Resolving Liquidity-Profitability Dilemma through Balance Sheet Management

Abstract

The paper resolves the Liquidity – Profitability dilemma through Balance sheet management. The study covered the periods between 1989 and 2014. Liquidity and profitability ensure short term and long term survival respectively. Thus the more present need should be priority while keeping a future need in mind, given that we eat to live not live to eat. The analysis employs two stage least square (TSLS) to evaluate a set of balance sheet approaches to resolve such dilemma. The Eview statistical package was used to analyze the data. The results confirm fundamental relationships among the variables. Asset based approach has focused much on resolving liquidity dilemma with a resultant higher effect. An Examination of the effect of asset based approach on liquidity-profitability dilemma confirms that the asset based approach significantly resolves the profitability dilemma, but with a different outcome with respect to the resolution of the liquidity dilemma. This attribute to the fact that unlike profitability requirement much of the liquidity requirement is set by an external force (monetary authority) and not controllable by Bank management team. Treasury Single Account (TSA) implementation increases the liquidity and profitability dilemma. Though Banks have been sapped of their free working capital, its management must strategize an interesting perspective by Re-emphasizing purchased liquidity than stored liquidity by seeing borrowed fund more as a source of liquidity than a threat to liquidity dilemma subject to supervisory constraints in a less orthodox manner the money market should be deepened. Eminence should be given treasurers than marketers in the financial superstructure. Deposit money banks should role shift from mobilization position to an investive and inventive position. The reduction of the cash reserve ratio is simply a temporary measure; rather a better approach should be reducing financial exclusion. With more inclusion liquidity and profitability are enhanced ceteris paribus. One outcome of this might be increased friction between the microfinance banks and deposit money banks in rural banking. Such challenge should culminate with advance guide centered on territory map out on deposit mobilization. This might be emergence of microfinance bank importance in Nigeria.

Keywords: Liquidity, Profitability, Liquidity-profitability dilemma, Balance sheet management