CHAPTER ONE
INTRODUCTION
1.0 Background of the Study
Financial performance is one important outcome in the banking sector that defines the viability and soundness of banking firms and how banks can maximize the wealth of its stockholders. Similarly, liquidity problems is arguably the most important aspect of banks short term management strategies which has implication on firm objective of maximizing stockholders’ wealth. Due to the overriding importance of liquidity management, firms adopts strategies to manage and address their liquidity needs to ensure that the required financial performance is achieved. Liquidity management has a broader scope and it can be defined to include cash management and liability management among others. This study therefore examined the liquidity management strategies of listed banks and the relationship between the liquidity management strategies and financial performance.
Effective liquidity management is an important concept that has implications on the overall activities of firms both small and large across the world. According to Gitman, Moses, and White (2016), the concept of liquidity management has evolved and the evolution of it is traced to the era of the Great Depression in the 1930s. The Great Depression of the late 1920s and the 1930s was the event that provided the impetus for the management of liquidity in terms of its sources, uses, risk and how it affects performance. Anjili (2014) had asserted that managers had more concern to the capital structure issues and how the blend of equity and debts affected the financial performance of firms until the depression occurred. One major effect experienced by firms during the great depression period was that revenues of firms drastically reduced and firms that were highly leveraged with debt filed for bankruptcy as a result of liquidity crises. This development revealed the importance of liquidity management in business organizations. Liquidity is however said to be the most liquid asset of firms and the management of which lays important emphasis on the liquidity position of the firm. Based on the close relationship between liquidity and liquidity, Leung (2018) defined liquidity management as the management of the liquidity resources of an organisation in such a way that firms have sufficient liquidity balance with the profitability of firms.
Empirical studies (Hamdi & Hakimi, 2019; Partovi & Matousek, 2019) have shown that liquidity forms a fundamental part of banks operations and as a result low liquidity causes the instability of banks and the financial sector at large. According to Hakimi and Zaghdoudi (2017) low liquidity arises where banks cannot meet all the request of depositors either totally or partially for a given period. The World Bank (2019) has realized surge in banks liquidity risk position by remarking that low liquidity creates risk that dovetails into others such as credit risk and it is the major cause of financial instability to banks.

1.1 Background of the Case Study
Skye Bank (SL) Limited is a leading financial institution in Sierra Leone and ranked among the top 10 banks in the country. We offer excellent banking services, anchored by our team of seasoned and dedicated staff. Skye Bank (SL) Limited was incorporated in Sierra Leone on 10th August 2007 as a Private Limited Liability Company, a subsidiary of Polaris Bank Limited. In accordance with the then Banking Act 2000, it was licensed by the Bank of Sierra Leone (‘BSL’) on 19th August 2009 to carry on banking business in Sierra Leone. Polaris Bank was a large financial services provider in West Africa and Central Africa. With headquarters in Nigeria, the bank maintains subsidiaries in Sierra Leone, the Gambia, the Republic of Guinea, Liberia, Angola, and Equatorial Guinea. In August 2019, Polaris Bank decided to sell off their subsidiaries in Sierra Leone to SIFAX Nigeria Limited.
SIFAX NIGERIA LIMITED began operations as SIFAX Nigeria Limited in 1988, started as a freight forwarding agency in Lagos, Nigeria. Services rendered at its inception included freight forwarding, haulage, and warehousing operations, as well as adjunct import and export support services.
Skye Bank (SL) Limited operates as one of the leading financial services companies in Sierra Leone and provides facets of financial products and services powered by a purpose-built technological framework that supports the service delivery process to customers. Skye Bank (SL) Limited operates through Retail Banking, Commercial Banking, and Treasury, Corporate and Investment Banking segments. The Retail Banking segment provides private banking services, individual customer current accounts, deposits, investment savings products, custody, credit and debit cards, consumer loans, and mortgages. The Commercial Banking segment provides current accounts, deposits, overdrafts, loans, and other credit facilities, foreign currency, and derivative products. The Treasury, Corporate, and Investment Banking segment provides financial instruments trading, structured financing, and corporate leasing.
Skye Bank (SL) Limited is a significant player in the corporate banking platform in Sierra Leone with strong competencies in Project Financing and Foreign Exchange transactions amongst others. We are ever ready to support our customers in exploring business opportunities in the Public and Private sectors in the emerging Sierra Leonean economy.
The Bank continues to drive customer acquisition by offering superior customer services and providing excellent customer experiences across all touch points. Our belief is that happy customers breed happier customers and this has yielded a consistently higher customer acquisition and retention volume. Skye Bank has asserted itself as the choice bank for a lot of customers. This has helped the bank remain highly profitable as demonstrated in the impressive figures from its audited financials.
Mission Statement
To consistently provide innovative and convenient financial services, through a highly motivated team of enterprising professionals to the benefit of all stakeholders.
Vision
To continuously challenge ourselves to be the most preferred financial institution in Sierra Leone

