UNIVERSITY of SAINT LOUIS Date Completed:

Tuguegarao City
Signature of Proponents
Tel No.: (078)-844-1872/1873/1822
Fax No. (078)-844-0889

Proponents Last Name First Name MI

Soriano Jose Jr. R.
Tabago Jefferson P.
Padilla Maebel Q.
Pazziuagan Evinna B.
Pelagio Myka Joana A.
Field of Specialization Accounting
Research Method/Design Descriptive-Correlational

Research Topic
Working Capital Management Practices among Rural Banks in the Province of Cagayan
Working Title: DELVING THE WORKING CAPITAL MANAGEMENT PRACTICES, ITS EFFECT ON PROFITABILITY
(as proposed by the proponent) OF SELECTED RURAL BANKS IN CAGAYAN
Approved Title: DELVING THE WORKING CAPITAL MANAGEMENT PRACTICES, ITS EFFECT ON PROFITABILITY
(as redirected by the research OF SELECTED RURAL BANKS IN CAGAYAN
consultant)
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 Variable/ Conceptual Working capital management practices(5), Working capital management(17), Profitability(65), rural
Tags/Synthesis Tally banks(18), return on assets(9), return on equity(7).
(optional)

Theoretical/Conceptual Framework Fisher's Separation Theory

Review of Literature This chapter of the research justifies the choice of the topic or area and to establish the value of
the research and its contribution to the field of study under focus. This section highlights salient issues
that are relevant to the research under study. It synthesizes the main themes and arguments of a
particular body of literature. This chapter also introduces significant researches by individuals that became
the foundation of the totality of the research.

Working Capital Management Practices

As critical as it is, Working Capital Managements goals is to ensure that a firm is able to
continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and
upcoming operational expenses. There are numerous factors affecting the WCM practices but those can
be summarized into two, it depends on the management implementing the practices and the composition
of the Working Capital Management itself.
According to Afrifa G. (2013), managers with the highest qualification and many years of work
experience have the ability to confidently managing all aspects of WCM, and therefore have the best
WCM practices. Agyie-Mensah B. (2012) also states that operators of small firms possess limited formal
education, weak managerial and financial management skills within the sector and therefore affects
working capital management practices. This shows that in some or most of the cases, the degree of
efficiency and effectiveness of Working Capital practices depends on the management itself.
Other cases point out that the composition of working capital is the primary factor in determining
the best WCM practices. Ndagijimana J.,Okech T.(2014) said that there is positive significant relationship
between accounts receivable, accounts payable and cash conversion, and working capital management
practices in the enterprises. Kasozi J. (2017) also states that the average collection period and the
average payment period are negative and statistically significant for profitability, implying that firms which
efficiently manage their accounts receivable and those that pay their creditors on time perform better than
those that do not.
Below are the common measures of the working capital management adopted by the banking
industry.

