THE EFFECT OF WORKING CAPITAL MANAGEMENT ON THE PROFITABILITY OF PRIVATE COMMERCIAL BANKS IN ETHIOPIA

Abstract

Effective working capital management focuses on keeping and having an optimal level of working capital for maximizing organizational value. The purpose of this study is to examine the impact of working capital management on the profitability of private commercial banks in Ethiopia. Financial statements of a sample of six (6) Private commercial banks were used for a period of eleven years (2005-2015) with the total of 66 observations. The Data was analyzed on quantitative basis using descriptive and regression analysis (Ordinary Least Square) method. It examined variables such as debtors collection period, creditors payment period, cash conversion cycle, and liquidity in relation to return on asset (ROA).In addition the study used credit risk, as measured by loan losses amount in relation to total loan amount; size of banks, as measured by logarithm of asset; efficiency as measured by the ratio of non -interest expense to net income, as control variables. The key findings from the study are; debtors’ collection period and cash conversion cycle are statistically significant and negative relationship with private commercial banks’ profitability. On the other hand, variables like creditors’ payment period and liquidity are statistically significant and positive relationship with private commercial banks’ profitability. In general paying customers longer and collecting payments from customers earlier, and the ability of banks to meet short-term obligation or commitments are all associated with an increase in the private commercial banks’ performance. Policy makers of private commercial banks, therefore, can increase profitability by improving the performance of management of working capital components.