Email this article Effect of Working Capital Management on Non-Performing Loans of Selected Microfinance Banks in Adamawa State, Nigeria
Abstract
Working Capital Management (WCM) affects Non-Performing Loans (NPLs) by influencing a company's liquidity and cash flow. It helps ensure timely debt repayments, reducing the likelihood of loans becoming non-performing. Poor WCM can lead to cash flow problems, increasing the risk of defaults and higher rate of NPLs. This study assessed the effect of working capital management on non-performing loans (NPLs) in selected microfinance banks in Adamawa State, Nigeria, over the period 2013 to 2023. Utilizing a panel data set from five microfinance banks, the analysis employs the Ordinary Least Squares (OLS) technique to explore the effect between various working capital management metrics and NPLs. The key variables examined include the Current Ratio, Quick Ratio, Debtors to Creditors Ratio, Working Capital to Total Assets, and Total Assets (as an independent variable). The findings revealed a negative significant effect between the Current Ratio and NPLs, indicating that better liquidity management was associated with a reduction in non-performing loans. Conversely, the Quick Ratio and Debtors to Creditors Ratio exhibit positive but insignificant relationships with NPLs, suggesting that these factors may not play a crucial role in the occurrence of non-performing loans. In contrast, the Working Capital to Total Assets ratio shows a positive significant effect with NPLs, implying that, higher working capital relative to total assets is associated with an increase in non-performing loans. Lastly, Total Assets, included as an independent variable, also demonstrate a positive significant effect with NPLs, highlighting the potential impact of the size of the banks on loan performance. These findings provide valuable insights for bank management and policymakers in enhancing financial stability within the microfinance sector in Adamawa State.
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