The impact of working capital management policies on profitability of commercial banks in Uganda

Abstract

The objective of the study was to examine the impact of working capital management policies on profitability of commercial banks in Uganda for a period 2013-2017. To establish whether, and to what degree, an association exists between working capital management policies, and company profitability, I adopted a quantitative research method and non-experimental correlational research design. Secondary data was collected and the target population for this study was all the 24 operational and licensed commercial banks conducting business in Uganda by 31st December 2017. Commercial banks considered for the study’s sample were seven (7) in total as guided by several factors such as availability of the necessary data and statistical viability among others. Data was analysed using descriptive statistics, correlation and regression analysis. The conventional level of significance of 0.05 was employed. Working capital management policies considered were the working capital investment policy and financing policy. Working capital investment policy was measured as a ratio of current assets to total assets whereas the working capital financing policy was measured as a ratio of current liabilities to total assets. Outcomes of the analysis showed that there is a significant negative relationship between the working capital management policies and profitability as represented by Return on Assets and Return on Equity. Therefore, Commercial banks need to adopt an aggressive working capital investment policy and a relatively conservative financing policy in order to increase profitability. The study was limited to the examination of only association rather than causal relationships between the research variables. However, it may serve as a basis for future researchers to expand the correlational design to experimental or quasi-experimental research design with adequate control for extraneous variables. This study was limited to only commercial banks. However, the working capital management policy practices may differ in other industries such as the manufacturing industry and other financial institutions such as Micro-finance institutions, Insurance companies and SACCOs. The study investigated the impact of working capital management policies on profitability of commercial banks in Uganda. Future studies may focus on the relationship between credit risk management, capital adequacy and corporate governance among others with company profitability.