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WORKING CAPITAL MANAGEMENT IN NIGERIA BANKING INDUSTRY

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.

Project detailsContents
 
Number of Pages140 pages
Chapter one Introduction
Chapter two Literature review
Chapter three  methodology
Chapter  four  Data analysis
Chapter  five Summary,discussion & recommendations
ReferenceReference
QuestionnaireQuestionnaire
AppendixAppendix
Chapter summary1 to 5 chapters
Available documentPDF and MS-word format


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