Liquidity
Liquidity is a flow concept and as such refers to ability of a firm to generate adequate cash from
both internal and external sources to meet its cash requirements (Egbide and Enyi, 2008). It is technically
known as solvency meaning the firm’s continuous ability to meet maturing obligations. While profitability
refers to the firm’s ability to generate revenues in excess of the cost of generating such revenues. Most
empirical studies have established liquidity and profitability as the most important goals of working capital
management and have been found to be universally associated with each other (Raheman and Nasir
2007, Shin and Soenen, 1998; Pandey, 2005) Van-Horne and Wachowicz, 2005). Trade-off between
the dual goals of working capital management as shown in Smith (1980) which is similar to risk-
return trade-off has increasingly been supported by many empirical findings (Nguyena, 2007;
Eljelly, 2004 and Raheman and Nasir, 2007).
For example, Yunq-Janq (2002) examines relationship between liquidity and profitability
for firms in Japan and Taiwan and discovers that aggressive liquidity management enhances
operating performance which leads to achievement of higher corporate values for both countries despite
differences in both their structural characteristics and financial systems. Along the same line of
investigation, Eljelly (2004), examines a sample of 29 joint stock companies in Saudi Arabia and
finds a strong negative relationship between liquidity and profitability. These two studies evidence
the need to balance profitability with liquidity. This is because policies that tend to maximize profitability
tend to reduce liquidity and vice versa for the particular business firm under consideration (Raheman
and Nasir, 2007 and Uremadu, 1998, 2000, 2001). Although profitability target is seen as the ultimate
objective of an enterprise but preserving liquidity is equally important. Hence, increasing profitability
at the expense of liquidity or vice versa can bring serious problems to the firm. Therefore arises the
need to balance profitability goal with liquidity goal of business enterprise in order to maintain a balanced
working capital position of the particular firm and ensure its survival at all times. To have higher
profitability, a firm will have to maintain a relatively low level of current assets (Pandey, 2005;
Van-Horne, and Wachowicz, 2005, Egbide and Enyi, 2008). The implication of this is to ensure that fewer
funds are tied up in idle current assets, but the firm adopting this strategy will be sacrificing solvency
thereby exposing itself to greater risk of cash shortage and stock outs. On the other hand, to
ensure solvency, a firm has to be very liquid which means maintaining a relatively large
investments in current assets. The latter policy ensures that the firm is able to meet its short term
obligations as well as fills sales orders and ensures smooth production schedule. This will,
however, reduce profitability since a large proportion of funds are tied up in current assets
(Egbide and Enyi, 2008 and Uremadu, 2004). Nonetheless, profitability and liquidity objectives should not
be mistaken to be permanently mutually exclusive as there may arise situations where both move in the
same direction. For example, Lyroudi and Lazaridis (2000) demonstrate through a study that there
exists no linear relationship between liquidity and profitability among the Greek food industry. In
support of this view, Byrnes (2003) reports that Dell Corporation generated huge amount of liquidity
and extra-ordinary high returns at the same time. His study reveals that while it took Dell forty five days to
pay its vendors, its debtor’s collection period was four days. That this strategy has crafted a sort of cash
engine which enabled them to finance the company’s rapid growth and limited its externalfinancing needs
as well as has yielded high returns. Finally, this argument can equally be supported by a view that liquidity
is a matter of degree and lack of it can limit advantages of favorable discounts, profitable
opportunities, management actions and coverage of current obligations (Egbide and Enyi, 2008). In the
same way, illiquidity often precedes lower profitability, restricted opportunities, loss of owner control, loss
of capital investment, insolvency and bankruptcy (Anon, 2003).

Debtors’ Management
All efforts the financial manager makes in setting credit standard, credit terms and credit
collection periods are geared towards establishing an optimal credit policy for the firm. An optimal
credit policy is one which maximizes a firm’s value, and it is a point where Pandey (2005)
assets that the incremental or marginal rate of return of an investment is equal to the incremental
or marginal cost of funds used to finance that investment. Optimal credit policy invariably
translates into an optimal investment in receivables which, in turn, maximizes firm’s value or net-worth.
Usually a firm lengthens its credit period to raise its operating profit through expanded sales turnover
program. However, there will be net increase in operating profit only when the cost of extended credit
period is less than the incremental operating profit (Pandey, 2005 and Egbide and Enyi, 2008). The
foregoing captures consensus of experts’ on views on the relationship between receivables management
and profitability objective of most business firms. Hence, Damilola (2005) opines that the purpose of
offering credit is to maximize profits. Similarly, Lazaridis and Tryfonidis (2005) maintain that credit
periods whether from suppliers or granted to customers, in most cases, have a positive impact on
profitability. However, due to associated risks inherent in credit policy, financial managers, most
often, vary the level of receivables in keeping with the trade-off between profitability and risk. Pike and
Chang (2001) maintain that given a significant investment in accounts receivables by most large firms,
credit management policy choices and practices may have important implications on corporate value and
that successful management of resources will often lead to higher corporate profitability. Hence,
there should be a guided flexibility introduced in managing a firm’s customers (debtors) credit extension
policy.

Creditors Management
The main purpose of effective management of the various components of working
capital (accounts payable inclusive), as earlier said, is due to the likely influence each component will
have on the company’s performance (measured here by profitability) and on the company’s
stability (measured by liquidity). Therefore, three different components of cash conversion cycle could be
managed differently to enhance both profitability and growth of the enterprise (Lazaridis and
Tryfonidis, 2005 and Egbide and Enyi, 2008). Accounts payables are largely dependent on the
firm’s purchases which, in turn, will depend on the volume of production. Thus, a decision as to
whether to take trade discount or not, or to stretch accounts payables or not, should be based on the
cost and benefits analysis of a firm’s credit policy in relation to profitability and or liquidity of the
enterprise. Van-Horne and Wachowicz (2005) put it this way, “the firm must balance the advantages of
trade credit against the cost of foregoing a possible cash discount, any possible late payment,
penalties, the opportunity cost associated with any possible deterioration in credit reputation and the
possible increase in the selling price the seller imposes on the buyer”. Therefore, the ultimate effect of
efficiently managing accounts payables is to optimize the cash outflow that ensures that a firm’s liquidity is
not adversely affected so thata company’s profitability will not also be affected in the long run (Egbide and
Enyi, 2008).

