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.
Depositors will lose confidence in the bank and this may eventually
result to a legal tangle and hence closure of the bank. Liquidity is
however measure with following ratios. Current Ratio = Current
Asset Current
Liabilities
In banks liquidity is usually assessed by using cash ratio which is.
Cash + Marketability Security
Current Liabilities
In order to achieve the aims and objectives of this study, the banks
working capital was carefully examined and required information on the
subject matter was gathered information on the subject matter was
gathered from personal interviews, collected fact from text banks,
journals. Other crucial information were obtained from respondents and
from a number of questionnaires administered within the banks. Finding
from the study shows that efficient working capital management will
improve profitability to help to stabilize or improve liquidity of bank.
The study concluded that banks should maintain adequate level of
working capital in order to improve on profitability of
liquidity.
CHAPTER ONE
1.1 INTRODUCTION
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.