Determinants of working capital requirement and policies of banks in Ghana

Abstract

Efficient management of working capital guarantees not only the future cash flow of a firm but also its profitability. This study attempts to find out the determinants of working capital requirements and working capital management policies in the Ghanaian Banking Industry. The study used bank level data (1999-2008) from the Bank of Ghana. Using panel methodology within the random or fixed effects framework, the study concluded that while Cash Conversion Cycle, Size and Age of a bank have significantly positive impact on bank working capital requirement, leverage, cash position and deposit herfindahl index have a significantly negative effect on bank working capital requirement. Profitability, cash position, growth size and deposit herfindahl index are found to be the key determinants of working capital policies of banks in Ghana. Consequently, the study finds support for the pecking order and agency theories even though no support was found for the lifecycle theory. Thus to ensure efficient working capital management, banks in Ghana would be better off pursuing growth strategies geared towards obtaining greater proportion of the banking market and issue more short term debt instruments.