Cash Management
The ultimate goal of the financial manager in the management of cash is similar to the
management of other current assets (e.g. stocks and debtors). The objective is to attain an
optimal balance and turnover of cash that maximizes the market value of the firm (Agrawal,
2007). Attaining the optimal balance of cash means that effective and efficient management of cash
should impact on both the firm’s liquidity and profitability (Egbide and Enyi, 2008). Pandey (2005) and
Gundayelli (2005) agree that effective cash inflow and outflow factors in such a way as to maintain
adequate control over cash position to keep the firm sufficiently liquid while investing excess cash
in some profitable opportunities. It should be recalled, as we stated earlier somewhere in this paper, that
excess cash implies inefficiency of management in applying funds to profitability projects as idle cash
earns no income. Similarly, inadequate cash exposes the firm to risk of illiquidity since it would not be able
to meet its short-term maturing obligations nor can it take advantage of viable investment opportunities.
Therefore, it behaves the financial manager to formulate a cash strategy that will ensure cash
management style which optimally enhances liquidity at all times and leverages cash surpluseson
profitability operations (Egbide and Enyi, 2008).

The Cash Conversion Cycle (CCC)

Another aim of working capital management is to maximize time outflows and inflows of cash
otherwise known as the cash conversion cycle while simultaneously optimizing process costs and process
quality (KPMG, 2005). Usually the process from when you spend money to when you get money is
undoubtedly the single most important process to optimize for any business. It is therefore not surprising
why most researchers adopt cash conversion cycle or period as the most comprehensive measure of
working capital management as well as testing its impact on profitability (Deloof, 2003 and Reheman
and Nasir, 2007). Nonetheless, the relationship between cash conversion period and profitability does
not have a clear demarcation as two schools of thought have emerged namely: the traditional belief
that a short cash conversion period favours profitability and the contrary view that a longer cash
conversion period can lead to improvement of profitability (Shin and Soenen, 1998). Consequently,
researchers around the world have subjected this relationship to empirical examinations at different
platforms and their findings and conclusions are in support of the conventional school of thought. For
instance, Shin and Soenen (1998) in a study of a large sample of 58985 firms for a period of twenty
years, find a strong negative relationship between the net trade cycle and corporate profitability of listed
companies in America. They therefore conclude that financial managers can increase the value of firms
for their shareholders by reducing the conversion period to a reasonable minimum. Deloof (2003) also
investigates this relationship on a sample of 1009 large Belgian non-financial firms and finds a
significant negative relation between these two variables and concludes that managers can
increase corporate profitability by reducing average collection period and inventory conversion
period, and thus invariably reduce cash conversion period (CCP). Eljelly (2004) also discovers that the
CCC was a more important measure of liquidity and that its effects on profitability are more than
current ratio among joint stock companies in Saudi Arabia.
Furthermore, the study of the effect of working capital management on profitability which
examines a sample of 8872 small and medium size Spanish companies also reveals that a shorter CCC
can improve a firm’s profitability profile (Garcia-Teruel and Martinez-Salano, 2004). In line with the
above findings, KPMG (2000) asserts that a reduction in the CCC releases liquidity and impacts directly
on the company’s financial position thereby leading to rise in returns. In Athens, Lazaridis and
Tryfondis (2005) study a sample of 131 listed firms covering 2001-2004, and find a strong negative
relationship between profitability and CCC. They thus advise that financial managers can create
profits for their companies by correctly handling the cash conversion cycle (CCC) and keep each
component of CCC at optimal level. In India, the findings of Akella (2006) are not different as Indian firms
were advised to strive to improve their working capital system as a way of enhancing their profitability
status. Moreso, Reheman and Nasir (2007) study a sample of 94 Pakistan firms and find a strong
negative relationship between components of working capital and profitability thereby indicating that as
cash conversion cycle increases it leads to decreasing profitability. Sadlovska and Viswanathan (2007)’s
further survey in a related study reveals that the best performing companies have CCC in the range of 5-6
times shorter than the average and low performing ones. Conversely, a number of arguments
could arise in favour of a direct and positive relationship between a longer cash conversion cycle and
profitability. For example, Shin and Soenen (1998) argue that a firm could have larger sales with a
generous credit policy that extends cash cycle. In that case, the longer cash conversion cycle may result
in higher profitability. Besides, Deloof (2003) says that a longer cash conversion cycle might
increase profitability because it leadsto higher sales. The above arguments are in tan-dem with the
findings of Lyroudi and Lazaridis (2002) that study this relationship among food industries in
Greece and find a positive and significant relationship between CCC and profitability (measured by
return on investment, ROI and net profit margin). These above cited studies and their results
outstandingly demonstrate that a longer cash conversion cycle can equally improve corporate profits.
Although, Lavely(1996) states that high sales volume does not necessarily equate to high profitability and
he further argues that a firm losing money each time it sells cannot make it up in volume. Besides,
corporate profitability might as well decrease with cash conversion cycle if the costs of higher investment
in working capital rise faster than the benefits of holding more inventories and/or granting more trade
credits to customers. Nonetheless, these two schools have abandoned their divergent beliefs after
further empirical investigations reveal the contrary, yet, the sense in their arguments requires
further empirical investigation (Egbide and Enyi, 2008).

