WORKING CAPITAL MANAGEMENT IN THE BANKING SECTOR

CHAPTER ONE

INTRODUCTION

1.1       BACK GROUND OF THE STUDY

            Working capital management is vital in the management of the bank’s current account which include current assets and current assets and current liabilities.  This explains the various forms of current assets and current liabilities adjustments which a bank can make in order to meet its required working capital.  Working capital is of two types, gross type and net type.

            The gross type  refers to the bank’s investments in current assets, this means those assets which can be means those assets which can be converted into cash within accounting year, like short term securities, debtors bills receivable, stock and cash. 

            The net type is the difference between current assets and current liabilities.  Current liabilities means those claims of outsiders which are expected to mature for payment within an accounting year, such as creditor, bank overdraft and bills payable.  Net working capital occurs when current assets exceeds current liabilities.

Working capital management is one of the important aspects of the bank’s overall financial management.  This is because efficiency in this area is necessary in order to ensure the bank long-term success and achieve its overall goal which is the maximization of owners wealth.

A certain level of working capital is required for operation in the banking industry.  This level of working capital of a bank constitutes the cash holding or near cash holding or near cash assets required of a bank by a statue of the government or it should be noted  however, that the level of working capital do not directly earn the bank any income when it is all allowed to be held in cash form, that is idle cash.

The main purpose of establishing commercial banks to operate is to make profit for the shareholders.  In that regards, banks as well as other profit seeking enterprises strive to increase their net income and presence value of their assets.  While recognizing this, the immediate concern of the bank manger is to provide satisfactory returns for the shareholders, and this requires holding a sufficient volume of safe and productive assets as well as sourcing for funds through the fast volatile and expensive available sources. 

It should be noted however, that a bank does not possess full control over its assets and also a greater part of its liabilities, the reality it that it possesses partial control on some current assets and current liabilities absolute control on some and still lack total control over others.  It is within this business environmental constraints and prospect that banks have to carry out their various adjustments to suit their long run objectives objectives.

In the earlier paragraph, it was mentioned that there are two concepts of working capital (the gross and net working capital )  They have equal significance from the management view point, the gross working capital concept focuses attention on the two aspects of current asset management.

(a)                optimum investment in current assets

(b)               Financing current assets.

The consideration of the level of investment in current assets should avoid two danger points, the excessive and inadequate investment on assets.  The investment in current assets should be in adequate form to enhance better performance.  While the excessive investment in current asset should be avoided because it impairs a bank’s profitability since idle investment earns nothing to the investor.

On the other hand, inadequate availability of working capital can threaten the solvency of the bank when it fails to meet its current obligations.  Thus the financial managers should have knowledge of the source of working capital funds as well as the investment avenues, where the idle funds may be temporally invested.  The net working capital on the other hand has indicated liquidity position and suggests that current assets should be sufficiently in excess of current liabilities in order to constitute a margin for maturing obligations within the ordinary operation cycle of a bank’s business.

The need for working capital to run the day to day activities of a bank business cannot be over-emphasized.  We will hardly find banks or other firms which does not require any amount of working capital.  Banks should earn enough return from their operations in order to be able to achieve their set goals, which of course includes the maximization of shareholders wealth and as such to avoid the recent distress problems in today’s banks which has its root basically from inadequate working capital caused by inefficient working capital management .  The banks have to invest enough in current assets for success of their business.

                  The need for working capital to run the day to day activities of a bank business cannot be over-emphasized.  We will hardly finds bank or other firm which does not require any amount of working capital. Banks should earn enough return from their operations in order to be able to achieve their set goals, which of course includes the maximization of shareholders wealth and as such to avoid the recent distress problems in today’s banks which has its root basically from inadequate working capital.  The banks have to invest enough in current assets for success of their business.

      The inability of the bank to honour claims from individuals/customers demand start a spiral of technical insolvent, it was for the avoidance of such embarrassing situation as liquidity, technical insolvency, high risk and low profit that such theory, the profit ability theory, the liability management theory have been formulated in banking to guide bankers in their decision making process.

