CHAPTER ONE

1.0     INTRODUCTION

            Liquidity management seeks to ensure the attainment of short term objectives of monetary policy, which means maintenance of dose rue monetary aggregate. It is very important aspect of monetary policy implementation and control.

            Universal banks create money every day, but when the quantity created is compatible with the absorption capacity of the economy macro economic instability may result. In order to maintain relative macroeconomics stability, mush reliance is placed on liquidity, growth in the banking system.

            Lending and investment operation of universal banks have been widely and extensively discussed in various literatures. It has also been stated that any one who expects to borrow from the universal banks should be most concerned with the loans investment policy and techniques. The concept profit making activity of a universal bank is making loan available to its customers. It faces uncertainties and therefore risk of many kinds. A bank does not consider earning alone instead it seeks some optimum combination of earning; liquidity and safely.

            For example to gather higher earnings, a bank has to increase more risk and liquidity and vice versa. However, universal banks are limited in their ability to assure risks because of the very high ratio of their liability to their total assets.