Rural Bank Industry in the Philippines

The banking industry in the Philippines traces its roots on April 6, 1828 when Spanish King
Ferdinand VII issued a decree establishing a public bank in the Philippines to meet the requirements of
increasing commerce and trade in the island. The bank of the Philippine Islands, one of the earliest banks
in the Philippines , was originally called El Banco Español Filipino de Isabel 2 named after Queen Isabela
II, the daughter of King Ferdinand VII. On May 1, 1852, for the first time the Philippine Peso was printed in
the country and named pesos Fuertes or “Strong Pesos”. The first deposit was made by a man named
Fulgencio Barrera. Three days later the first borrowing was made by a Chinese man named Tadian.
(Zaide, 1983).
The Philippine banking system sustained its growth momentum managed to deliver remarkable
performance in 2016 amid lingering uncertainties in global financial markets. Key performance indicators
showed further strengthening of bank’s balance sheets with double digits growths in assets, loans,
deposits and capital. During the year, banks maintained an ample liquidity to meet their operational
requirements and related funding needs. There was a notable rebalancing of banks’ portfolio particularly
cash credit related accounts as bank shore up liquidity to manage potential market volatilities at the onset
of rising interest rates. Banks likewise sustained their profitability arising from strong core revenue from
lending activities. (www.bsp.gov.ph)
While there are many types of banks in the Philippines, Rural banks continued to be profitable
as net profit stood at Php. 2.6 billion. With slightly lower earnings over the same period in the past years,
both the annualized return on assets and equity (ROE and ROA) ratios declined to 1.5 % and 8.6% from
1.8% and 10.7%, respectively. (www.bsp.gov.ph)
Total assets of the industry stood at Php. 170 billion, up by 2.5% from Php. 166.1 billion.
Consistently, the biggest share at Php. 112.7 billim or 66.2% of the industry’s total assets was held by
rural banks situated in Luzon. This was followed by the rural banks in Mindanao at Php. 41.7 billion or
24.4% and the rural banks based in the Visayas with Php. 15.5 billion or 9.3 %. (www.bsp.gov.ph)
On a regional basis, rural banks in NCR retained the top position in terms of net profit at P0.6
billion, down by P0.4 billion (43.6 percent) from P1.0 billion in the same period last year.
(www.bsp.gov.ph)
Meanwhile, CALABARZON (Region IV−A) also remained at second place as net profit
increased by 10.7 percent to P0.5 billion from P0.4 billion previously. The other top earners are rural
banks in Central Luzon (Region III) at P0.3 billion (from P0.f billion), Davao (Region XI) at P0.3 billion
(unchanged) and Northern Mindanao (Region X) at P0.2 billion (unchanged). In contrast, rural banks in
ARMM and CARAGA posted net losses during the one−year period ended. (www.bsp.gov.ph)

