CHAPTHER ONE1.0 INTRODUCTION1.1 BACKGROUND OF THE STUDYLiquidity is necessary for banks to compensate for expected and unexpected balance sheetfluctuation and to provide funds for growth. It also represents a bank‟s ability to efficientlyaccommodate the redemption of deposits and other liabilities and to cover funding increases in theloan and investment portfolio (Grueving and Bratanovic 2003).A bank has adequate liquidity potential when it can obtain needed funds (by increasing liabilities,securitizing or selling assets) promptly and at a reasonable cost.Sayers (1960:59), asserts that the perfectly liquid asset is of course cash itself. The more the cash abanker holds the more obviously can he exchange for deposits. But cash is an „‟idle asset‟‟, it earnsno income at all. To make a profit, the banker must hold some assets which are imperfectly liquid.What should be the nature (other than income earning) of the imperfectly liquid assets of a bank?The answer which bankers have given to this question has generally left an ambiguity about theword „‟liquidity‟‟, an ambiguity that has its root in the banking conditions of earlier years.According to Olagunju, Adeyanju and Olabode, (2011), liquidity is the ability of the company tomeet its short term obligations. It is the ability of the company to convert its assets into cash.According to Nwankwo (2004), in banking, liquidity management simply means being able to meetevery financial commitment when due, whether it is withdrawing from a current account, maturingeuro or interbank deposit or a maturing issue of commercial paper. Bank liquidity refers to as theability of a bank or banks to raise certain amount of funds at a certain cost within a certain period oftime to discharge obligations as they fall due. It follows, therefore, that quantity, that is, amount,time and cost, are at the heart of liquidity management. The greater the amount of funds a bank canraise in a certain time at a specified cost, the more liquid it is. Similarly, the sooner a bank can raise2a given amount of fund at a certain cost, the greater is its liquidity; and the less it costs a bank toraise a given amount of funds in a certain period of time, the more liquid it is. This has twoimplications to be effective, liquidity management must contribute tom the achievement of theoverall corporate funds management objective of attaining and maintaining a balance ofprofitability, solvency and liquidity.To satisfy depositor‟s claims, a bank must be able to convert its assets into cash quickly. But this isnot all, if the depositor‟s claims are to be fully satisfied, the banker‟s assets must be converted intocash without loss. When bankers have said that they aim at liquidity, they have generally includedboth these attributesAccording to Ariyo (2005), in a non-barter economy (like that of Nigeria), money serves as themeasure and store of value. It also oils the wheels of the economy by serving as the means ofexchange. In this regard, one unit of physical output or service rendered need to be backed up with asimilar unit of currency to ensure parity in value between the real output and the unit of currency.Regulatory agencies like Central Bank of Nigeria (CBN) and Nigerian Deposit InsuranceCorporation (NDIC) were normally established to ensure appropriate liquidity. Bindseil (2000:1),asserts that „‟liquidity management” of a Central bank is defined as the frame work, set ofinstruments and especially the rules the Central bank follows in steering the amount of bankreserves in order to follow their price ( i.e., short term interest rates) consistently with its ultimategoals (e.g., price stability).Practically, profitability and liquidity are effective indicators of the corporate health andperformance of not only the commercial banks (Eljelly, 2004), but all profit oriented ventures.These performance indicators are very important to the shareholders and depositors who are majorpublics of a bank. (Olagunju, Adeyanju and Olabode, 2011)