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DECLARATION:
I, NTABUZI PETER MIRONDO, declare that this dissertation is my own work and that it has
never been presented for a degree award to any other university by students.
Signature……………………………………………… Date……………………
NTABUZI PETER MIRONDO
REG. NO: 07/U/14085/EXT
STUDENT. NO: 207015409
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APPROVAL
This is to certify that this dissertation has been submitted with my approval as university
supervisor
Signature……………………………………….. Data………………………….
MR. KITAALE CHRIS CHARLES
MAKERERE UNIVERSITY
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DEDICATION
This work is dedicated to all those who
treasure Transparency, Trust and Disclosure
In their financial activities.
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ACKNOWLEDGEMENT
I thank God for blessing me with the hard work and heartiness to complete this task. A number
of significant people made eternal contributions towards this profound task, academically,
morally and financially, without them this manuscript would not be comprehensive.
I value my supervisor Mr. Kitaale Chris Charles for his professional guidance and advice in this
research.. Thank you for all your kind assistance and God bless you always.
I am indebted to all my Family members, uncles and Aunts for their continuous support and
encouragement over my Academic endvors, meticulous thanks go to my parents Mr. Mirondo
Micah and Mrs. Mirondo Betty. Thank you all for your kind assistance and God Bless you
always.
Meticulous thanks goes my brothers, Mr.Mirondo Fred, Richard, Godfrey, Waiswa, Ronnie
Jether, and also to my sisters. Sylivia, Harriet, Christine, Aidha, Sarah, Kaudha, Babirye and
Esther, thank you all for your kind assistance and God bless you always I cannot over look
academic support of my colleagues at Makerere University specifically Madam Nahwera
Penelope and Kyeyune who upgraded my competence am obliged to Makerere University
Management for the assistance towards my academic carriers and forming me into world class
Business Academicians.
All in all, I thank all my Bachelor of commerce classmates; without their solidarity the course
would never have been exciting and tantalizing. May the good Lord Bless you and reward you
abundantly.
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ABSTRACT
This research aimed at establishing the relationship between the core pillars of corporate
governance and financial performance in commercial Banks in Uganda. Trust has a significant
impact on financial performance, commercial Banks continuously poor in financial performance
due to lack of lack of trust, Disclosure and improved financial performance (mark, 2000). So
these principles of trust, Disclosure and transparency should be practiced in order for these
commercial Banks to survive in a competitive financial environment.
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LISTS OF ABBREVIATION
ACCA : Association of certified chartered Accountants
ANOVA: Analysis of Variance
BCBS : Based Committee Bank Supervision
BGFRS: Board of Governors of the Federal Reserve System
BOU : Bank of Uganda
CAMEL: Capital Adequacy, Asset Quality, Management Earnings and liquidity
CAR: Capital Adequacy Ratio
CERUDEB: Centenary Rural Development Bank
CIFAR: Center for International Financial Analysis and Research
CMA: Capital Market Authority
DIF : Depositor Insurance Fund
FASB: Financial Accounting Standards Board
FIS: Financial Institutions Statute
GBL: Green Bank Limited
IAS: International Accounting Standards
ICB: International Credit Bank
ICGU: Institute of Corporate Governance of Uganda
ICPAU: Institute of Certified public Accountant Uganda
IFRS: International Financial Reporting Standards
IMF: International Monetary Fund
PSCGT: Private Sector Corporate Governance Trust
PWC: Price Water House Coopers
SPSS: Statistical Package for Social Sciences
WTO: World Trade Organization
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TABLE OF CONTENT
DECLARATION: ..................................................................................................................... i APPROVAL ............................................................................................................................. ii DEDICATION ........................................................................................................................ iii ACKNOWLEDGEMENT ...................................................................................................... iv ABSTRACT...............................................................................................................................v LISTS OF ABBREVIATION ................................................................................................. vi
1.0 CHAPTER ONE ..................................................................................................................1 1.1 Background of the Study ....................................................................................................1 1.2 STATEMENT OF THE PROBLEM ..................................................................................2 1.3 PURPOSE OF THE STUDY .............................................................................................3 1.4 OBJECTIVES OF THE STUDY ........................................................................................3 1.5 RESEARCH QUESTIONS ................................................................................................3 1.6 SCOPE OF THE STUDY ..................................................................................................3
CHAPTER TWO ......................................................................................................................6 2.0 LITERATURE REVIEW ...................................................................................................6
2.1 Stakeholders and corporate governance ...........................................................................6 2.1.2 Corporate Governance..................................................................................................7 2.1.3The attributes/ pillars of corporate governance ..............................................................7 2.2 The Concept of Transparency..........................................................................................8 2.2.1 Bank Transparency ......................................................................................................9 2.2.2 Transparency and Corporate Governance ...................................................................11 2.2.3 Corporation and transparency .....................................................................................11 2.3 The Concept of Disclosure ............................................................................................14 2.3.2Financial Disclosure ....................................................................................................16 2.4 Market Discipline and Public Disclosure .......................................................................17 2.4.1 The Concept of Trust .................................................................................................17
CHAPTER THREE ................................................................................................................ 22 3.0 METHODOLOGY...........................................................................................................22
3.1 Research Design ...........................................................................................................22 3.2 Study Population ...........................................................................................................22 3.3 Sampling and Sampling Size .........................................................................................22 3.4 Data Collection Methods. ..............................................................................................23 3.5 Sources of data. .............................................................................................................23 3.6 Problem Encountered ....................................................................................................24
CHAPTER FOUR ................................................................................................................... 25 4.0 DATA PRESENTATION, ANALYSIS AND INTERPRETATION ................................25
4.1 Demographic characteristics of the respondents ............................................................25 4.2 The level of Transparency, Disclosure and Trust ...........................................................26 4.3The level of Financial Performance ................................................................................29
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4.5 DATA ANALYSIS AND INTERPRETATION ............................................................39
CHAPTER FIVE..................................................................................................................... 41 5.0 DISCUSSIONS, CONCLUSIONS AND RECOMMENDATIONS .................................41
5.1. Summary of the findings ..............................................................................................41 5.1.1. Level of Corporate Governance; Financial Transparency, Disclosure and Trust.........41 5.1.2. Levels of Financial Transparency ..............................................................................41 5.1.3. Level of Disclosure ...................................................................................................41 5.2.1. Level of Financial Performance- ...............................................................................42 5.2.3. Relationship between Corporate Governance and Financial Performance ..................42 5.4 CONCLUSION.............................................................................................................43 5.5 RECOMMENDATIONS ..............................................................................................44 5.6 AREAS FOR FURTHER RESEARCH .........................................................................44
LIST OF REFERENCES ........................................................................................................ 45 APPENDICES ......................................................................................................................... 51
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CHAPTER ONE
1.1 Background of the Study
Internationally the financial landscape is rapidly changing economics and financial systems are
undergoing traumatic years, financial arenas are becoming more open ,due to the increasing
Globalization and technology hence invention of new product and services being marketed and
regulators every where are scrambling to assess the changes and master the flux (Lee, 1999).
