245 Liquidity There should be adequacy of liquidity sources compared to present

245 liquidity there should be adequacy of liquidity

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2.4.5 Liquidity There should be adequacy of liquidity sources compared to present and future needs, and availability of assets readily convertible to cash without undue loss. The fund management practices should ensure an institution is able to maintain a level of liquidity sufficient to meet its financial obligations in a timely manner; and capable of quickly liquidating assets with minimal loss. The liquidity ratio expresses the degree to which a bank is capable of fulfilling its respective obligations. Banks makes money by mobilizing short-term deposits at lower interest rate, and lending or investing these funds in long-term at higher rates, so it is hazardous for banks mismatching their lending interest rate. The liquidity requirements are taken into Bank Analysis as below:
22 Majority of the funding is coming from customer’s deposits, and no concentration of funding sources. Is there a maturity or interest rate mismatch? Does the central bank impose reserve requirements? The profitability is estimated based upon the following key financial ratios, Table 2. 5 Liquidity Ratios Analysis Ratios FormulaCustomer deposits to total assets Total Customer DepositTotal AssetsTotal loan to customer deposits (LTD) Total LoanTotal Customer Deposit Rating of Liquidity Each of the components in the CAMEL rating system is scored from 1 to 5. In the context of liquidity, a rating of 1 represents strong liquidity levels and well-developed funds as the institution has access to sufficient sources of funds to meet present and anticipated liquidity needs. On the other hand, the rating of 5 signifies critical liquidity-deficiency, and the institution demands immediate external assistance to meet liquidity needs. (Uniform Financial Institutions Rating System 1997, p.9). 2.5 The significance of CAMEL rating framework in banking supervision Providing a general framework in evaluating overall performance of banks is of great importance due to the increasing integration of global financial markets. CAMEL model reflects excellently the conditions and performances of banks over years as well as enriches the on-site and off-site examination to bring better assessments towards banks’ conditions. Its purpose is to provide an accurate and consistent evaluation of a bank’s financial condition and operations in the areas such as capital, asset quality, management, earning ability and liquidity. Muhammad (2009) claims that the strength of these factors would determine the overall strength of the bank. The quality of each component further underlines the inner strength and how far it can take care of itself against the market risks.
23 Furthermore, it serves the purpose of summarizing the significant compliance information needed for the regulators. It also assists them to ensure the degree of supervisory concern and type of supervisory response to generate timely warnings to minimize the adverse effects on banks. In the financial crisis of 2008, this rating was

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