Effect of Working Capital Management on Financial Performance of Islamic Banking in Nigeria

Abstract

Much attention is now focused towards Islamic banking, as some scholars have claimed that it has a uniqueness in managing risk. The objective of this study is to examine the role of working capital management on the financial performance of Islamic banks in Nigeria. Audited financial statements of a famous Islamic bank in Nigeria, Jaiz bank Plc from 2013-2022 were used to extract data for the variables listed. Purposive sampling was used to select the series. Generalized least square was used to test the three hypotheses. The regression results of hypothesis 1 indicated that, day sales outstanding (Murabaha receivables) is positively and insignificantly related to financial performance. The coefficient of 0.000905 signifies that 1% increase in Murabaha receivables will translate into 0.000905 increase in financial performance of Jaiz bank. This finding adds to the continuous debate that Islamic banks should move from Murabaha products that are less risky to profit sharing products such as mudharaba and musharaka. The result of hypothesis II reveals that customers’ deposit (DPO) has significant negative impact on financial performance of Jaiz bank with a coefficient of -0.002438. Hence, one percent increase in delay payment to customers will increase the bank financial performance by 0.002438. This will increase liquidity, and also serve as an opportunity for investing in liquid assets such as Sukuk or other short-term marketable securities. That will motivate customer deposits, and hence improve the bank’s financial performance, and consequently increase shareholders’ value. The hypothesis III shows a coefficient of 0.1135 which reveals that when other bank balance is increased by 1%, financial performance will reduce by 0.1135. Although this is not unconnected with the fact that some balances are with Central Bank and yield no interest. To enrich this concept, it is recommended to extend the study to other Islamic banks, or make a comparative study between Islamic and conventional banks.