An international wave of mergers and acquisitions has swept the banking industry as boundaries
between financial sectors and products have blurred dramatically. The need for countries to have
sound resilient banking systems with strong banks and good corporate governance will then use
competition to strengthen and upgrade their institutional that will survive in an increasingly open
environment (Kaheeru, 2001).
International standards and guidelines on corporate governance have been established by many
multilateral organizations like the Basel Committee, in the effort to ensure improved legal
institutional and regulatory framework for enhancing corporate governance in institutions such
as Banks and financial markets (Kibirango, 2002)
According to the former World Bank Group president James Wolfenshon, Corporate Governance
is about promoting fairness. Transparency and Accountability (Financial times, 1999).
Governance is a requisite for survival and a gauge of how predictable the system for doing
business in any country is. Its importance is to strengthen the fabric of society and contribute to
Global Economy (Luis, 2001).
Specifically the World Bank has proposed guidelines for good corporate governance in financial
sector because of the critical role of the sector as the main vehicle for robust growth and
effective transmission of monetary policy.
In Uganda, poor corporate performance emanate from lack of professionalism in people‟s
approaches evidenced by lack of transparency, accountability and poor ethical conduct
(Kibirango, 1999).
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Commercial banks failure have been linked to self inflicted causes resulting from Bank owners
with one man management syndrome on corporate governance for example Sulaiman Kigundu
of Greenland Bank Ltd, Thomas Kato of international. Greenland Bank Ltd had two boards of
directors but neither had a say in the running of bank , the July 1998 Bank of Uganda Audit
report stated that as per 30th
June 1998 insider lending stood at Ushs. 22, 722 million
representing 47 percent of customer deposits and accounting 55 percent of total loan portfolios
yet the maximum amount in bank could lend according to the FIS 1993 was Ushs. 975 million
only. The report also cited that in most cases credit was extended on sole instruction of the
managing director without any or minimal documentation (BOU, 1999).
The BOU closure of the above mentioned banks was intended to awaken owners, directors and
managers of the other commercial banks to institute sound corporate governance principles and
foster better financial performance.
But even after the closure of at least three commercial banks in 1999, a number of commercial
banks in Uganda have continued to register poor financial performance for instance National
Bank of Commerce in 2001/2002 reported a loss of 729,000,000 (Aggreys, 2003).
Similarly, the balance sheet position of Stanbic Bank (U) ltd for year 2001 declined by 14.24
percent compared to growth of 19.9 percent of total assets declined by 24.42% efficiency ratio
declined by 31.655 to 35.07 percent (Stanbic Bank Uganda, 2001).it was recently awarded the
best banker(Global website via www.sstandardbank.com/cib)
1.2 STATEMENT OF THE PROBLEM
Insufficient disclosure was evidenced by high level of off balance sheet items, lack of
transparency resulting from gross mismanagement and dubious accounting actions as observed
in cases of ICB, GBL (Yunusu, 2001), Trans Africa Bank ltd (BOU, 2002) are detrimental to
interests of banks stakeholders especially depositors Banks capital assets and earnings values are
affected and as a result the financial performance is questionable. This may be due to poor
corporate governance.
Internal stakeholders like employees and external stakeholders like Bank customer expect
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commercial banks to be financially transparent and disclose adequate financial information
willingly. However, this problem has not been rectified due to lack of professionalism in
people‟s approach as evidenced by poor accountability. Lack of transparency (Kibirango, 1999)
leading to poor financial performance like National Bank of Commerce in 2001/2002, Citi banks
profits fell from 4.1 to 2.3 (Aggrey, 2003) and closure of many banks like Green Land Bank ltd.
Thus their closure was intended to awaken owners, directors and managers of other commercial
banks to institute sound corporate governance principles and foster better financial performance
(BOU) institutions like Basel Committee have been set up (Basel Committee 1998, 1999).
1.3 PURPOSE OF THE STUDY
To examine relationship between financial performance and the core pillars of corporate
governance elements such as transparency, disclosure and trust in commercial banks in Uganda.
1.4 OBJECTIVES OF THE STUDY
● To assess the financial performance in selected Commercial Banks in Uganda.
● To examine the relationship between corporate governance and financial performance of
commercial banks in Uganda.
● To asses the corporate management in selected commercial Banks
1.5 RESEARCH QUESTIONS
●What is the financial performance of selected commercial banks in Uganda?
●What is the relationship between corporate governance and financial performance of selected
commercial banks in Uganda?
●What is the level of corporate management in selected commercial banks in Uganda?
1.6 SCOPE OF THE STUDY
SUBJECT SCOPE
This research was limited to the core pillars of corporate governance, transparency, disclosure
and trust in Uganda commercial banks. Accountability which is also one of the integral parts of
corporate governance was not studied due to lack of a recognized benchmark for its
measurement in Uganda.
Financial performance was also studied and this was measured using capital adequacy, earning
and profitability, and liquidity.
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1.7 The Conceptual Frame Work on Corporate Governance and Financial
Performance.
The internal stake holders such as Employees and External stake holders such as Tax Authorities
,Bank customers ,Bank customers, Bank supervisors expect Commercial Banks to be financially
transparent and Disclose adequate financial information to the user needs. This information can
be got through preparation of Statement of Financial Position, Statement of Comprehensive
Income hence fostering trust between Commercial Banks and stake holders. Macro Economic
variables like inflation changes in interest rates may either improve or distress Commercial
Banks performance.
Figure (1)
Financial management
Policy
Corporate
Governance
Professionalism in
stake holders
approaches like
openness, honesty
Financial performance
Earnings
Liquidity
Life span of
firm
Background
Culture
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GEOGRAPHICAL SCOPE
International and local commercial bank with headquarters in Kampala district, Stanbic, Cairo,
Orient and CERUDEB Banks were considered.
1.7 SIGNIFICANCE OF THE STUDY
The findings are intended to assist the companies‟ especially commercial banks in instituting
better corporate governance principles. The study also provides the literature that forms a
foundation for further corporate governance research for scholars in various academic
institutions and this work also contributes to international accounting literature.
