This chapter introduces the study and sets out the basis of the study as well. The chapter commences with an insight of banks importance and the concept of treasury management under the sub-heading “Background of the study”. Other sub-headings of the chapter includes: problem statement; research objectives; research questions and hypothesis statement; significance of the study; scope and limitation of the study; and disposition of the study.
1.2 Background of the study
The significance of banks in every economy cannot be under emphasized. As far back as 1781, Alexander Hamiton a financial analyst cited in Levine (2005) posited that, banks are the happiest institution established for spurring economic growth. This is because, banks are major role players in the financial intermediation process of every economy more especially in developing countries such as Ghana. Banks perform numerous roles stringing from marshalling and amalgamating funds, promoting exchange of goods and services to promoting pre and post monitoring of investments and financing (Levine, 2005). In support of Hamiton (1781) assertion, other scholars such as Amable and Chatalain (2001); Adam and Siaw (2010); and Madiefe 2015 argued by revealing that, financial sectors development is needed for economic growth.
Halling and Hading (2006), posit that, the efficiency and effectiveness of banks in executing their roles is essential for ensuring economic stability and growth. In a similar way, Diamond and Rajan (2001) believes that banks themselves aside contributing to economic growth has many critical issues such as risk management that need to be addressed. The addressing of those critical issues will help banks have competitive advantage, be profitable and survive. This insinuates that, if banks are not profitable and are not able to survive, their significant role of contributing to economic stability and growth will not be realised. Hence these critical issues need to be addressed.
Bonfim and Kim (2012) presented that, these critical issues emanate from bank execution of routine mandatory roles. In the process of role execution, banks are exposed to many risks notably; market risk, interest rate risk, credit risk and liquidity risk. Iion and Dragos (2006) explained liquidity risk for example as the likelihood of banks not having the capacity to finance its daily transactions such as payment of deposit withdrawal, financing debt and payment of loan portfolio and investment. Therefore, there is the need for treasury management since taking precautions against financial risks is the focus of treasury management (Horcher, 2005).
All business activities of modern enterprises and banks are always accompanied with risks. Financial risks include interest rate risk, currency risk, commodity price risk and the negative impact of highly leveraged capital structure and the consequent financial loss directly and indirectly. Therefore, reducing the adverse consequences to the enterprise or banks from these risks is the responsibility of treasury management. The role of treasury management is to look at organizational systems, processes, and management procedures, and to make them real and relevant to the concerns of shareholders, for example by improving profitability. According to Athanasogglou, Brissimis and Delis (2006), return on asset (ROA), return on equity (ROE) and net interest margin (NIM) which are measures of bank profitability are mostly influenced by banks management decisions and policies.
Treasury management is also concerned with the management of current assets (cash, financial instruments etc.) and current liabilities (creditors, overdrafts etc.) of banks. Horcher (2005) suggested that the key role of treasury is in the safeguarding and stewardship of bank’s financial assets and the management of bank’s financial liabilities. Although, the role of treasury management is limited in certain government agencies because of government law, banks do not face any treasury management constraints. For example, some public agencies may not be permitted to make investment in financial instruments because of high risk but banks are free to diversify and invest in any project deem to have high returns. Many argue that treasury management has evolved into a system that provides strategic insights, improves effectiveness, reduces costs, add value and ultimately providing a competitive advantage for banks (Hashim and Allan, 2001).
In the quest to improve financial management, banks adopt treasury management. The adoption of treasury management by banks is to help avoid any financial problems such as financial distress when they face insufficient liquidity to meet their financial liabilities. Andrade and Kaplan (1998) reported that the likelihood of having to cope with financial distress grows the larger the debt–equity ratio, with its most noticeable effect being suspension of debt interest payments. Other effects have been observed as cutting capital expenses, liquidating fixed assets and downsizing.
For these reasons and many others, there seems to be a general acceptance that an efficient and effective treasury management practice in an organizational setting (banks) is very crucial to its survival. However there is some controversy with regard to the level of sophistication of treasury management procedures and tools in developing countries especially the banking sector. Therefore, this study looks at the impact of treasury management on the profitability and liquidity of banks in Ghana. This is done by using Bank of Africa as a case study.
1.3 Problem Statement
The recent financial crisis has put cash and its management back in the spotlight, forcing treasurers to focus their efforts on ways to improve cash management. Efficient cash management and risk minimization is vital for ensuring that every spare Ghana cedi has been fully utilized. Even in normal times, efficient cash and risk management is crucial for banks, as lack of liquidity may result in an inability to pay liabilities, increase costs and in the worst-case scenario, banks may end up in insolvency (Said and Tummin, 2011).
