Impact Of Adequate Working Capital On Profitability Of Banks

Project and Seminar Topics with material for Banking and Finance

Impact Of Adequate Working Capital On Profitability Of Banks


Abstract


This project examines the issues of working capital management in banks specifically, it focuses attention on an efficient and effective. Working Capital Management using the case study of Wema Bank Plc. The study examines and expatiates on the merit of maintaining an efficient working capital portfolio in an organization. It focuses on the efficiently managed. In the project, a critical assessment of the relationship between the various components of working capital as an important tools to enhancing profitability and liquidity as well as the rudiment for the effective working capital management within any organization was done. It was discovered that fro a bank to maximize the wealth of its share holders the bank should earn a steady amount of profit from its operation. Hence the bank needs an adequate working capital level to generate sufficient returns. Working capital in bank refers to items required by the bank to ensure efficient delivery of its operation on day-to-day basis. If can be defined as the excess of current asset over current asset over current liabilities. Liquidity ratio measure the ability of the bank to meet its current obligation as they become due, failure of bank to meet its obligation due to lack of sufficient liquidity would result in loss o customers goodwill


Chapter One


Introduction

1.1 Background of the Study

Many corporate bodies into problems because of mismanagement of working capital and inability to determine the effectiveness of working capital component on the organization performance.

Working capital is the backbone of any organization be it finance / bank, manufacturing or trading. It is so because, if working capital of a company is not properly managed, it could lead to the total breakdown and closure of the organization. Hence, management of working capital is being critically analyzed in this research work.

Working capital in bank refers to items requires by the banks to ensure efficient delivery of its operation on day-to-day basis. It can be defined as the excess of current asset over current liabilities. Generally, working capital management is concerned with the managing of:

Current Asset: Which majorly consist of stock, trade debtor’s payment or creditors balance at bank, and cash in hand? Although the component of each variables of current asset depends on the type of industry in question e.g while stock may be subdivided into raw materials, work in progress and finished good. In banking industry their stock is mainly money or cash.

Current Liabilities: Trade creditors, accrued, expenses, taxation. Furthermore, cash is an important component of working capital, a pointer to this fact is the even though cash constituted the smallest portion of the total current asset yet management of any organization devotes considerable time to its management. The following are the consequence of efficient management of working capital.

  1. Regular operation will not be possible, as inadequacy of funds will course unplanned closure.
  2. The incessant slowing down of banking activities leading to inability to needs customers. This may lead to bank customers closing their account and going for other banks that are effective in bank transaction.
  3. Low level of availability of find may hamper the extension of credit and bring about inability to meet customer with drawals.
  4. Deposit that has matured may be impossible to repay which may resort into litigation and consequent upon which bank may be waind up.

1.2 Statement of the Problems

These are the problems that are envisaged in this research work. The first part relates to problems directly attributable to the research topic, and the other relates to the problems encountered in the course of carrying out the research work.

The following problems relate to working capital as a research topic:

  1. In ability to determine the adequate level of working capital may affect availability of funds in banks which may in turn affect loan portfolio since there was not enough fund to give out as loan.
  2. Where a bank experience increase in its number of customers, there is likelihood that demand for credit will increase. If it does, and funds are not available, level of operation will be hampered.

The following problems are assumed to be encountered in the course of carrying out the research work.

  1. The response to the questionnaires by the respondents cannot be taken to the totally correct .
  2. There is also the problem of implementation of working capital policies even when it was correctly formulated.
  3. It is also assumed that to some extent. The respondents to the questionnaire might not want to supply important information considered confidential to the bank.

1.3 Objectives of the Study

The objectives of the study are;

  1. To ascertain the effective working capital management in bank will improve level of profitability.
  2. To ascertain the relationship between adequate working capital and bank profitability
  3. To ascertain the impact of adequate working capital on profitability of bank

1.4 Research Hypotheses

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

  1. H0: there is no effective working capital management in bank will improve level of profitability.
    H1: there is effective working capital management in bank will improve level of profitability.
  2. H02: there is no relationship between adequate working capital and bank profitability
    H2: there is relationship between adequate working capital and bank profitability

1.5 Significance of the Study

This research works reveal how important working capitals improve tremendously profitability of bank. The research conducted in this research show how availability of adequate working capital on increase profitability of Wema Bank tremendous. The impact of working capital helps bank to achieve its aims and objectives of profit making. It also helps in the efficiency of operation and this improve customer confidence on banker due to the fact that banker always able to meet customer demand at any time he/she demand for his / her money. In addition, the research conducted shows that availability of working capital helps bank to employ its excess or surplus working capital an viable project and investment that improve its profitability tremendously. Finally, the availability of adequate working capital is a great tools to help banks to improve its profitability tremendously. It is very important that every bank should try to increase their working capital which will have positive impact on their profitability and improve their efficiency of operation.


1.6 Scope and Limitation of the Study

This study will cover several areas to shows the impacts of adequate working capital on profitability of banks with special reference to Wema Bank Plc, Apata Ibadan. This study will also include the literature review of different sholars on the subject matter i.e. the benefits to the derived on adequate working capital in relating to profitability of banks. The researcher encounters some constrain which limited the scope of the study;

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational Privacy:

Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities


1.7 Definition of Terms

Cash Budget:

This is the summary statement of a firm’s expected cash inflows and outflows over a projected period of time.

Cross Working Capital:

This refers to the firm’s investment in current asset which can be easily converted into cash within an accounting year.

Working Capital:

This is the excess of current assets over current liabilities. The surplus which would be available for work.

Liabilities:

This is a debt owe by the company and will be settled at stipulated time.

Prepayment:

This is the payment made now and y the benefit in advance or nearest future.

Cash:

This is the money which the bank can disburse easily and immediately without restriction.

Collateral Security:

This is the real or tangible asset which can be used as surely for the loan secure.

Overdraft:

It is a relationship exists between banker and customer whereby bank allows its customer to withdraw funds in excess up to a certain specified limit during a stipulated period.


1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  • Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
  • Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
  • Chapter three deals on the research design and methodology adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was impact of adequate working capital on profitability of banks. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of adequate working capital on profitability of banks


5.2 Summary

This study was on impact of adequate working capital on profitability of banks. Three objectives were raised which included: To ascertain the effective working capital management in bank will improve level of profitability, to ascertain the relationship between adequate working capital and bank profitability, to ascertain the impact of adequate working capital on profitability of bank. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of wema bank, Apata, Ibadan. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made human resource managers, accountants, ICT analysts and senior staff were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies


5.3 Conclusion

Understanding the fact that a number of studies have been conducted on working capital management theory and practice in the non-financial institutions, this study however aimed at contributing to existing literature on working capital management by extending it to financial institutions; that is the Nigerian Deposits Money Banks. The study undertakes to ascertain the relationship between working capital management and the profitability of DMBs in Nigeria. The study results depict positive relationship between Returns on Equity (ROE), Returns on Assets (ROA) and the elements of working capital management.


5.4 Recommendation

Wema bank should improve their marketing strategies so as to increase their sales and generate more profits for the bank. Given that loans are a major asset to the bank, we recommend the bank to increase their stringent measures while granting loans which will enable them to recover a larger proportion of loans they grant on their total loans. Wema bank can effectively manage their working capital to enhance profitability by putting in place adequate planning and controls to help them monitor their daily operations thereby maximizing shareholder wealth. We will also recommend them to invest more on profit generating activities only so as to increase income as well as their reserves. With these high reserves, they will be able to face any risk or crisis efficiently


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