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CHAPTER TWO
2.0 LITERATURE REVIEW
Related literature to the study focusing on the key corporate governance pillars of transparency,
disclosure and trust and Financial performance relating to commercial banks is reviewed based
on the performance dimensions of capital adequacy, Asset quality, earnings and liquidity. it is
divided into three sections i.e. corporate governance, financial performance and the relationship
between corporate governance and financial performance. Before the first section, the
background information in form of key stakeholders expectations and rights is presented in the
following paragraphs.
2.1 Stakeholders and corporate governance
The competitiveness and ultimate success of a corporation is dependent on average of different
resource providers including investors, employees, creditors, customers, suppliers, hence the
board must take into account . The board should promote good will and a reciprocal relationship
with these parties and be prepared to outline policies determining and regulating its conduct and
relationships with stakeholders identified as having legitimate interest in the corporations
activities whether by way of contractual relationships or as a consequence of the impact of its
activities (ICGU, 2000).
Corporations do not act independently from the societies in which they operate and thus business
enterprises‟ corporate actions must be compatible with legitimate societal issues pertinent to its
location of activities. Stakeholders who may have a direct or indirect interest in the achievement
of the economic objectives of the corporation.
Expectations, rights and duties of stakeholders
In any business entrepreneur, there exist a number of stakeholders. Customers, financiers,
shareholders, government which formulates rules and regulations that enterprises should follow
as they transact their business, organizations are also expected to file returns to the tax authorities
for instance Uganda Revenue Authority and Bank of Uganda, the expectation of government is
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that, information from these enterprises should not be biased and misleading. Management has to
take into account the stakeholders expectations when they set a strategic direction but this can
only be attained through sound corporate among others with a variety of rights in terms of
receiving a dividend and appointing managing director. It is not clear whether their duties might
lie since it is understood that buying shares in an investment there is no reason why a shareholder
remains loyal to a company in any circumstances. It is thus entirely unreasonable for
industrialists to a case shareholders of short terms when selling shares that have not performed to
expectations James and Arthur (2003).
2.1.2 Corporate Governance
Corporate governance is about building credibility, ensuring transparency and accountability as
well as maintaining an effective channel of information disclosure that would foster good
corporate performance. It is also about how to build trust and sustain confidence among the
various interest groups that make up an organization. Indeed the outcome of a survey by
Mckinsey in collaboration with the World Bank in June 2000 attested to the strong link between
corporate governance and stake holder‟s confidence (Mark, 2000).
Corporate governance refers to the manner in which the power of a corporation is exercised in
the stewardship of the corporations' total portfolio of assets and resources with the objective of
maintaining and increasing shareholders value with the satisfaction of other stakeholder in the
context of its corporate mission (PSCGT, 1999).
The committee on the aspects of corporate governance (the Cadbury Committee) defines
corporate governance as the system by which companies are directed and controlled.
2.1.3The attributes/ pillars of corporate governance
Corporate governance is important because it promotes good leadership within the corporate
sector. Corporate governance has the following attributes, leadership for accountability and
transparency, leadership for efficiency, leadership for probity (integrity) and leadership that
respects the rights of all stakeholders (ICGU, 2000). Lack of sound corporate governance has
enabled bribery, Crony and corruption to flourish and has suppressed sound and sustainable
economic decisions. Some key pillars (PSCGT, 1999) on which good governance are framed
include;
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There must be an all-inclusive approach to governance that recognizes and protect the rights of
members and all stakeholders-internal and external and a body responsible for governance
separate and independent of management to promote transparency, accountability, probity and
integrity and timely disclosure of information relating to all economic and activities of the
corporation.
The institutional governance framework should provide an enabling environment within which
its human resource can contribute and bring to bear their full creative powers towards finding
solutions to shared problems.
In corporate governance, the above four pillars can be summarized into five basic tenets,
accountability, efficiency and effectiveness, integrity and fairness, responsibility and
transparency. According to Kibirango (2000), chairman of CMA of Uganda, concepts of
transparency disclosure and trust construct the principle of corporate citizenship which results
from sound corporate governance (Kibirango, 2002).
Given that a study has already been carried out on the extent to which board composition affects
team processes, board effectiveness and performance of the selected financial institutions in
Uganda (Rosette, 2002),. The constructs/ tenets are reviewed in the following sections.
2.2 The Concept of Transparency
Transparency is integral to corporate governance; higher transparency reduces the information
asymmetry between a firm‟s management and financial stakeholders, mitigating the agency
problem in corporate governance (Sandeep et al, 2002).
The focus on transparency has increased in the wake of recent events beginning with Asian crisis
in the later half of 1997. Continuity with the recent failures of power companies in the US such
as Enron (Peter, 2003). In Uganda lack of transparency is attributed to the closure of commercial
banks (Yunusu, 2001).
To be transparent, financial statements must accurately represent the underlying economies in an
unbiased manner (FASB, 1984)
The practitioners, large institutional equity investors in particular have also demonstrated
increasingly active participation in creating level playing ground between management and
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financial stakeholders (Sandeep et al, 2002). One of the main functions of regulators is to ensure
an investment environment where gains from private information are minimized ex-ante and
penalized ex-post. Financial statements are transparent if they make apparent the underlying
economies of business and its transactions. Thus, transparency involves not only concepts related
to reliability but also understandability.
Additionally, transparency is associated with the idea in the financial accounting standard Boards
(FASB) conceptual framework that financial statements should be presented in a manner that is
easily understood by individuals “who have a reasonable understanding of business and
economic activities and are willing to study the information with reasonable diligence” (FASB,
1984).
2.2.1 Bank Transparency
Transparency refers to the quality and quantity of public information on a bank‟s risk profile and
to the timing of its disclosure, including the banks past and current decisions and actions as well
as the plans for the future. The transparency of the banking sector as whole also includes public
information on bank regulations and on safety net operations of the Central Bank (Enoch et al,
1997 and Rosengren, 1998). The aim of safety net for the banking sector is to reduce financial
fragility.
Stock market participants including professional analysts such as Moody's encounter
difficulties in measuring banks, credit worthiness and risk exposures (Poon, Firth, and Fung,
1999, Morgan 1999, and Jordan, Peek, Rosengren (2000).
However, it is not easy to interpret banks accounting data (Beatty, Chanberlaun and Magloilo,
1995, Collins Shackelford and Whalen 1995 and Genay, 1998) or disclosures of banks‟ credit.
Safety nets in general and Depositor Insurance Schemes (DISs) in particular banks (Dewatripoint
and Tirole (1994), Kane (1989), Denirguc.Kunt and Detragiache (1998) enhancing would wipe
out the moral hazard problem by strengthening Market discipline (Rosengren, 1998). Stringent
transparency requirements should thus deter banks from excessive risk taking (Ari, 2000).