Crowe (2009) believes that, banks have the probability to fail irrespective of how strong their asset is or how high their capital base. In practicality, every human being is a manger by economizing scarce resources available for maximum output. Same applies to banks, the management of resource is termed as treasury management and its absence or misapplication can lead to failure and closure of banks. As indicated by Rajan (2001); Bonfim and Kim (2012), banks face many risk is carry out their transactions and this threatens the efficient and effective functioning of banks when the risks are not managed. Therefore, it is important that, treasurers ensure that, bank resources are well managed to support the banks make profit. Thereby contributing to economic growth as mentioned by Hamiton (1781) and Halling and Hading (2006) among other scholars.
This has engendered the call to examine the treasury management practices and systems that are employed at Bank of Africa in attempt to identify the challenges, opportunities and prospects and how the treasury management practices support bank liquidity and profitability. The study therefore seeks to generally find out the set of policies, strategies and transactions that banks adopts and implements in their quest to raise finance at an acceptable cost and risk, to manage its cash resources.
1.4 Objectives of the study
The primary objective of the study is to identify the impact of treasury management practices on banks liquidity and profitability. However, secondary objectives are also outlined to help arrive at the primary objective of the study. The secondary objectives are:
To examine the treasury management practices of Bank of Africa.
To investigate challenges confronting Bank of Africa in terms of its treasury management practices.
To identify how the organizational structure of Bank of Africa affects its treasury management.
To recommend best practices in treasury management to Ghanaian banks based on the finding of the study.
1.5 Research question and Hypothesis statement
Research questions are asked to induce answers that will help achieve the research objectives. In view of this, the following research questions are posed:
How are treasuries managed at Bank of Africa?
What are the challenges to treasury management at Bank of Africa?
Does the organizational structure of Bank of Africa affects it treasury management system?
In view of these questions, it is hypothesized that;
H0: Treasury management practices impact the liquidity and profitability of banks in Ghana.
H1: Treasury management practices does not impact the liquidity and profitability of banks in Ghana.
1.6 Justification of the study
The purpose of conducting research is to seek knowledge. However, in conducting research, apart from providing substantive arguments based on empirical findings which enhance quality, the research must be unique. The uniqueness of this study stems from missing literature on treasury management practices of banks. Banks are important for the numerous roles they play in economic growth and development. Although, banks face financial risks, very little studies have been carried out to understand how the banks deal with the financial risks to be profitable and remain in business.
Therefore, the knowledge from this research will close a wide gap in literature as not many studies have focused on banks’ treasury management but rather bank liquidity and profitability. In Ghana for example, many studies have been conducted to analyze the operations and practices of banks, not a single study has been dedicated to investigating treasury management practices of banks. Therefore, this study will serve as a reference point to banks, business enterprises, policy makers and researchers. Hence, this makes this research unique and necessitated.
1.7 Scope and Limitation of the StudyThe study investigates treasury management practices of Bank of Africa and how it impact its liquidity and profitability. However, the study is limited to only the branches of Bank of Africa in the Greater Accra region of Ghana. Since the selected region is the capital of Ghana and houses the head office of Bank of Africa, the geographical scope limitation does not impede the findings of the study as treasury management practices are more than likely to be the same for Bank of Africa branches across the country and for other banks. The similarities in treasury management practices among banks allows for generalizations of findings. Hence, using Bank of Africa branches in Greater Accra alone is not considered as a limitation to the study.
Limitations to this study originated from the researcher’s fieldwork, including: time constraints as research subjects are mostly busy; financial difficulties as the researcher has to travel from the Ashanti region to Greater Accra to collect data; and research bias which is prone to many researches. In spite of all these limitations, the researcher ensured that the quality of the study was not hampered in any way by: properly negotiating and schedule time for data collection; staying with a colleague instead of a hotel and minimize research bias as much as possible.
1.8 Disposition of the study
The study is organized into eight (8) chapters. Chapter 1 introduces the research topic by discussing the background of the study, problem statement, research objectives, questions and hypothesis statement. The justification, scope and limitation of the study are also discussed in chapter 1. Chapter 2 continues chapter 1 by review both theoretical and empirical literature related to treasury management practices as well as how it is likely to influence bank liquidity and profitability. Chapter 3 describe the procedures and approach for conducting the study. How data is collected and analyzed will be discussed in Chapter 4 while empirical analysis of the gathered primary data will be presented in chapter 5. The outcome of the analysis will be presented and discussed in chapter 6. Chapter 7 and 8 will emphasize on recommendations and conclusion of the study based on the empirical findings from chapter 5 and 6.