IMPACT OF ADEQUATE WORKING CAPITAL ON PROFITABILITY OF BANKS

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IMPACT OF ADEQUATE WORKING CAPITAL ON PROFITABILITY OF BANKS

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO 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.

i. Regular operation will not be possible, as inadequacy of funds will course unplanned closure.

ii. 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.

iii. Low level of availability of find may hamper the extension of credit and bring about inability to meet customer with drawals.

iv. 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 JUSTIFICATION 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.

1.3 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.

i. The response to the questionnaires by the respondents cannot be taken to the totally correct .

ii. There is also the problem of implementation of working capital policies even when it was correctly formulated.

iii. It is also assumed that to some extend. The respondents to the questionnaire might not want to supply important information considered confidential to the bank.

1.4 OBJECTIVES OF THE STUDY

The objectives of this research work is to study bank’s level of working capital to determine its adequacy as well determine its impact on the level of profitability.

1.5 TESTING FOR HYPOTHESIS

For the purpose of this study, the following hypothesis were tested.

Ho: That effective working capital management in bank will improve level of profitability.

Hi: That effective working capital management in bank will not improve level of profitability.

1.6 RESEARCH METHODOLOGY

The study will seek to answer the following questions. But in answering the question, the use of personal interviews, textbooks and journals will be employed. The answers are considered to the final output of this research study. The questions include:

1. What is the need for an effective working capital?

2. What is the importance of cash as a working capital tools?

3. How can working capital be effectively managed?

1.7 SCOPE 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.

1.8 LIMITATION OF THE STUDY

The research is designed to cover wide are but due to some limitation which deferent researchers to cover much area like

i. Problem of finance, which really limit our research to certain area.

ii. Another problem that stands as a limiting factor. There was no sufficient time for us to carryout much research.

iii. Inadequacy of materials, the absence of necessary materials in the school library has narrowed the way of getting materials.

However, despite all these short-coming, the project was written with adequate information gathered to produce meaningful and comprehensive work.

1.8 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 incurrent 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 exist between banker and customer whereby bank allows its customer to withdraw funds in excess up to a certain specified limit during a stipulated period.

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