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Credit losses (Ahmed, Takedo and Thomas 1999 and US General Accounting Officer, 1994).
Rochet and Torole (1996) noted that inter-bank lending complicates assessment of banks actual
liquidity and solvency ratios.
A bank can be transparent to market participants both before and after investments are made in
the bank in the export sense, the degree of a banks transparency determines the degree of
information available to its claims holders on the banks financial condition. If it transpires that
the value of a banks asset is low the banks creditors and particularly its un insured depositors
may withdraw their funds (Niinimaki, 2000) exante transparency implies that appreciate a banks
financial condition prior to placing funds in it.
Thus it strengthens market discipline because the better investors are able to evaluate bank‟s risk
position.
To enhance transparency of banking sector, various international institutions such as the Basel
Committee on banking Supervision, G7 Finance Ministers, International Monetary Fund and the
World Bank have campaigned for improved accounting and disclosure practices (Basel
Committee, 1998, 1999 and 1996). Numerous scholars like Berlin, sounders and Udell (1991)
Edwards and Mish kin (1995), Bhattacharya, Boot and Thakar (1998), Rosengren 1998, Jordan,
Peek and Rosengren (1999-2000) and Thefferman (2000) also advocate a transparent banking
system. Mayer (1997, 1998), and Mayer and Visalia advocate a transparent banking system.
Mayes (1997, 1998) and Mayes and Vesala (1998) regard transparency as an instrument for
improving both domestic and international banking supervision. These calls for increased
transparency seem to be well founded given the experience of recent banking crises around the
world (summers, 2000).
The more risk sensitive the bank‟s funding costs should be (Hayek, 1945, Grossman and Stigliz,
1980). The supply of funds to a bank is also directly related to the perceived soundness of the
bank. The contention that lower quality banks attract fewer uninsured deposits than high quality
banks recently received sound, empirical support (Park, 1995, Billet, Garpikes, O‟real 1998, Park
and Penstian 1998, Marinez and Schmukier1998, Goldberg Hudgins 1999, and Jagfiani and
Lemieux 2000).
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Finally, according to Bhalla (2004) the practice of disseminating information as well as its
reliability, timelessness and quality vary sharply from one country to another hence considerable
attention has been devoted in the recent debate to developing uniform transparency codes and
standards. For instance, the international Accounting Standards committee has joined other
agencies to develop proper accounting and disclosure news for the securities capital market.
The IMF has developed voluntary standards in certain areas in the financial system. The code of
good practices on fiscal transparency was recently approved. Among others the policies listed
include fostering public availability of information and accountability.
However, it is important to recognize that while transparency is of paramount importance as it
enables and improves the understanding of the instance of policies by market participants, the
quality and content of transparency has to be appropriate and in tune with country circumstances.
2.2.2 Transparency and Corporate Governance
Financial accounting information is a product of corporation accounting and external reporting
systems that measure and routinely disclose audited, quantitative data concerning the financial
position and performance of publicity held firms. Audited balance sheets, income statements
along with supporting disclosures, form the foundation of firm.
Corporate finance is defined as the wide spread availability of relevant and reliable information
about the periodic performance, financial position, investment opportunities, governance, value,
risk of publicity traded firms.
2.2.3 Corporation and transparency
A corporation can be reviewed as a nexus of contracts designed to minimize contracting costs
(Coase, 1937). Parties contracting with the firm desire information both about the firms' ability
to satisfy the terms of contracts and the firm‟s ultimate compliance with its contractual
obligations.
Financial accounting information supplies a key quantitative representation of individual
corporations that supports a wide range of contractual relationships. Financial accounting
information also enhances the information environment more generally by disciplining the un-
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audited disclosures of managers and supplying input into the information processing activities of
outsiders.
The identification of investment is necessary but not sufficient to ensure efficient allocation of
resources. Given information asymmetry and potentially self interested behaviour by managers,
agency theories argue that pressures from external investors as well as formal contracting
arrangements are needed to encourage managers to pursue value-maximizing investment
policies Jensen (1986) objective, verifiable accounting information facilitates shareholder
monitoring and the effective exercise of shareholder rights under existing securities laws;
enables directors to enhance shareholder value by advising, ratifying and policing managerial
decisions and activities and supplies a rich array of contractible variables for determining the
financial rewards from incentive plans designed to align executives and investors financial
interests.
Ball (2001) argues that timely incorporation loses in the published financial statements (that is
conservation) increases the effectiveness of corporate governance, compensation systems and
debt agreements in motivating and monitoring managers. For instance, improved governance can
manifest in a reduction of the private benefits that managers can extract from the company or in
a reduction of the legal and auditing costs that shareholders must bear to prevent managerial
opportunism.
The third channel through which one expects financial accounting information to enhance
economic performance is by reducing adverse selection and liquidity risk. As documented in
Amihud and Mendelson (2000), the liquidity of a company‟s securities impacts the firms cost of
capital.
A major component of liquidity is adverse selection costs which are reflected in the bid-ask
spread and market impact costs. Firms pre commitment to the timely disclosure of high quality
financial accounting information reduces investors risk of loss from trading with more informed
investors, thereby attracting more funds into the capital markets, lowering investors liquidator
risk Diamond and Verrechia (1999); Botosan (2000); Brennan and Tamarowski (2000); and
Leuzand (2000) capital markets with low liquidity risk for individual investors can facilitate high
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return, long term (illiquid) corporate investments, including long term investments in high return
technologies, without requiring individual investors to commit their resources over the long term
(Levine, 1997).
The roots of corporate governance can be traced back to at least Berle and Means (1932); who
argued that effective control over publicity traded corporations was not being exercised by legal
owners' equity, the shareholders, but hired, professional managers. Given wide spread existence
of firms characterized by this speculation of control over capital from capital ownership,
corporate governance research generally focuses on understanding mechanisms designed to
mitigate agency problems and support this form of economic organization. There are a number
of pure market forces that discipline managers to act in the firms‟ owners‟ interest. These include
product market competition (Alchian 1950, Stigler 1958), the market for corporate control
(Manne, 1965), and labour market pressure (Fama, 1980). However, despite the existence of
these powerful disciplinary forces, there evidently remains residual demand for governance
mechanisms tailored to the specific circumstances of individual firms.
This demand is documented by a large body of research examining boards of directors,
compensation contracts, concentrated ownership structures debt contracts and securities law in
disciplinary managers to act in the interests of capital suppliers (Sheleifer and Vishny (1997) for
an insightful review of this literature.
