Impact of working capital on the market value and profitability of Jordanian Commercial Banks (2012-2000)

• Author: Ghazi Al majeed Alrguibat - Mishaan Salem Aldvery
• Position: Department of Banking and Finance, Faculty of Business and Finance Management / Al al-Bayt University - Researcher

Introduction

Commercial banks management faces many financial decisions to solve the sources of liquidity , the correlation between them stems from the importance of both the existence of any institution and continuation ,so liquidity necessary to avoid the risk of bankruptcy also profitability is essential for growth , continuity and survival . There is discrepancy between these two elements, such as discrepancy in the Commercial Bank which appears in the form of opposes that explained between the interests of the two groups, which provided funding to the bank, so the shareholders and depositors look forward to high profitability on their investments, and they inclined to a little sacrifice in liquidity in order to improve their profitability, also looking to the safety, possibility of recovering their money when they need it without difficulty, they inevitably tend to more liquidity, the difficult task entrusted to the bank's management is balancing liquidity and profitability, through managing and analysis of working capital cycle in the commercial bank with analyzing cost of funds directed to finance working capital (financing structure), with taking in their considerations the financial leverage to achieve greater return on the invested money, but increasing reliance on borrowed money , without that there will be efficient in using displays bank risk which forcing them to raise the rate of return, and increases cost of borrowing , financing risks and the researcher examined the impact of working capital on market value and profitability of Jordanian commercial banks through the study of the impact of the components of working capital both separately and the total ingredients together, so that the researcher conducting this study (Cross - Sectional Study) on the financial statements of commercial banks . The study sample for the period (2000 - 2011).

Importance of the study: management of working capital include number of features that make it a great importance for the following reasons:

1 - Working capital considered an a great element for commercial banks; accounting for current assets (assets Cash and cash equivalents) is approximately (58%), of the assets in Jordanian commercial banks at the end of 2012, while formed short-term liabilities of about (76% ), the size of the liabilities college in the same year, despite the fact that commercial banks can reduce their investments in fixed assets by lease, but they can not avoid investing in working capital, due to limited sources of long-term financing available to them, which forced them to rely heavily on short-term sources, (deposits), which amounted in 2012 about 22504 million Jordanian dinars a rate of approximately (65%) of the total volume of liabilities, and both of which increases the importance of working capital management for such banks.

2 - working capital needs to the importance of special management of commercial banks to speed the movement and its importance in achieving profitability Commercial Bank, where the percentage of liquidity data consolidated balance sheet of commercial banks of Jordan (159.1%) in 2011, while the return on assets for the same year 2011 ROA (1.1%), and return on equity ROE (8.8%), while the percentage of coverage Coverage R. (52.0%), and the proportion of Leverage Leverage R. (13.0%).

3 - As an importance of this study the dependence on data of Jordanian commercial banks, which is the size of circulation about (15%) for the volume of shares traded in Amman Stock Exchange in 2011 as well as the size of the assets exceeds the amount of 37.6864 billion Jordanian dinars until the end of the same year While the market value of the banking sector until the end of February of the year 2012 approximately 8,303,137 million Jordanian dinars.

Objectives of the study: Researcher seeks through this study to achieve the following objectives:

First: to measure the impact of working capital in commercial banks to bank profitability and market value.

Second: identify the components of working capital in the Jordanian commercial banks and assessing the impact of these components on the profitability of commercial banks.

Third: determine the relative importance of the impact of these factors and how is it different in effect on the profitability of banks and their market value.

Fourth: make the necessary recommendations to improve the efficiency of working capital management in the Jordanian commercial banks.

Study Problem:

policies on working capital decisions Include relating to the assets traded in terms of the elements of the composition, how to use them, the effect of composition on the risks and returns, and policies are necessary for the growth of banks on long-term survival. Unless available at banks working capital needed to increase investments, you may miss opportunities to increase repeat profits. Also, the banks that retain a high level of working capital have available liquidity to enable them to meet their obligations accrual, if what happened Conversely, banks face the burdens associated with low credit rating and compulsory liquidation, So we can summarize study problem through questions :

- Is there any effect of working capital in the Jordanian commercial banks on the profitability of those banks?.

- Is there any effect of working capital in the Jordanian commercial banks on the market value of those banks?.

- Is there much effect on bank profitability and market value depending on the components of working capital in the Jordanian commercial banks?.

Hypotheses: Study Hypotheses put to answer the problem of the study, and was formulated as:

The first hypothesis :

Ho: there is no impact of the working capital in commercial banks on the profitability of those banks. Which emanated to the following sub-hypotheses: Ho: there is no impact for the cash balances in working capital in the Jordanian commercial banks on the profitability of those banks.

Ho: there is no impact for the commercial paper discounted of working capital in the Jordanian commercial banks on the profitability of those banks.

Ho: there is no impact for the portfolio in working capital in the Jordanian commercial banks on the profitability of those banks.

The second hypothesis :

Ho: there is no impact for the working capital in commercial banks on the market value of those banks. Which emanated the following sub-hypotheses:

Ho: there is no impact for the cash balances in working capital in the Jordanian commercial banks on the market value of those banks.

Ho: there is no impact to the commercial paper discounted for working capital in the Jordanian commercial banks on the market value of those banks.

Ho: there is no impact to the portfolio for working capital in the Jordanian commercial banks on the market value of those banks.

Model study: Study Model depends on determine the dependent variable and the independent variables according to the following regression equation:

Y1, (Y2) = a + b (X1), (X2), (X3)

Where is :

Y1: the dependent variable (the profitability of banks) return on assets ratio (ROA).

Y2: the dependent variable (market value) the market value on the closing prices of the shares of commercial banks in the Amman Stock Exchange during the study period.

a: the value of the constant

b: a mile of the curve

X1: the first independent variable is the amount of cash balances in working capital.

X2: second independent variable is the amount of the Bank's investments in commercial paper discounted in working capital.

X3: third independent variable is the amount of the Bank's investments in securities within the portfolio of working capital.

The regression analysis was used within the statistical package E-views and to measure the impact of factors Independent Group, which will be addressed in separate financial analysis and hypothesis testing.

Definitions of Study Terminology

- Return on Assets: Profitability ratios measure the effectiveness of recruitment in assets and facilities can be calculated by dividing net income by total assets.

The rate of return is calculated on assets according to the following equation:

Net income (profit after interest and tax) / total assets of the company

- Commercial papers (accounts receivable): Type of facilities that companies give to other individuals or companies guarantee returns for the goods that are selling to be paid the value of these securities later.

- Cash balances : Money is kept by the bank in the form of cash in vaults or at the Central Bank in the form of current accounts to meet the deposit withdrawals.

- Securities portfolio: Portfolio combination or a group of investment tools, whether real or maintained by the financial investor in order to achieve a return at a reasonable level of risk through diversification of its components.

- Market value: The current value of securities and registered according to the latest prices on the flimsiest higher market prices that can be sold securities in the market.

- Book value: Reflect the book value of the total capital contribution , retained earnings and reserves in the value of the company's shares.

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