Measurement Of Bank Leverage And Liquidity – A Study Of Selected Deposit Money Banks In Nigeria
Dr John Okey Onoh
Department of Banking & Finance, Abia State University, Uturu Nigeria.
Gbalam Peter Eze Ph D
Department of Finance & Accountancy, Niger Delta University, Wilberforce Island, Bayelsa State, Nigeria
Keywords: Bank, Leverage, Liquidity, Deposit money banks, Nigeria
Abstract
The study focused on the effect of banking policy on leverage and liquidity positions of banks in Nigeria using four big banks. The problem of the study is that there in a dearth in literature of critical examination of methods of exploiting resources as cheaply and as possible for the highest possible returns on investment. Since the banking reforms of 2005 very little has been said on ‘corporate leverage’ and how it can be used to foster adequate capital cover on risky assets or investments with a good potential for profitability. Given the role of firm leverage and liquidity with the attendant effect of interest sensitivity margins the study objectives includes the determination of the direction and magnitude of the capital-mix structure and bank liquidity by corporate policy. The methodology used was leverage and liquidity ratios. The findings were that corporate leverage has not significantly affected the direction and magnitude of capital-mix structure of the banks in the post reform era and also had not changed the level of growth in liquidity of banks since the reforms became effective in 2005. In conclusion first bank had the lowest leverage ratio among the banks studied at 27.2% as against the average for the banks studied which is 53.9%. Also, GTB had the highest returns on loans and advances at 9% as against the industrial average of 5.5% this puts GTB ahead of it’s peers in liquidity terms and since the banks have a uniform ratio of minimum primary reserves it means that bank performance is hinged more on market dynamics than regulatory restrictions. Recommendations include employing more specialists in different areas of business administration to boost the quality of human capital in a competitive banking sector. There should be adequate understanding with relevant strategies and resources to strengthen the capital structure. Secondly, sufficient knowledge of trading systems to minimize operational costs associated with the asset conversion process in an era of universal banking. Regulatory, financial reporting and taxation framework should be well understood by banks as news of black listing, fines or suspension from other trading activities in the financial service sector not only sends danger signals to investors but can adversely affect the firm’s value through it’s share price thereby affecting its initial leverage disposition and liquidity gaps.