1.2 Problem Statement
As already proven by the literatures reviewed so far, liquidity is a crucial factor that impacts the bank’s viability and soundness. One of the many impact it does is in the profitability. Liquidity crisis occurs when there is shortage of fund in the market and banks are not able to meet the obligations in due time. Basically what banks are facing right now is not the bank run but because of the shortage of funds they are not being able to float loans and earn revenue. Many customers have complained the banking industry to reduce such high interest. Among them majority are the retail and business clients who have suffered from the high cost of operation. The bank so far has been assuring to the clients that the existing higher interest rate is due to shortage of fund in the market and this rate shall soon fall. Many clients have resorted cheaper alternative ways whereas many clients are still waiting for the interest rate on the loan to fall. The expectation is that since the interest rate on the deposit have fallen in the, the interest rate on the loan shall also fall sooner. But the banks have not reduced the interest rate on loan so far.
Liquidity problem has been faced by the banking industry in the past years. In December 2020 when the liquidity crunch was hitting hard on financial industry, the net profit growth of Banks was slow and the deposit growth was also sluggish. Thus the researchers wants to study the causes and effects of liquidity problems in the Sierra Leone banking industry.

1.3 Objectives of the Study
The objectives of the study are as follows:
• To investigate the major causes of liquidity problems in the banking industry in Sierra Leone.
• To find out whether Cash Reserve Ratio have significant relationship with problems of liquidity.
• To investigate the impact of liquidity in the banking industry and small and medium enterprises in Sierra Leone.
• To assess the effects of liquidity problems in the performance of banks in Sierra Leone.
• To find out whether Loan less deposit to total assets have significant relationship with the problems of liquidity in the banking industry in Sierra Leone.

1.4 Research Questions
The following research questions will help to achieve the above objective:
• How has liquidity problems influenced output in the Sierra Leone economy?
• To what extent has liquidity problems affected the economic growth in Sierra Leone?
• How liquidity problems affected the operations of banks in Sierra Leone?
• Has liquidity played any significant role on economic growth in the banking industry in Sierra Leone?
• What are the liquidity challenges faced by banks in Sierra Leone in going overseas?

1.5 Significance of the Study
The following are the significance of our study:
• The findings of this study will help researchers to ascertain the remote and immediate causes and effects of liquidity problems in the banking industry and the remedial measures that should be used to address the problems.
• The result of the study would inevitably lead to a reduction of the liquidity problems in the banking industry in Sierra Leone.
• The study is therefore aiming at pointing out the areas of possible friction that may arise between the bank and its customers and then elicit possible solutions as both of them have their roles to play towards the development of effective and efficient banking system.
• The study may also enable the top management and policy makers to discuss the effect of liquidity problems on the economy, its environment and the people of Sierra Leone and to know the problems which poor liquidity management has been militating against the effective and efficient performance and management of the banking industry in the country.

