PROFITABILITY AND LIQUIDITY IN THE BANKING SECTOR

pixabay

WHAT IS PROFITABILITY AND LIQUIDITY?

PROFITABILITY is the the degree in which the company can make financial gain in utilizing their resources, it can said to be the rate of returns over investment.
In a business sector profitability is many at times what the owner of the business set its eye on before going into a business.

LIQUIDITY is the ability for a person to convert its assets to cash with minimum delay and loss. Liquidity its simplest form means the availability of cash.

Many at times we wonder why bank liquidate, wind up or fold up. It is because they could not manage their profitability and liquidity discrepancy.

Profitability and liquidity work in opposite direction. They are said to be enemies who must work together. The reason why they are enemies is because the shareholders wants profit while the customers wants liquid, so there are two different interest of the key people who the bank needs to exit.

For example, the shareholder wants the bank to give out loans, make investment which will increase their profitability index and this will not make funds readily available for customers who want funds to be available for them as any given point in they demand for it?

The ability to manage the two factor determines the existence of a bank because any bank that cannot manage these two factors is sitting on a keg of gun powder that can explode at any time.

To manage this, the treasury department is very vital and most be empowered and monitored to achieve success in any banks.

pixabay

HOW TO SETTLE THEIR DISCREPANCY

1. Give out loans fom fixed deposit according to the time of maturity of that fixed loan, loan out for 5months out of the funds of a 6months fixed deposit.

2. Acquire assets that appreciates and that can be easily sold for cash at anytime.

3. Make a pool of funds by creating a single account that all funds are deposited.

4. Cut down and reduce to the lowest level the rate of expenses incurred by the bank.

5. Educate customers on why they should invest in your banks by rollling sales of shares at regular intervals.

6. Create other avenues for funds by investing in other related business and in your personnel.

Hope you find the post useful

Thanks for reading.