Governance research exploits the role of accounting information as a source of credible
information variables that support the existence of enforceable contracts, such as compensation
contracts with pay offs to managers contingent on realized measures of performance, the
monitoring of managers by boards of directors and outside investors and regulations and the
exercise of investor rights granted by existing securities laws. There are a number of issues to
consider in this regard first, the existence of a strong financial accounting regime is likely a pre-
condition for the existence of a vibrant stock market and in its absence the nations of equity
based pay and diffuse ownership of firms become moot (Ball, 2001) and Black (2000).
Secondly, while executive wealth clearly has become more highly dependent on stock price,
managerial behavior is imported by executive and boards understanding of how their decisions
14
impact stock price. Under efficient markets theory; stock price is a sufficient statistic for all
available information an the economy with respect to the firm‟s value implying that stock price
is a good mechanism for guiding investors resource allocation decisions, as they only need to
look at price to get the markets informed assessment of value.
According to the Bureau of product standards a WTO/ TBT enquiry point and member of ISO
information network, measuring corporate transparency at the country level involves considering
three main elements. Corporate reporting (Voluntary and mandatory), information dissemination
via media and internet channels and private information acquisition and communication by
financial analysts. Institutional variables used to measure corporate transparency comprise
financial accounting disclosures of major stakeholders, timeliness of disclosures, information
dissemination and completeness of information.
Robert and Abbie (2001) concur with BPS especially on institutional transparency, they outline
the transparency dimensions as; completeness of financial information, release of information,
timeliness and means of dissemination.
Dangers of transparency
While we focus on beneficial effects, theory identifies potential adverse consequences of public
information. For example, the early release of public information can destroy risk sharing
opportunities (Hirshleifer, 1971, Marshall, 1974), signaling of private information can result in
over investment or other misallocations of capital (Spence, 1973); More frequent reporting of
information can increase moral hazard costs by increasing the scope of strategic behaviour
available to manager (Hailstorm and Milgrom 1987); Abreu et al 1991; Gilglerand Hemmer,
1998) information release can complicate contract negotiation and impose agency costs if parties
can not commit not to renegotiate contracts (Laffont and Tirole, 1990; Demski and Frimor,
1999) public release of proprietary information can distort investment behaviour (Darrough,
1993).
2.3 The Concept of Disclosure
Given the recent corporate scandals (US Based; Enron, World com (Heidi and Marleen (2003)
and Uganda Based; Green Land Bank ltd, ICB….(Japheth, 2001) restoring public trust is at the
top of the agenda of today‟s business and control structures full disclosure seeks to avoid
financial statements fraud.
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Beasley, 1996, Beasley et al, 2006). Prior studies have concentrated on disclosure of items such
as management earnings forecasts (Johnson et al, 2001, Levi and Penman 1990) or interim
earnings (left with and Zimmeriman 1981), or have examined a very general disclosure index of
financial and / or non-financial items (Chow and Wong-Borren, 1987). The CIFAR index (i.e. a
disclosure index created by the center for International Financial Analysis and Research rates
annual reports on the inclusion or omission of about 90 (rather traditional and mandatory
financial) items from the following categories; general information, income statements, balance
sheet, funds flow statement, accounting standards, stock data and special items (Laporta et al,
1998).
2.3.1Voluntary disclosure
Information disclosure to capital markets is based and evolved around accounting based financial
information evidence indicates that usefulness of financial information has been deteriorating
during the past 20 years (Lev, 1989; Lev and Zarowin, 1998).
Healy and Palepu (1993) conclude that managers can improve their communication with
investors by developing disclosure strategies. Financial reporting is potentially useful mechanism
for managers to communicate with outside investors.
Healy and Palepu suggest two potential mechanisms available for managers to improve
credibility of their financial reporting. Voluntary disclosure has been supported by Shelley
Taylor, publisher of, Full disclosure, and international study of corporate Disclosure (Kelly,
1999).
“It is the voluntary disclosure of qualitative information that creates share price premium and
thus should be seen as a fundamental component of corporate disclosure.”
Dangers of Voluntary Disclosure
The most common argument against voluntary disclosure from a managerial perspective are fear
of giving away sensitive information to competitors and procurement of extra costs for collecting
and disclosing the information (Eccles and Marina, 1995), Healy and Palepu (1993), Reich and
Cylinder (1997).
16
Transparency reporting and disclosure allow stakeholders to view a company‟s financial
performance and high quality reporting translates into more efficient pricing and a fairer price for
investments (Dickinson and Millineux, 2001).
2.3.2Financial Disclosure
Financial Disclosure is the key component of the newly proposed Basel Capital Accord.
In April 2003, the Basel committee on banking supervision (BCBS, 2003a) headquarters at the
Bank for international settlements in Switzerland released the new Basel capital Accord, which
replaced the 1988 capital Accord with an attempt to set regulatory capital requirements that are
comparable across countries.
The new Accord popularly known as Basel II rests on three “pillars”.
The first focuses on making bank regulatory capital requirements more sensitive, while pillar two
emphasizes refinements of current bank supervisory processes regarding capital issues. Pillar
three complements the other two pillars by representing an enhanced set of public disclosure
requirements focusing on capital adequacy.
Bank customers, trade counter parties and investors in their assets monitor banking institutions
like firms. This type of monitoring is part of monitoring is part of what is known as “market
discipline”. Increasingly viewed as complementary to the monitoring efforts of government
supervisors (Kwan, 2002).
Pillar three addresses the issue of improving market discipline through effective public
disclosure. Specifically it presents a set of disclosure requirement that should improve market
participant ability to assess bank‟s capital structures, exposures, management processes and
hence their overall capital adequacy and management.
Corporate structures refers to how banking group is organized, for example, what is the top
corporate entity of the group and how are its subsidiaries consolidated for accounting and
regulatory purposes.
Capital structure corresponds to how much capital is held and in what forms, such as common
stock. The focus by banks in the risk management area is on the exposures to credit risk, market
risk, risk from equity positions and operational risks for credit risk which is defined as potential
17
losses arising from borrowers not repaying their debts, banks must provide a qualitative
discussion of their management policies, key definitions and statistical methods used in their risk
analysis and information on their supervisors acceptance of their approach. Qualitative
disclosures include total gross credit risk exposures after accounting for offsets and without
taking account of credit risk mitigation efforts.
Credit risk models are tools for assessing the potential losses from aggregate fluctuations in loan
repayment by borrowers, and internal rating systems provide these models with indicators of
how likely different borrowers are to repay their loans.
