Effects of Working Capital Management on Profitability of Banks: A Case Study of Some Selected Banks in Ghana

Abstract

This study sought to examine the effects of working capital management on profitability of banks with a case study of some selected banks in Ghana. The selected banks included the GCB Bank, Agriculture Development Bank (ADB), National Investment Bank (NIB), Standard Chartered Bank (SCB) and ECOBANK. The study covered a period range of 2006 – 2015 that is a maximum of ten years. The audited annual reports from a sample of five selected banking firms in Ghana were employed for the study. Descriptive analysis as well as correlation and regression analysis were all used to analyze the data. The findings of the descriptive statistics showed that the selected commercial banks had an average of 138.283 days in lieu of collected cash from credit sales. Also, accounts payable period recorded a payment policy of 573.106 days, with a standard deviation of 186.659. The findings further indicated that the commercial banks used for the study needed an average to172.29 days to sell their inventory. Moreover, the inventory holdings period for the selected banks ranged from 0 to 163.23day. Based on the findings, cash conversion cycle took an average of 123.685 days to convert asset into cash. According to the findings of the study, there is a negative relationship between return on asset and cash collection cycle. The findings demonstrated that there was a negative coefficient between return on asset and account receivable. Based on the findings, some of the recommendations suggested included; banks in Ghana should try to come up with drastic reduction in the number of days’ accounts receivables are outstanding and cash conversion cycle. The reduction in the number of days resulted in high profit maximization for the banks. Hence it is also recommended that the banks should adopt effective working capital management practices which enable them to keep working capital at its optimal level.