By three main geographic regions, rural banks located in Luzon had the largest net profit at P1.8
billion (70.3 percent of the total industry net profit) while rural banks in Visayas posted the least net profit
at P0.2 billion (8.5 percent). Rural banks in Mindanao earned a moderate P0.5 billion (21.1 percent).
(www.bsp.gov.ph)
The annualized earning asset yield declined to 13.7 percent from 15.3 percent due to the offset
of a lower interest income against higher average earning assets. Meanwhile, the 91−day Treasury bill
(T−bill) rate tumbled to 1.6 percent from 3.2 percent. Consequently, the spread between the earning asset
yield and the 91−day T−bill rate was unchanged at 12.1 percentage points same period last year.
(www.bsp.gov.ph)
Likewise, funding cost dropped to 4.5 percent from percent same period last year with interest
expenses going down while the average interest bearing liabilities went up. With a faster 1.6 percentage
points fall in the annualized earning asset yield than the 0.5 percentage point reduction in funding cost,
the interest spread slid to 9.2 percent from f0.3 percent. (www.bsp.gov.ph)
Moreover, the premium on annualized funding cost over the 9f−day T−bill rate further increased
to 2.9 percentage points over the f.8 percentage points same period last year. This benefited the
depositors of rural banks .Despite the lower net profit, the industry was more efficient as the annualized
cost−to−income (CTI), [exclusive of losses/recoveries on financial assets] ratio improved to 72.7 percent
from 77.5 percent. Rural banks in the following regions bested the industry average: NCR at 49.1 percent,
Davao (RegionXI) at 61.0 percent, MIMAROPA (Region IV−B) at 65.7 percent, Cagayan (Region II) at
72.9 percent, and cordillera Autonomous Region (CAR) at 73.8 percent. On the other hand, rural banks in
the following regions were least eficient: ARMM at f0f.3 percent, CARAGA (Region XIII) at 94.9 percent,
Western Visayas (Region VI) at 87.9 percent, Soccsksargen (Region XII) at 83.3 percent, and
CALABARZON (Region IV−A) at percent. By main islands, rural banks in Luzon had an annualized CTI
ratio of 69.6 percent while those in VIsayas and Mindanao had 82.5 percent and 78.1 percent,
respectively. (www.bsp.gov.ph)
The slight decline in the industry's profit reduced both the annualized ROA and ROE ratios to f.5
percent and 8.6 percent over the same period last year's f.8 percent and 10.7 percent, respectively.By
region, rural banks located in the following regions had the best annualized ROA: MIMAROPA (Region
IV−B) at 3.4 percent; Bicol (Region V) at 2.6 percent; Northern Mindanao (Region X) and Zamboanga
(Region IX) both at 2.5 percent; and Central Visayas (Region VII) at 2.1 percent and. On the other hand,
rural banks in ARMM, and CARAGA posted negative annualized ROA ratios.Geographically,
Luzon−based rural banks posted the best annualized ROA and ROE ratios of 1.6 percent banks had
annualized ROA at 1.4 percent and annualized ROE at 8.7 percent, while Visayas−based rural banks had
annualized ROA at 1.4 percent and annualized ROE at 7.2 percent. (www.bsp.gov.ph)

Effects of Working Capital Management on Profitability on Non-Banking institution

Profitability means the state of yielding profit or financial gain. Surely, working capital
management affects profitability in most cases. The company’s practices like its collection and payment
period imply that firms which efficiently manages their accounts receivable and those that pay their
creditors on time perform better than those that do not. Effects are caused also by the composition of the
working capital management itself because having the best working capital management practices also
means that you have the best chance of gaining profit. Kasozi J. (2017)
Lyngstadås, H. & Berg, T. (2016) said that reducing inventories held, time spent paid for
receivables and settling own accounts payable will increase profitability. Even though indigeneity may
exist, this does not affect the results from the previous analysis. Similar results are also obtained when
industry-specific effects are controlled for, supporting the robustness of the results obtained. The
relevance of quadratic dependencies of the profitability on independent variables was also identified and
suggests a decreasing trend of return on assets with increasing values of the working capital management
characteristic variables.
Choosing the right policy also determines its profitability. Mwangi L., Makau M., Kosimbei G.
(2014) recommended that managers of listed non-financial companies should adopt an aggressive
financing policy and a conservative investing policy should be employed to enhance their performance.
Hassan, U.N., Imran, M.M., Amjad, M. et al. (2014) showed us empirical results which indicate
that average age of inventory is positively related to gross profit margin and return on asset, whereas it is
negatively related to return on equity but the relationship is found insignificant. Although the relationship is
insignificant but positive sign may be because of increasing sales which leads to higher profit and thus
fewer inventories. Average collection period is significantly and positively related to gross profit margin
and return on assets. This finding shows that management of receivables has a positive impact on firm
performance. Moreover, it confirms the prediction that reduction in average collection period improves the
accounts receivable turnover which in turn positively affects the firm’s profitability. Although average
collection period is positively related to return on equity but the relationship is found insignificant. Average
payment period is positively related to gross profit margin and negatively related to return on asset but the
relationship is found insignificant. However, average payment period is positively and significantly related
to return on equity. This finding indicates that stretching the payment period increases the firm’s ability to
utilize creditors’ money in their operation which in turn enhances the firm value. As far as control variables
are concerned, a significant positive relationship is observed between firm size and two performance
measures such as gross profit margin and return on asset. Alternatively, firm size is negatively related to
return on equity but the relationship is found insignificant. Leverage is negatively and significantly related
to gross profit margin and return on asset. Alternatively, an insignificant and positive relationship is
observed between leverage and return on equity. The negative relationship between leverage and
profitably confirms the predictions of the pecking order theory which suggests that profitable firms tend to
borrow less due to their ability generate funds from internal sources. Finally, firm age is negatively related
to gross profit margin and return on asset whereas it is positively related to return on equity. However, the
relationship is found insignificant. In sum these empirical findings indicate that management of working
capital has material effects on firm performance.
Not only positive but also negative relationship arises from the working capital management
practices. Konak, F., Güner, E. (2016) points out that there is negative relationship between Net Margin
and, Short Term Debt Turnover Days and Cash Conversion Cycle. It can be interpreted that effective
management of working capital, such as decrease in Short Term Debt Turnover Days, can positively
affect firms’ performance.
Napompech K. (2012) said that there is also a negative relationship between the gross
operating profits and inventory conversion period and the receivables collection period. Therefore,
managers can increase the profitability of their firms by shortening the cash conversion cycle, inventory
conversion period, and receivables collection period. In addition, Ajibolad S.(2013) work revealed a
 significant negative relationship between firm’s working capital composition and their debt structure
choice.