The literature on the general rationale for capital regulation in financial institutions is extensive
and has been the subject of several recent surveys (Santos, 2001), Ball and Stoll (1998), Berger,
Herring and Swag (1995) Bank regulators have long regarded prevention of systematic risk as
the fundamental rationale for imposing capital requirements on banks. Institutions some times
voluntarily disclose more information than that required by the statute.
According to Subrata (2004) there could be many reasons for doing this such as communicated
best practice leadership to investor.
2.4 Market Discipline and Public Disclosure
In order for market discipline of banking institutions to be effective, banks must be sufficiently
transparent, improved public disclosures lead to increased transparency and should lead to
effective market discipline. Bank of Uganda has instructed commercial banks to provide a
detailed breakdown of the loan portfolios in a move to enforce disclosure (BOU, 2004).
2.4.1 The Concept of Trust
Every person wants to trust and to be trusted. Every one knows intuitively what is to trust
articulating a precise definition is not a simple matter (Wayne and Megan, 2002).
It is a dynamic construct that can change over the course of a relationship (Wayne and Megan
2002). Trust relationship is based upon interdependence, that is the interests of one party cannot
be achieved without reliance upon another (Rousseau, Siekin, Burt and Camerer, 1998). There is
18
no need for trust if there is no interdependence. Trust involves taking risks and making oneself
vulnerable to another with confidence that the other will act in ways that are not detrimental to
the trusting party (Wayne & Megan, 2002).
Hosmer (1995) observed that trust is not easy to define because it is so complex.
“there appears to be wide spread agreement on the importance of trust in human conduct, but
unfortunately there also appears to be an equally wide spread lack of agreement on a suitable
definition of the contract”.
Facets of Trust
There are several facets from the Trust Literature (Hoy & Tschannen-Moran, 1998, Tschannen-
Moran & Holy, 2001).
Benevolence honesty, openness, reliability, competence are all elements of trust (Wayne &
Megan, 2002).
Benevolence, it is the most common facet, that ones well being or something one cared about
will be protected and not harmed by the trusted party (Baier, 1986; Deutch, 1958 Frost; Stimpson
& Maughan 1978; Gambetta; 1988; Hosner, 1995, Hoy & Kuper Smith, 1985, Mishra, 1996). It
is the assurance that others will not exploit ones vulnerability (Cummings & Bromily, 1996).
Reliability, it combines a sense of predictability with benevolence in a situation of
interdependence, when something is required from another person or group, the individual can
be relied upon to supply it (Wayne & Megan, 2002). It implies a sense of confidence that
individual needs will be positively met.
Competences is the ability to perform as expected and according to standards appropriate to task
at hand, many organizations tasks rely on competence. Good intentions are not always enough
when a person is dependent on another but some level of skill is involved who means well may
nonetheless not to be trusted (Bailer, 1986, Butter & Cantrell, 1984, Mishra, 1996).
Lack of competence is not a breach of trust because the person is expected to make mistakes
(Solomon & Flores, 2001).
In such cases failure should not be confused with betrayal because the person did not purport to
have the requisite skill.
19
Openness. It‟s the extent to which relevant information is shared; it is process by which
individuals make themselves vulnerable to others. The information shared may be about personal
(Butter & Cantrell), 1984, Mishra, 1996) such openness signals reciprocal trust of confidence..
It‟s the extent to which relevant information is shared; it is process by which individuals make
themselves vulnerable to others. The information shared may be about personal (Butter &
Cantrell), 1984, Mishra, 1996) such openness signals reciprocal trust of confidence.
Honesty, it is the persons character, integrity and authenticity (Rotter, 1967) defined trust as “the
expectancy that the word, promise, verbal or written statement of another group can be relied
upon.” Correspondence between a person‟s statements and deeds demonstrates integrity.
Honesty is assumed when we think of what is entailed in trust (Wayne & Megan, 2002).
Individuals who are unwilling to extend trust through openness end up isolated (Kramer, Brewer
& Hanna, 1996).
In summary Trust is an individual or group willingness to be vulnerable to another party based
on confidence that the later party is benenovalent, open, honest, competent and reliable (Wayne
& Megan, 2002)
In Uganda as in many other countries there is a rooted destruct in most public sector Sheifer, and
Vishny (1993).
2.5.0 Concept of Accountability
Accountability relationships occur in every sector of society including the commercial sector
(Wheelers, 2000). Where there is inadequate accountability resources will be used inefficiently
and ineffectively thus inadequate accountability can result in devastating consequences for
millions of people and compromising the operations of an organization (Kluver, 2001).
Gray and Jenkins (1993) have the opinion that accountability is an obligation to present an
account of and answer for the execution of responsibilities to those who entrusted those
responsibilities, the principal/ agent relationship Kluver (2001). Accountability forms the basis
of trust in organization.
20
2.6.0 Relationships of Trust Disclosure Transparency and Financial performance
Transparency, trust and Disclosure which constitutes the integral part of corporate governance,
can lead to improved financial performance.
Financial performance, present and prospective is a benchmark for investment.
The McKinsey Quarterly surveys suggest that institutional investors will pay as much as 28%
more for the shares of well governed companies in emerging markets (Mark, 2000).
2.8 Financial Performance and Financial Institutions
Financial soundness is a situation where depositors' funds are safe in a stable banking system.
The financial soundness of a financial institution may be strong or unsatisfactory varying from
one bank to another (BOU, 2002).
External factors like deregulations lack of information, homogeneity of bank business,
connections among banks do cause bank failure.
Some useful measures of financial performance that are coined into CAMEL are used;
The Acronym “CAMEL” refers to the five components of a bank‟s condition that are assessed.
Capital adequacy, Asset Quality, Management, Earnings and Liquidity. Banks sensitivity to
market risk was added as the sixth component in 1997 hence the acronym was changed to
CAMELS. Ratings are assigned for a scale from 1 to 5.
Capital Adequacy. Capital adequacy determined how well balance institutions can cope up with
shocks to their balance sheet. Banks monitor the adequacy of its capital using ratios established
by the Bank for international settlements. Capital adequacy in commercial banks is measured in
relation to the relative risk weights assigned to the different category of assets held on and off the
balance sheet (BOU, 2002).
Asset Quality, it is important to monitor indicators of Asset Quality in terms of over exposure to
specific risk trends in non performing loans, health and profitability of bank borrowers especially
in corporate sector credit risk is inherent in lending which arises when the borrower defaults to
pay back. A financial institution whose borrowers default to repay may face cash flow problems
which eventually affect its liquidity position. This ultimately affects the profitability and capital
through.
21
Earnings. The continued viability of a bank depends on its ability to earn an adequate return on
its asset and capital. Good earnings performance enables a bank to fund its expansion, remain
competitive in market and increase its capital (BOU, 2002).
