Poor Bank Liquidity Risk Management and Bank Failures: Nigerian Perspective

Abstract

Nigeria has a long and sad history of bank failures. The problem became worse in the 1990s when many banks failed and in 2011 when several hitherto strong banks failed due to largely poor bank liquidity risk management. The Central Bank of Nigeria spent over US$6.8bn in purchasing the non-performing loans) of the failed banks. In fact, in the last few years the Central Bank of Nigeria and the Asset Management Corporate of Nigeria have been preoccupied in a bazaar of non-performing loans. Banks as custodians of depositors funds are expected to exercise due care and prudence in their lending activities and with regard to bank liquidity risk management best practice. This study was designed to asses the relationship between poor bank liquidity risk management and bank failures. Bank liquidity risk is a risk of loss to a bank arising from a bank not having adequate funds to meet deposit withdrawals and loan demands. The survey research design was deployed for the study. Data were generated from both primary and secondary sources. Reliability for the instrument used for the collection of data was calculated at 0.93 through the Cronbach’s Alpha technique. Coded data were analyzed by descriptive statistics and the Pearson’s correlation methods. The result of correlation was r = .993*, which meant that poor bank liquidity risk management has strong positive relationship with bank failures. Five recommendations were made based on the result of this study.

Keywords: macroprudential, microprudential, microfinancial, bazaar, prudential guidelines, involuntary liquidation, bridge banks.

JEL Classification: M10, M12