Effects of Working Capital Management Practices on Profitability on Banking Industry

The banking sector is the section of the economy devoted to the holding of financial assets for
others , investing those financial assets as leverage to create more wealth and the regulation of those
activities by government agencies.
Like all businesses, banks profit by earning more money than what they pay expenses. The
major portion of a bank’s profit comes from the fees that it charges for its services and the interest that it
earns on its assets. Its major expense is the interest paid on its liabilities.
(https://www.investopedia.com/what-banking-sector).
Working Capital Management is vital in the management of the bank’s current account which
include current assets and current liabilities. This explains the various forms of current assets and current
liabilities adjustments which a bank can make in order to meet its required working capital. (Adagye,
2015).
According to Adagye (2015) there are two profitability proxies (Returns on Equity (ROE),
Returns on Assets (ROA)) that positively affected all the elements of working capital management. The
paper noted variety of components of working capital and profitability; this therefore means that banks are
to ensure that appropriate management of working capital is essential for achieving its objective of
maximizing the profitability.
Mandiefe (2016) points out in his research that working capital management effectively
influences the performance of Afriland First Bank. The analysis show that customer deposits, the size of
the bank, outstanding expenditure and return on assets all have a positive impact on bank profitability and
are statistically significant, however, an increase in reserves leads to a reduction of profitability while other
factors such as leverage have a positive effect on bank profitability.
ALShubiri (2011) found out on his research that there is no statistically significant relationship
between the level of current assets and current liabilities on operating and financial risk in industrial firms.
There is some statistically significant evidence to indicate a relationship between standard deviation of
return on investments and working capital practices in banks.
Determinants of bank profitability in a Philippine economy according to Suflan and Chong (2008)
suggest that size, credit risk, and expense preference behaviour are negatively related to banks'
profitability, while non-interest income and capitalisation have a positive impact. During their study, the
results suggest that inflation has a negative impact on bank profitability, while the impact of economic
growth, money supply, and stock market capitalisation have not significantly explained the variations in
the profitability of the Philippines banks.

Background of the Study According to Mandiefe (2016) Working Capital can simply be defined as resources which a firm
has to run daily operations. Working Capital Management involves setting working capital policy and
bringing it out for day to day need of the company or the firm. This requires wise investments in cash,
receivables and inventories as well as the level and the mixture of short term financing. Some author
defines Working Capital Management as a firm’s excess of current assets over current liabilities which
then measures the extent on which it can finance any increase in turnover from other fund sources. To
ensure the maximization of an entity’s firm there should be harmony present to all of the components of
Working Capital. Through ensuring that the firm’s has sufficient fund that will satisfy its long term debt and
maturing short term obligations as well as it’s expected operational expenses.

