Liquidity management in commercial banks, a case study of Guaranty Trust Bank Uganda Ltd

Abstract

Liquidity is the ability of a company to meet its short term obligations. It is the ability of the company to convert its assets into cash. This study was undertaken to investigate how the drivers of liquidity can explain the low profitability indices in commercial banks taking a case of GTBank Uganda Limited. It was guided by the following objectives namely; to examine the challenges faced in managing liquidity, identify the drivers for high liquidity levels and investigate how the drivers of liquidity could be responsible for low profit indices in financial institutions. The study was guided by an explanatory case study research design in which purposive sampling technique was employed targeting the senior management team of GTBank Uganda. The researcher selected 15 participants but 10 respondents were used as the sample for the study. Primary data was collected using guided face-to-face interviews and data was processed, analyzed and presented using descriptive statistical tools. The study findings highlighted that the major challenges in managing liquidity in GTBank Uganda included; Limited sources of figure customer deposits, expensive fixed deposits, unbalanced deposits currency mix, cash in transit challenges, non-performing loans, limited skills and expertise in liquidity management and limited lines of credit to utilize in case of liquidity shortage. It was further found out that the main drivers for high liquidity levels were increased customer deposits, limited loan portfolio growth and frequent investment maturities due to short term investments. It was noted that high liquidity levels are associated with costs which are either direct or indirect and these impact directly to the profitability levels of the institution. The costs included; High cash deposit charges by BOU, interest expense on fixed deposits, cash insurance costs, increased staff costs in cash management, low returns on short term investments, Cash in Transit (CIT) costs and increased fraud risk. From the findings, the following recommendation were therefore made; Financial Institutions should adopt and implement an optimum liquidity model for maximum returns on investment, survival, stability, growth and development of banking system in Uganda, management should identify and monitor key liquidity drivers, develop well streamlined strategies for growth of figure funding and loan portfolio as well as loan default recovery. Besides bank officials should be trained in the areas of effective liquidity management and focus on operational efficiency of the banking industry