposit of the customers is the money left with the bank since it is realized that not all the deposit are withdrawn at the same time. Bank makes provision for possible demand by way or keeping the remainder to the borrowers high network customers of the bank. Note that some of the asset is highly liquid with low risk attraction and low interest while those that are more risky but less liquid


A price and a stated method of how this composition is balancing archived among commercial bank is reflected on the maturity label of the banks investment and the degree of liquidity and profitability.

  • The table above represent that cash at call are highly and yield no income contributed little of nothing to the profitability or the bank.


Treasury bills and certificate maintained high profitability on the other hand other government stock and loan and advances has low liquidity and contribute very highly to the profitability of the bank.

Thus the banker primary responsibility is maintaining a balance between liquidity and profitability. The task is enormous and challenging to the banker as there are inherent conflicts between this task objectives.

A commercial bank must with a portfolio in such a way as to strike a balance between liquidity and profitability.


First bank Nigeria Plc is a leading bank institution in Nigeria with over hundred years of banking experience and resilience behind it. Founded in 1894 by a chipping maynate in Liverpool, sir Alfred Jones. The commenced as a small bank in the office of elder Demister in the company in Lagos. Today first bank of Nigeria plc have diversified into a wiled range at banking activity and service including commercial/merchant and international banking and has become a potential factor in the development of the country. It was incorporated as a limited liability company in London on March 31 1894 with the head office in Liverpool under the cooperate name of the bank of the British west Africa with a paid up capital 12 pounce. It started business after it has absorbed its predecessors. The African banking cooperation, which was established earlier in 1892. This signaled the pre-eminent position of the bank in its early years. It grew rapidly working in close co-operation with he colonial government in performing the traditional role of a central bank such as issuing of currencies in West African sub-region.


In 1696, a branch was opened in Accra the (the gold cost now Ghana) while another was established in seri lerron in1898. This marketed millstone in the rank of an internal bank operation thereby justifying its West African international coverage. The second branched in Nigeria was in the old Calabar in 1900 and two years later, service extended to northern Nigerians with a branch network of 295 spread throughout the federation including London.


The bank has experience phenomenal growth over the years with a share capital of 55.6 M in 1980, which rose to 265m in 1995. The bank total assets currently stands at 59,826m supported with a deposit base of 41.64b in 1997. When the bank began operation in 1894, it had a total number of six staff comprising 3 Europeans and three Africans. Today, the bank is virtually fully Nigerialized. This of course has been the result of planning responsiveness to the yearning Nigerians, people and their government as well as bank determination to identify with the inspiration of the country in the march towards national development.

In the pursuance of this, the bank has to continually adjust its organizational structure and cooperated entry beginning with a change of its name to the bank of West African in 1957 reflecting the movement towards independency by West African countries. The standard bank of Nigerian limited. This was in response to the dictate of the decree of 1968.


Thereafter, the active participation of Nigerians in the management of the bank became a cooperative policy. Further changes in the management of the bank was made in 1979 and 1991 to first bank of Nigerian limited to first bank of Nigeria limited Plc respectively. The enhance level of cooperation and the need to respond to increase in competition necessitated a considerable re-organization of the bank. This really began in 1985 when a new decentralized structure was introduced after a detailed analysis of the previous operational and reporting structure. The fine turning of that structure in 1992 has handsomely paid off. Aggressive banking decentralized decision-making process and responsive directorate system has become the pillar of the bank current effective operational mode.

In addition, computerization and effective information management has been introduced into the banking operations in order to facilitate rapid response to customers service..

As a result of a cooperate policy to divert its portfolio, of the non-core activity and in order to meet the bank of England regulatory requirements, the bank foreign partners, the standard chartered bank of African plc has reduced their share holding to 9.9% following after the 12049, 179 shares to the Nigerian public. This bringing the equity holding by Nigerians to 90.1%.

The bank has maintained its leadership in financing long-term development of the economy, which started in 1947 with a long-term loan to the colonial government. Today, the bank boast of diversified loan portfolio to various sector of the e economy. The bank on their banking records is unmatched by any other bank while its agricultural credit facility through the community farming loan scheme have giving peasant farmers tremendous access to much needed bank credit. The bank has worn in several time the correct stock exchange president merit award as the bank with the best financial report in the banking sector. Similarly, the bank has come first at the CBN farmer’s merit award at a total of five times.

The bank has improved substantially on its operational performance in the last three years with a record performance in 1995. The bank performance in 1995 shows that it has not rested on its oars, thereby ensuring a good beginning for meeting the challenges, it is the bank commitment to put a smile on the face of every costumers.

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