According to Kagalwala and Ram (2003) many banks throughout the World have failed due to
weaknesses in broad parameters of risk management functions. The banks that will survive need
sound capital base, better return on net equity and higher return on assets.
Management sound management is difficult to measure; it is primarily a qualitative factor
applicable to individual institutions.
Liquidity, initially Solvent financial institutions may be driven towards closure by poor
management of short term liquidity; indicators should capture large maturity mismatches.
Liquidity us the degree to which debt obligations coming due in the next 12 months can be paid
in cash or assets that will be turned into cash (William, 2000).
An unmatched position potentially enhances profitability but also increases risks of losses (The
Ugandan Banker, June 2001).
Conclusion
All in all, this literature forms the basis for establishment of relationship between corporate
Governance and financial performance of commercial banks
Corporate governance comprises of several attributes like transparency. Trust, accountability,
disclosure, financial performance is also detailed out and capital adequacy, earnings,
management liquidity as the key dimensions for measuring organizations performance in
selected commercial banks.
.
22
CHAPTER THREE
3.0 METHODOLOGY
This section presents how the study was designed and carried out; it discusses the research
design, sampling procedure, data collection methods, instruments and how data was analyzed.
3.1 Research Design
This research was conducted as both qualitative and qualitative study. A across sectional survey
was used and current information on financial performance (for year, 2003) was obtained aiming
at enabling the research to provide an in-depth investigation of the relationship between the
variables.
3.2 Study Population
The targeted population included depositors in Bank R (6,228), Bank Y (527,681 elements) Bank
Z (14, 357) and M (344, 005) element) (Appendix C). Other stakeholders considered include 15
official of BOU in financial institutions and 15 URA officials
3.3 Sampling and Sampling Size
Four Commercial banks dealing with both retail and corporate customers were selected.
Selection was based on a number of account holders as provided by BOU as indicated below
.Two commercial banks with highest number of account holder one local and another.
According to Roscoe‟s (1975) rule of thumb a sample of 30-500 is appropriate. To be specific
the researcher adopted Krejcie and Morgan (1970) simplified table in Sekarana (2000) and a
sample of 388 was selected at 95% level of certainty given the total population of the 4 banks
summed to 906,628 account holder. However, due to the down using proportionate stratified
Random sampling as shown below.
23
Table: 1
Bank No of Accounts Proportion% Sample
Small/ international (R) 6, 228 0.68 3
Small/ Local (Z) 14, 357 1.58 6
Large / Local (M) 344, 005 37.94 147
Large/ International (V) 527, 681 58.21 226
Total 906, 628 100 388
Source: (BOU)
3.4 Data Collection Methods.
this involved use of questionaires,here respondents filled and ticked questions of their choices.
Perceptions and beliefs were sought to a five-point Likert Scale, five being the highest (Tull and
Hawkins, 1993, Hog et al, 2000). The researcher also used observation, this involved systematic
selection, watching and recording of data; it involved face to face interviews guided by interview
guide.
3.5 Sources of data.
Primary and secondary data will be collected. Primary data was from the respondents and
secondary data especially annual reports from Bank of Uganda‟s Library, commercial banks,
Makerere University Research Centre.
After data collection, data was edited, coded and entered in the computer. It was analyzed using
descriptive analysis options of SPSS/PC Version 10.0. Thereafter, Pearson correlations statistical
techniques were used to test and establish whether there exist relationships between
transparency, Disclosure and trust.
Multiple regression was used to test the potential predicators of the dependent variable. Pearson
correlation was adopted given that the dependent variable was converted to interval data in five
scales in order to correlate it with the independent variables ranked on a five point likert scales.
Linkert scales were scored as though one was assuming a legitimate interval data. This is in
24
agreement with Abelson and Turkey (1970) who argue that the proper assignment of numeric
values to categories of ordered scale will allow it to be treated as though it was measured at
interval scale-level (Labovitz, 1970) argue that interval statistics can be applied to any ordinal
level data.
3.6 Problem Encountered
Disclosure of some of relevant information like earnings was not easy since commercial banks
fear to expose off their secret financial information to competitors hence a delay to access of
information (Bank Annual Reports) since the researcher had to explain the actual purpose and
confidentiality of the research report.
25
CHAPTER FOUR
4.0 DATA PRESENTATION, ANALYSIS AND INTERPRETATION
This chapter presents the findings and discussions of data compiled from the study. It is divided
into three sections one dealing with general characteristics of respondents and firms sample, the
other dealing with the findings from the study and that which analyses and discusses relationship
between the various variables in the study.
4.1 Demographic characteristics of the respondents
A total of 200 questionnaires were sent to respondents in selected commercial Banks in Uganda.
150 questionnaires were duly filled and returned by customers. Out of 150 respondent 105 were
males and 45 females implying that a big portion of clients in selected commercial are males.
4.1.1 Figure 2: SEX DISTRIBUTION RESPONDENTS IN SELECTED COMMERCIAL BANKS
105
45
0
20
40
60
80
100
120
140
160
Male Female
Sex
Respondents
26
4.1.2
Figure: 3 ; Age distribution from the selected commercial Banks in Uganda as stated
below.
Age range Frequency Percentage
Under 20 years 2 0.7
21-30 years 80 29.1
31-40 years 200 52.4
41-50 years 45 16.0
Above 50 years 5 1.8
Total 282 100
The data shows that the majority of clients fall in the age range of 31-40 totaling to 200 with a
percentage of 52.4% implying that it is the most economically active group following the Banks
activities especially on issues regarding disclosure and transparency and those below 30 years
could be still unemployed hence may see no need for commercial Banks activities.
4.2 The level of Transparency, Disclosure and Trust
Frequency tables were used to get the responses from customers, BOU, and stakeholders scored
after summing their opinions in the following ways basing on a linkert score questionnaire
strongly agree and agree.
Likert scores for financial Transparency from customers
Financial Transparency Dimension SA&A(%) NS (%) SD&D(%)
1. Completeness of financial results
Bank releases Balance sheets 11.1 73 15.9
Bank releases cash flow statement 23.7 14.9 61.4
Bank release future plans. 32.4 48.3 19.3
2. Bank releases financial results in this period
Quarterly period 23.5 49 .27.5
Semi annually period 19.7 40.4 39.9
End of financial year 3.3 12.7 84
27
linkert scores for Disclosure from BOU
Disclosure Dimension SA&A
(%)
NS
(%)
SD&D(%)
Bank discloses the amount of common
shareholders equity.
