Optimizing Cash Flow Management in Nigerian Commercial Banks Using Stochastic Control Models

Liquidity management in Nigerian commercial banks has assumed heightened importance following Central Bank of Nigeria regulatory tightening on liquidity ratios, increasing the operational and regulatory consequences of cash shortfalls or excess idle liquidity. This study applies stochastic control theory to develop optimal cash flow management models for commercial banks operating across multiple branch networks in Lagos, Kano, and Port Harcourt. The cash management problem is formulated as a stochastic dynamic programming model, with daily net cash flows modelled as a mean-reverting stochastic process estimated from branch-level settlement data. The optimal control policy specifies daily cash transfer thresholds between branches and the central treasury that minimize the total cost of cash holding, transfer, and borrowing to cover shortfalls. The Miller-Orr cash management model is adopted as a theoretical baseline and extended to incorporate inter-branch transfer costs, Central Bank liquidity requirements, and short-term interbank borrowing as a backstop. Empirical estimation uses three years of daily cash flow data from six bank branches. Results indicate that the optimal stochastic control policy reduces total cash management costs by 16 percent relative to current treasury management practices, primarily through more efficient cash redistribution between branches. The study also quantifies the economic cost of meeting liquidity coverage ratio requirements under stressed cash flow conditions. Recommendations include implementing the stochastic control policy within the bank's treasury management system. Keywords: cash flow management, stochastic control, commercial banks, liquidity, treasury management