1.2       STATEMENT OF THE PROBLEM

            There are many banks that are not able to meet the demands of their customers owing to their inability to manage their working capital effectively and efficiently.  Their bank managers are consistently confronted with formidable problems in striving to meet their level of working owners investment in their banks.  The problem is really related to the following

(1)               Inadequate cash reserves

(2)               Poor management of the available funds.

(3)               Non compliance to rules and regulations in giving loans to their customers

(4)               Non payment of loans extended to customers on time and sometimes not paying at all.

(5)               Constant withdrawals of money deposited in bank by their depositors owning to lack of confidence by customers.

(6)               Abstaining from depositing money in banks due to constant cases of banks distress by some would have been banks customers.

1.3                   PURPOSE OF THE STUDY

(a)                To know whether working capital management has any affect on the liquidity of banks

(b)               To find out the causes of bank distress or reasons why there are distress in banking industries today.

(c)                To know whether the working capital management has any effect on the profitability of the bank.

(d)               To how the bank manager manage the current account of the bank.

(e)        To find out whether the long term longs affect the management of the bank.

(f)                To find out how adequacy is the working capital of the bank.

1.4                   RESEARCH QUESTIONS

(a)                How is working capital being managed in UBA Plc Surulere, lagos?

(b)               Is there enough working capital for the operational activities in the bank?

(c)                Do the management (officers) of UBA Plc Surulere, lagos make proper use of the available working capital

(d)               If there is proper working capital management in UBA Plc Surulere, lagos, has it contributed to  the profitability of the bank?

(e)                How do the loan beneficiaries respond to such offer given to them by the Bank?

(f)                How do the customers react to the operational mode of the bank?

1.5                   RESEARCH HYPOTHESES

            In this research hypotheses, the null hypotheses is represented by HO while the alterative hypothesis is represented by Hi

1.         HO:     Working capital management in united bank for Africa Plc affects the liquidity of the bank.

            Hi:       Working capital management in united Bank for Africa does not affect the liquidity of the bank

2.         HO:     The efficient management of the working capital in the bank is enough.

3.         HO:     Long term loans and short term loans methods of issuing loans are not favourable to the bank.

4.         Ho:      The united bank for Africa Plc should not employ more well trained personnel’s.

5.         Hi:       The united Bank for Africa should employ more well trained personners to enhance productivity.

1.6       SIGNIFICANCE OR RATIONALE OF THE STUDY

            There are many significances about the working capital management of  united Bank for Africa plc Surulere, lagos. Those are as follows

(i)                             The study of this project topic will give the researcher the opportunity to know and hence empty the most dynamic and competitive techniques of working capital management.

(ii)                           It serves as data base of information on contemporary practices in evaluation.

(iii)                         The study will help/lead to increase know how in areas of risk reduction, liquidity management.

(iv)                         It will help the management of united management and make good use of its working capital decision making process.

1.7                   SCOPE OF THE STUDY

            The scope of this study will be based on working capital management, its inadequacy and excess implications in banking industry.  Another things that contributed to this limitation are time and financial constraints, which did not allow for more exhaustive research.

1.8     DEFINITION OF TERMS

            There are some technical terms which are used in this research they are defined as shown below.

(i)     CAPITAL:      This is defined as wealth owned by an individual or business organization (bank) in form of money or goods, which can be used for creation of additional wealth.

(ii)     CURRENT ASSESTS:  These  are assets which can be readily converted into cash acquired for use within an accounting period.

(iii)       CURRENT LIABILITIES:  These are those accounts payable, notes payable and all the accruals.

(iv)     WORKING CAPITAL:  This is the difference between the current assets and current liabilities of a firm (Bank).

(v)      WORKING CAPITAL MANAGEMENT:  This is the determination of the ratios at which to hold the current assets and current liabilities in the overall valuation of a bank (firm).

(vi)     MARKETABLE SECURITIES:  These are short term securities which can readily be converted into cash, such as Treasury, bills, Treasury certificates development stocks and bonds

(vii)   NET WORKING CAPITAL:  This is total current assets less total current liabilities

(viii)   MANAGEMENT:  The act of getting things done more specifically which involves setting bank’s goals and directing human and physical resources to achieve these set goals

(ix)   GROSS WORKING CAPITAL:  This is the investment in current assets by banks (firms)