ABSTRACT
Working capital management is very
crucial in this period of global financial turmoil. This is because illiquidity
is prevalent world wide necessitating that effective and efficient management
of any available cash will be needed to ensure that company breaks even and
survives this distressed time since credit is not easily come by. This project
presents empirical evidence of the effect of working capital management and
liquidity in Nigeria banking industry using annual financial report data for
the period 2000-20 10. These data were analyzed using descriptive statistics
and Financial Analysis Techniques of working capital ratios. Contrary to most
previous empirical works, cash operating cycle has a significantly positive
relationship with banks’ working capital management, just like debtors’
collection period; whiles creditors’ payment period exhibits a significantly
opposite relationship. However Nigeria banks appear to perform poorly in these
working ratios.
CHAPTER ONE
1.1 BACKGROUND
OF THE STUDY
Working Capital management is a
prime concern in a banking environment and a working capital deficiency (that
is excess of current liabilities over current assets) has often been a trigger
for bank failures. Working Capital of a Bank simply represents the operating
liquidity available to run the bank.
Management of working capital is
an important component of corporate financial management because it directly
affects the profitability and liquidity of all firms, irrespective of their
sizes. Working capital management refers to the management of current assets
and current liabilities. Researchers have approached working capital management
in numerous ways but there appear to be a consensus that working capital
management has a significant impact on returns, profitability and firm value
Deloof, (2003). Thus, efficient working capital management is known to have
many favourable effects: it speeds payment of short-term commitments on firms
(Peel et. al, 2000); it facilitates owner financing; it reduces working
capital as a cause of failure among small businesses (Berryman, 1983); it
ensures a sound liquidity for assurance of long-term economic growth and
attainment of profit generating process (Wignaraja and O’Neil,1999); and it
ensures acceptable relationship between the components of firms working capital
for efficient mix which guarantee capital adequacy, (Osisioma, 1997).
On the other hand, there is also a
general agreement from literature that inefficient working capital management
also induces small firms’ failures (Berryman, 1983), overtrading signs
(Appuhami, 2008), inability to propel firm liquidity and profitability,
(Eljielly, 2004; Peel and Wilson, 1996; and Shin and Soenen, 1998), and loss of
business due to scarcity of products, (Blinder and Maccini, 1991).
For all firms, in both developed
and developing economies, one of the fundamental objectives of working capital
management is to ensure that they have sufficient, regular and consistent cash
flow to fund their activities. This objective is particularly heightened for
financial institutions like banks. In banking business, being profitable and
liquid are not negotiable, at least for two reasons; to meet regulatory
requirement and to guarantee enough liquidity to meet customers’ unannounced
withdrawals. Consequently, proper working capital management would enable banks
in sustaining growth which, in turn leads to strong profitability and sound
liquidity for ensuring effective and efficient customer services.
A bank is set to be liquid when
there is sufficient cash and cash transferable assets including investment in
securities that are easily realizable at a short notice without loss to the
bank, together with the ability to raise fund quickly from other sources to
enable it to meet its payment obligations and financial commitment in a timely
manner.
A Positive working capital is
required to ensure that a firm is able to continue its operations and that it
has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The Current
assets are those assets which will be converted into cash within the current
accounting period or within the next year as a result of the ordinary
operations of the business. They are cash or near cash resources. For banks,
these include: Cash and balances with central bank, Treasury bills, Due from
other banks, Prepaid expenses.
On the other hand, the Current
liabilities are the debts of the firms that have to be paid during the current
accounting period or within a year. These include: Customer deposits, Due to
other banks, Current income tax, Short-term borrowings, and Dividends payable.
A key activity of the Central Bank
of Nigeria (CBN) is liquidity management. According to the CBN Act of 1958 and
its subsequent amendments, the CBN is responsible for implementing restrictive
or expansionary monetary policies in order to achieve price stability,
influence interest rates, manage the growth in credit to the domestic economy
and maintain the international value of the local currency. It manages Banking
Sector liquidity by supplying or withdrawing liquidity from the Banking Sector
which it deems to be consistent with a desired level of short-term interest
rates or reserve money. It relies on the daily assessment of the liquidity
conditions in the banking system, so as to determine its liquidity needs and
thus, the volume of liquidity to inject or withdraw from the economy.
Basically, banking is a service
industry operated by human beings for the benefit of the general public while
making returns to the shareholders. As such, it is natural that the services
provided thereof by the industry cannot be 100% efficient; however, there is
always a room for improvement. It is on this statement that the index of our further
discussion on this study is based.
The Banking Sector plays an
important role in the Nigerian economy. According to Soludo (2009:23), Nigerian
banks account for over 90 percent of financial system assets and dominate the
stock market. As a result, a well funded Banking Sector is essential in order
to maintain financial system stability and confidence in the economy.
