The Effect of Working Capital Management on Financial Performance of Deposit Money Banks in Nigeria

Abstract

Working capital is one major factor upon which the stability and survival of a business entity depend. Failure of a bank automatically connotes its working capital failure which could be highly contagious leading to a bank run on the distressed. This is one of the reasons the financial performance of the banking sector deeply depends on the efficient management of the banks’ working capital. This study specifically examines the effect of Working Capital Management (WCM) on financial performance of Deposit Money Banks in Nigeria for the period of 2010 to 2019. The study sampled Seven (7) out of the Thirteen (13) listed Deposit Money Banks in Nigeria as at 31st December, 2019. Three models were formulated to guide the study with Net Interest Margin (NIM), Return on Equity (ROE) and Operating Profit Margin (OPM) as proxies for financial performance (dependent variables) of each model respectively; the independent variables are Loan to Deposit ratio (LTD), and Cash Ratio (CR) while the control variable is Bank Size (BS). The data were extracted from the annual reports of the banks. The ratio analysis along with descriptive, correlation analysis and Regression analysis were used to estimate the various models. The findings showed that LDR has positive insignificant effect on NIM while CR and BS have significant positive effect on NIM, as to the overall outcome, working capital management jointly have significant effect on NIM. Also, LDR and BS have positive insignificant effect on ROE while CR exerts negative insignificant effect on ROE, working capital management jointly have no significant effect on ROE. Finally, LDR and BS have negative insignificant effect on OPM while CR exerts positive insignificant effect on OPM, working capital management jointly have significant effect on OPM. The result revealed that managing working capital through cash ratio and bank size can mildly improve the bank’s financial performance when the performance is proxy by Net Interest Margin. For this to be achievable, the management of banks should ensure that there is adequate liquidity to meet customers’ demand at any point in time.