Kaur (2010) describes Working Capital Management as all management decisions and actions
that ordinarily influence the size and effectiveness of the working capital. Kaur further asserts that, it is
concerned with the most effective choice of working capital sources and the determination of appropriate
levels of the current assets and their use. This clearly focuses attention to the managing of current
assets, current liabilities and the relationships that exist between them. The basic objective of
working capital management is to manage firm’s current assets and current liabilities, in such a way, that
working capital are maintained, at a satisfactory level. The working capital should neither be more nor
less, but just adequate

Smith (1980) then states that working capital management plays an important role in a
firm’s profitability and risk as well as its value. There are a lot of reasons for the importance of working
capital management. Efficient management of working capital plays an important role of overall corporate
 strategy in order to create shareholder value (Dong and Su, 2010). The way of working capital
management can have a significant impact on both the liquidity and profitability of the company (Shin and
Soenen, 1998).

The Bangko Sentral ng Pilipinas (BSP) through the Republic Act 7353 also known as Rural Act
of 1992 “An Act Providing for the Creation, Organization, and Operation of Rural Banks, and for Other
Purposes”, the State hereby recognizes the need to promote comprehensive rural development with the
end view of attaining equitable distribution of opportunities, income and wealth. Rural banks are defined
as government-sponsored/assisted banks which are privately managed and largely privately owned that
provide credit facilities to farmers or merchants or to cooperatives of such farmers or merchants at
reasonable terms and in general, to the people of the rural community. For many years the Philippine’s
agriculture sector as well as agribusiness depends portion of their funds to rural banks. It became a
sustainable source of funding because it offers much lower interest rates compared to commercial banks.
So it is but right to now the profitability standing of Rural Banks to assure the public it is but all right to loan
from these banks.

This study will made use of the Fisher’s Separation theory and the Pecking Order theory as the
model of measures of Working Capital Management of selected rural Banks in Cagayan to determine their
effect on the entity’s profitability. Data will be interpreted to determine the best practices of these rural
banks. And with the presented reasons the proponents of the study want to delve on the Working Capital
Management practices and their effect on the profitability of selected Rural Banks in the province of
Cagayan.

Research Questions/ What is the profile of the Rural Banks in terms of:
Objective
a. Type of Rural Bank
b. Number of Branches
c. Main Office Address
d. Date of Incorporation
e. Number of Years of Operation
What are the Working Capital Procedures/Measures that these rural banks have been adopting?
What is the level of profitability of these rural banks?
Are the Working Capital Management practices of these rural banks have an effect on their profitability?

Significance of the Proposed Study
This study will help to provide a clear understanding of the effect of working capital management on the
profitability of rural banks in the Philippines. This research paper will be a great help and contribution to
different individual, groups, bodies and organizations. The said groups are as follows:
a. Rural Banks
By presenting the best practice utilized by selected rural banks, the study will aid the
financial management decision making aimed at maintaining a balance between profitability and
liquidity.
b. Society
The study will be beneficial to the society since these banks are found to have a positive impact
on economic development having 63% of our finances coming from them.
c. Shareholders, Prospective Customers, and Creditors
The study will help through its findings the following groups with regards to profitability in
relation to efficient working capital management.
d. Government
 Since Rural Banks are regulated by the government it is but right to know some practices of these banks
in terms of their working capital management to fully assist the said body to implement a more efficient
law regarding such type of entity.
e. Bangko Sentral ng Pilipinas (BSP)
The study offers relevant data that can be used by BSP for further studies.
f. Researchers
The study will assist in obtaining new knowledge about the problem under study and the
best approaches in dealing with finances.
g. Future Researchers
This study can be a great benchmark for future researchers to expound more the topic or
make a different study regarding the topic

Research Simulacrum/ Conceptual Framework

Research Paradigm

Working Capital
PROFITABILITY
Management
Practices EFFECT

The study will be using the above Conceptual Framework during the conduct of the study. The
Independent variables which composes of the working capital management practices which affects the
dependent variable which is the profitability of the bank. The study will be using sophisticated tools to
determine the correlation of both of the variables.

Methods Research Design

This study aims to determine the effect of Working Capital Management Practices of selected Rural Banks
within the province of Cagayan and its effect of these banks profitability. As the aim of the study
determines the overall framework of the research, this study will be employing the descriptive-correlational
type of research.

Descriptive Correlational Method of research will be utilized during the conduct of the study. To validate
the objectives of the study the descriptive method seeks to know the characteristics of the phenomena or
the events and categorizes it into descriptive variables. The Correlational method on the other hand,
determines the relationship between the independent variables and dependent variables, observed and
analysed to look for consequences, changes and outcomes and effects.