A significant body of literature
exists on working capital management and the determinants of banking liquidity;
some of these include Central Banks’ recommendations, financial institutions
and risk management textbooks. However, Traditional working capital/liquidity
management involves the mapping, estimation and simulation of inflows and
outflows within some time horizon, including safety margins and contingency
plans to deal with exceptional losses and disbursements. The separation from
the investment decision makes it difficult to assess objectively how much cash
is too much, hindering bank’s ability to seize profitable opportunities, and
how much is too few, making the risk of losses higher than acceptable in
exchange for the increased returns on illiquid assets. As a result, there is a
gap between theoretical developments in liquidity management and what is
actually used in practice by commercial banks, and the decision about the
optimal liquidity level relies much more on art and professional experience
than on science and well specified decision processes.
The recent global financial crisis
and its impact on the Nigerian Banking Sector has shown that CBN’s daily
forecasts of Banking Sector liquidity is not sufficient in assessing the
liquidity requirements of the sector as several
Banks remain relatively fragile
and incapable of withstanding periodic liquidity shocks. According to Alford
(2010:6) “Following the special examination and during the period from December
2008 to December 2009, Nigerian banks wrote off loans equivalent to 66% of
their total capital; most of these write offs occurred in the eight banks
receiving loans from the CBN”. Most of the banks also suffered panic runs and
flights to safety during the period.
It is
on this argument that this work lies to assess the working capital management
of deposit money banks in Nigeria.
1.2 STATEMENT OF THE PROBLEM
Between 1991 and 2011, over 55
Nigeria banks have been liquidated by the NDIC due to their protracted problem
of distress. According to Soyinbo and Adekanye (2002) and Adam (2003) nearly
100 out of the 128 banks in Nigeria failed and collapsed as result of
inadequate capital base, mismanagement of funds, overtrading, and lack of sound
regulation, control and unfair competition from the foreign banks.
How are Nigeria banks strategizing
to improve upon their working capital management? What are the existing working
capital items of Nigeria banks? What has been the end-result of working capital
management in Nigeria banking industry?
These stated problems together
with the research questions below are what the researcher tries to encapsulate
in the research topic with a view to providing their answers in the course of
this research.
1.3 RESEARCH QUESTIONS
In view of the above stated problems, my research questions for this
study are as follows:
What is the composition of working capital items in Nigeria banks?
What have been the end-results of working capital management in Nigeria
banks?
Have these components of working capital well managed?
1.4 OBJECTIVES
OF THE STUDY
In dealing with the above research questions, the
study seeks to achieve the following objectives; To examine the composition of
working capital items in Nigeria banks.
To examine the adequacy of working capital management in Nigeria banks.
To ascertain if the components of working capital are well managed.
1.5 SCOPE OF THE STUDY
This research attempts to study
the working capital management among Nigeria banks. The study covers all the
commercial banks in Nigeria from 2000-2010 excluding two expatriate banks whose
annual reports and financials are in dollars, viz, Citibank and Standard
chattered Bank.
1.6 SIGNIFICANCE OF THE STUDY
Although much have been written
about banks’ working capital management and liquidity management, the
significant of this study can be viewed from two major standpoints- practical
and academic.
Practical significance
The bank directors, corporate bodies and management that want to embark
on banks’ working capital management and liquidity management will find useful
information in this work.
For bankers in general, it will broaden their scope of knowledge on
working capital elements, management, optimization and risk management.
Academic Significance
In the academic arena, this research will prove to be significant in the
following ways:
It will serve the purpose of arousing deep thoughts and genuine interest
on the subject matter for further research.
It will contribute to the enrichment of the literature on working capital
management.
It will suggest ways (of interest to academics) based on empirical
evidence of enhancing working capital management
1.7 DEFINITION OF TERMS
WORKING CAPITAL: (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization or other entity, including
governmental entity.
MANAGEMENT: The act or manner of guiding or taking charge, handling,
directing or control.
OVERCAPITALIZATION: is a state where earnings are not sufficient to
justify the fair return on the amount of share capital which has been issued by
the company UNDERCAPITALIZATION: is a state where the capital which is owned by
the business is much less than the borrowed capital.
LIQUIDITY – It is the ability of banks to pay cash immediately when
called upon to do so for all of its demand liabilities
LIQUIDITY MANAGEMENT – It is the
ability of the bank to manage the liquidity position so that neither the
liquidity nor the profitability will suffer. It involves the provision for the
withdrawal of deposit, short time cash cyclical and secular cash requirement of
the specks – financial institutions.
DEPOSIT MONEY BANKS: The resident
depository corporations and quasi-corporations who have many liabilities in the
form of deposits payable on demand, transferable by cheque or otherwise usable
for making payments.
DEPRESSION: The state of being
depressed. It is a period when there is little economic activity, and many
people are poor or without jobs.
ECONOMY: The relationship between
production, trade and the supply of money in a particular country or region. It
is the system of trade and industry by which the wealth of a country is made
and used.
DEREGULATION: It is a way to free
a trade, business activity etc from certain rules and controls.
LIBERALIZATION: This is a way to
free somebody or something from political, religious, legal or moral
restrictions.
LOAN AND ADVANCE: Loan is a sum of
money which is borrowed, often from a bank, and has to be paid back usually
together with an additional amount of money known as interest, while Advance is
bank lending which may be via term loan, overdraft, or bill discounting.
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Item Type: Postgraduate Material | Attribute: 54 pages | Chapters: 1-5
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