1.6 Scope and Limitations of the Study
The study focuses on the linkage between the bank liquidity causes and the effects. The liquidity ratios are limited to the five basic ratios: credit to deposit ratio, cash and bank balance to deposit ratio, loan to total asset ratio, total liquid fund to deposit ratio and liquid asset to total asset ratio. The bank profitability measure has been defined by three ratios: return on asset (ROA), return on equity (ROE) and net interest margin (NIM). The study covers the fiscal year of 2010/11 to 2016/17 to examine the core objective of the study. Analysis of the balance sheet, income statements from the quarterly reports were done to extract the data required for the study.
The limitation of the study is mainly the lack of data available for the study. The quarterly as well as annual reports were obtained with lot of difficulty. That is why the data is limited to seven years. Had there been more data available, the research could have been more reliable for us. The researchers are also not free from the fact that it only includes one commercial bank out of 14 commercial bank in Sierra Leone. This study thus would not be representative of the overall banking sector of Sierra Leone. The time factor is another challenge for the researchers.

1.7 Definition of Terms
Liquidity: Liquidity is a measure of a company’s ability to pay off its short-term liabilities—those that will come due in less than a year. It’s usually shown as a ratio or a percentage of what the company owes against what it owns. These measures can give you a glimpse into the financial health of the business. In other words, liquidity describes the degree to which an asset can be quickly bought or sold in the market at a price reflecting its intrinsic value. Cash is universally considered the most liquid asset because it can most quickly and easily be converted into other assets. Tangible assets, such as real estate, fine art, and collectibles, are all relatively illiquid. Other financial assets, ranging from equities to partnership units, fall at various places on the liquidity spectrum.
Liquidity Management: Liquidity Management refers to the services your bank provides to its corporate customers thereby allowing them to optimize interest on their checking/current accounts and pool funds from different accounts. Your corporate customers can, therefore, manage the daily liquidity in their business in a consolidated way.
Bank: A bank is a financial institution that accepts deposits from the public and creates a demand deposits while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital market. Because banks play an important role in financial stability and the economy of a country, most jurisdictions exercise a high degree of regulation over banks. Most countries have institutionalised a system known as fractional reserve banking, under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, the Basel Accords.
Assets: In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset). The balance sheet of a firm records the monetary value of the assets owned by that firm. It covers money and other valuables belonging to an individual or to a business.
Assets can be grouped into two major classes: tangible assets and intangible assets. Tangible assets contain various subclasses, including current assets and fixed assets. Current assets include cash, inventory, accounts receivable, while fixed assets include land, buildings and equipment. Intangible assets are non-physical resources and rights that have a value to the firm because they give the firm an advantage in the marketplace. Intangible assets include goodwill, copyrights, trademarks, patents, computer programs, and financial assets, including financial investments, bonds, and stocks.
Liability: A liability is a legally binding obligation payable to another entity. Liabilities are incurred in order to fund the ongoing activities of a business. Examples of liabilities are accounts payable, accrued expenses, wages payable, and taxes payable. These obligations are eventually settled through the transfer of cash or other assets to the other party. They may also be written off through bankruptcy proceedings.

1.8 Organization of the study
The study is divided into five different chapters, which are, 1) Introduction, 2) Review of Literature, 3) Research Methodology, 4) Results and 5) Summary and Conclusions. Moreover, the study is accompanied by references and annexes in supplementary section of the report.
Chapter One provides the general idea about the research topic. Hence, it deals with the subject matter of the research work. This chapter focuses on the background of the study, problem statement and research objective.
Chapter Two is primarily concerned with the review of concepts and past research studies which helps in the formulation of theoretical framework.
Chapter Three is concerned with research methodology which describes the research design, sampling design, data collection procedure, pre-testing, and reliability statistics and study results
Chapter Four presented data into an organized form to find out the major conclusions of the research work. The different chapter in it generally covers interpretations and findings. The required data are presented through textual, tabular and graphic devices and are critically analyzed and interpreted.
Chapter Five is the last part of the report which is primarily concerned with the summary, conclusions and implications. The summary relates the major findings. Discussions are based on the interpretation of data for the purpose of solving the research problem.

1.9 Summary
This chapter gives a brief description about the background of the causes and effects of liquidity problems in Sierra Leone Banking Industry and as well as the background of the case study which serve as the subject matter to be investigated, it also entails the problem statement that the researchers want to solved, the aim and objectives of the study, the various research questions, the significance of the study, the delimitation of the study which includes the scope, and as well as the organization of the study.