The researchers would like to find out the Working Capital Management Practices of selected rural banks
and its effect on the profitability along the jurisdiction of Cagayan Province. Descriptive method is
appropriate in the analysis of data that can be grouped and tabulated for descriptive analysis evaluation. It
is considered a descriptive study since it describes the working capital management practices of the said
banks. Likewise, correlational relationship of Working Capital Management Practices and Profitability will
be conducted through ratio computation of a 12 year financial statement of the selected banks. Data will
be organized and be submitted to Pearson Correlation test as well as regression analysis through ANOVA
(One Way Analysis of Variance).
Locale of the Study
The study will be conducted in the selected town of the province of Cagayan, Philippines. Cagayan is
located in the north-eastern part of Luzon and is geographically located between 18®0’0”N,121®48’0”E.
Situated within the Cagayan Valley region, the province is bounded by the Philippine Sea on the east; on
the south by Isabela province; on the west by the Cordillera Mountains; and on the north by the Balintang
Channel and the Babuyan Group of Islands. About 2 kilometers (1.2 mi) from the northeastern tip of the
province is the island of Palaui; a few kilometers to the west is Fuga Island. The Babuyan Group of
Islands, which includes Calayan, Dalupiri, Camiguin, and Babuyan Claro, is about 60 nautical miles (110
km) north of Luzon mainland.

The province comprises an aggregate land area of 9,295.75 square kilometers (3,589.11 sq mi) which
constitutes approximately three percent of the total land area of the country, making it the second largest
province in the region.

Cagayan comprises 28 municipalities and one city divided into three congressional districts. It has 820
barangays. Tuguegarao City (as of December 18, 1999) is the provincial capital, regional seat, and center
of business, trade, and education.

Subject and Participants

The population of the study were the registered rural banks along the province of Cagayan. The lists of
these registered banks were obtained through the Bangko Sentral ng Pilipinas as of August 31, 2017. A
total of 27 rural banks were duly registered and acknowledged by the BSP and from these banks the total
sample will be obtained. Using the Slovin’s formula of obtaining the sample from the population at 95%
level of confidence it was computed that 25 out of 27 rural banks will be used in the conduct of the study.
Below is the computation of sample.

n=N/1+Ne2

=27/1+(27) (.05)2

=25

Where:

n=sample

N=Population

e=degree of error

Sampling will be done using random sampling to give the samples equal chances to be picked. The
random sampling will be done through randomly assigning a two-digit number on each rural bank through
the use of fish bowl method. After assigning random numbers picking the sample will be aided by the use
of random number function (ran#) of a scientific calculator, the first two digits will be considered. The 25
samples obtained will be submitted to the interview proper.

Data Gathering Instruments

After designing the data gathering tool for the study, it will be presented to the research adviser for
approval. The main tool consisted of three sections. Part I , determined the appropriate profile of the Rural
Bank; Part II, delving the Working Capital Management Practices of these rural banks; Part III, knowing
the Profitability of these rural banks and directly correlating it to their Working Capital Management
Practices.
 For the computation of needed ratios for the Correlation and Regression Analysis, the researchers will be
obtaining a twelve (12) year financial statement of the Rural Banks through the Securities and Exchange
Commission.

Data Gathering Procedures

The researchers will be gathering data through the use of checklist guided by an interview. The tool will be
pre-tested to selected rural banks in the City of Tuguegarao. Suggestions will be considered from the set
of respondents and will be included in the checklist that will ultimately lead to its refinement. The revised
tool was again presented to the research adviser for approval.

Data gathering will be done from 1 st Semester of School Year 2018-2019. The respondents will be
informed about the purpose of the study and consent to participate in this research will be obtained.

The gathering of data will be conducted then through a checklist with the aid of an interview. Gathered
results will be compiled and organized ready for data analysis. For the ratio computation the obtained
Financial Statement will be scrutinized to compute the relevant ratios for the study.

Data Analyses

Descriptive Statistics will employ the selection of the highest ratio for a certain WCM Practice as well as
the lowest among the 12-year term. Mean will be computed with the two ratios. Standard Deviation will
also be squeezed from the data.

Pearson Correlation will highlight if there is a high or low relationship between the ratios obtained and the
level of profitability of the rural banks. The data will be analyzed at 0.05 level of significance.

The ANOVA (Analysis of Variance) table is a table that looks at the differences of the variances of the
variable. It’s used to know the significance of your variable. The data will be analyzed at 0.05 level of
significance.

APPENDICES: 1. Literature Matrix

2. Variable Matrix

3. Research Instrument /s