Working Capital Management and Profitability of Banks in Zambia

Abstract

The objective of this research was to assess how the management practices related to working capital impact the profitability of banks in Zambia. The primary research question guiding this study was: To what degree do the policies and practices regarding working capital management influence the profitability of banks in Zambia? In order to address this question, the study calculated the Return on Average Assets as a metric to measure bank profitability, which served as the dependent variable. Receivables collection period, payables payment period, and cash conversion cycle were adopted as predictor variables, while leverage, bank size, growth and credit risk were the control variables. Descriptive statistics, correlation analysis and fixed effects regression modelling using dummy variables were then used to analyse panel data for 14 commercial banks in the country for the period 2010 to 2021.Based on the findings, the study concluded that overall, effective management of working capital had a statistically significant positive impact on the profitability of banks in Zambia. With respect to individual working capital elements, it was observed that the period for collecting receivables and the duration of the cash conversion cycle had a negative and significant influence on bank profitability. Conversely, the period for making payments on payables had the opposite effect, positively impacting bank profitability.Additionally, the study discovered that when the receivables collection period and payables payment period were utilized instead of the cash conversion cycle in the regression analysis with return on average assets, there was a greater increase in R-square change and squared multiple partial R. This indicates that managing receivables and payables as distinct components of working capital is more advantageous for the banking sector in Zambia compared to employing the cash conversion cycle.

Keywords: Bank, Profitability, Return on average assets, Working capital management, Zambia

DOI: 10.7176/RJFA/14-16-06

Publication date:August 31^st 2023