68.0 9.7 22.3
Bank discloses capital base. 63.3 16.7 20
Bank discloses amount of tier1 capital. 83 5.3 11.7
Bank discloses deductions from tier 1 and tier 2. 14 14 72
Bank discloses amount of preference shares 60 26.7 13.3
28
:Likert scales for trust from customers
Trust Dimension SA&A N.S SD&D
Openess
Managing Director openely shares personal
information with managers.
16 48.6 35.4
Managers in the Bank are open to each other. 20 53 27
Managers do not tell clients what is going on in the
Business
33 29 38
Honesty
Managers in the bank have faith in the integrity of
managing director.
6 44.4 49.6
Managers in the bank have faith in the integrity of
their colleagues.
8 41 51
Customers have faith in managers word 43 20 37
Competence
Bank managers believe that its clients are
competent.
20 44 36
Managers do their job well. 43 19 38
Managers an competent in their work. 15 42 43
Benevolence
Managing director does not show concern for
managers.
17 38 45
Reliability
Customers in the bank are reliable. 7 58 35
Managing Director acts in the best interest of Bank
Managers.
15 15 70
TOTAL 380 452 505
29
4.3The level of Financial Performance
Dimensions of “CAMEL” was used to find the level of financial performance in selected
commercial Banks in Uganda Annual Reports of 2000 to 2003 were used (BOU).
Financial performance of selected commercial Banks in Uganda
4.3.1 Table 2: ORIENT BANK LIMITEFD
KEY FINANCIAL RATIOS (
percentages) 2006 2007 2008 2009 2010
Profitability ratio
Liquidity ratio
0rdinary dividend pay out ratio
Return on capital employed
Earnings per share
34
42
44
30
1019
32
42
0
31
1329
31
39
0
32
1563
29
38
0
26
1739
27
31
0
24
1843
FINANCIAL REVIEW (Sh 000)
Income
Operating profit
Dividend- ordinary share
Retained profit
Loans and Advances
Total Assets
Customer „s Deposit
Share holders funds
19183
6533
2250
2843
59054
139165
101362
23606
25221
8120
-
6644
79884
182245
1383375
28036
33223
10202
-
7816
110901
235600
182220
35853
36057
10605
-
8676
122770
262364
199567
44527
422883
11575
-
9166
199346
361905
289963
53710
SOURCE: Audit Report prepared by Deloitte and Touché on 7th march 2011
30
4.3.2 Graph 1: TOTAL ASSETS OF ORIENT BANK
4.3.3 Chart 1 : LINE TOTAL ASSETS OF ORIENT BANK LIMITED
31
4.3.4 Graph 2: CUSTOMERS DEPOSITS OF ORIENT BANK LIMITED
4.3.5 Chart 2: CUSTOMER DEPOSIT OF ORIENT BANK LIMITED
4.3.6 Graph 3: OPERATING PROFITS OF ORIENT BANK LIMITED
32
4.3.7 Chart 3: OPERATING PROFITS OF ORIENT BANK LIMITED
4.3.8 Graph 4: LOANS AND ADVANCES OF ORIENT BANK LIMITED
4.3.9 CHART 4 : LOANS AND ADVANCES OF ORIENT BANK LIMITED
33
High lights of performance for 2010:
There was an increase in total Assets by 38% from Ugx shs;262.4 billions - UgShs,361.9bn
There was also an increase in customers deposit by 45% from 199.57 billions to 289.96 billions.
Also Net interest income increased by 21% from 10.6 to Billions and share holders fund
increased from .5 to 53.71 billions
4.3.10 Table 3 :CENTENARY BANK
FINANCIAL REVIEW YEARS
2009. (000)
YEARS
2010
Total assets
Loans and advances
Customers deposit
Retained Earning
Profit After tax
Core Capital/RWAs
582,688,799
343,148123
443,410,715
794,00276
234,831,78
22.6%
807238427
395,820,200
630,814,099
102,913,915
293,970,99
20.5%
SOURCE: Audit Report prepared by KPMG on 25TH
MARCH 2011
4.3.11 Graph 5: TOTAL ASSETS OF CENTENARY BANK
34
4.3.12 CHART 5 : TOTAL ASSETS OF CENTENARY BANK
4.3.13 GRAPH 7: CUSTOMERS DEPOSIT OF CENTENARY BANK
35
4.3.14 CHART 6: CUSTOMERS DEPOSIT OF CENTENARY BANK
4.3.15 GRAPH 8: PROFITS AFTER TAX OF CENTENARY BANK
36
4.3.16 CHART 7; PROFIT AFTER TAX OF CETENARY BANK
4.3.17 GRAPH 9: LOANS AND ADVANCES OF CETENARY BANK
4.3.18 CHART 8: LOANS AND ADVANCES OF CETENARY BANK
37
High lights of financial performance:
Profit after tax increased by 25.2% from shs 23.4 billion to 29.3 billions
Total Assets grew by 38.5% from 582.6bn to 807.2bn
Net loans and Advances increased by 15.3% from 443.4 bn to 630.8bn
Deposits increased by 42.3% from 443.4bn to 630.8bn to 630.8bn
Deposit increased by 42.3% from 443.4bn to 630.8bn
4.3.18 Table 4 :CRANE BANK
FINANCE
PERFORMANCE
YEARS
YEARS
YEARS
YEARS
YEARS
2006 2007 2008 2009 2010
Loans and Advances
Customers Deposits
117242
172491
144152
290020
207638
341558
24038391
418768766
410594875
580176525
Source Audit Report prepared by price Water house coopers on19th march 2011
4.3.19 GRAPH 10: LOANS AND ADVANCES OF CRANE BANK
38
CHART9: LOANS AND ADVANCES OF CRANE BANK
4.3.20 GRAPH 11: CUSTOMERS DEPOSITS OF CRANE BANK
39
4.3.21 CHART 10: CUSTOMERS DEPOSITS OF CRANE BANK
Highlights of financial performance:
Loan advances increased by 70.8% from 240.38bn to 410.59bn
Customer‟s deposits increased by 38.5% from 418.77bn to 580.18bn
4.5 DATA ANALYSIS AND INTERPRETATION
4.5.1 Descriptive Statistics
Reliability test to determine the internal consistency of scales used to measure variables in the
study was carried out. Cronbach and test was used to determine reliability of the instrument as
seen below.
Table5:
Reliability test output Coefficient
Financial Performance
- Completeness 0.7807
- Timeliness 0.5851
Trust
- Openness 0.6964
- Competence 0.6955
Disclosure
- Capital Adequacy 0.8174
- Asset Quality 0.6154
All coefficients were above 0.5 implying that scale used in measuring variables were consistent
and thus the instrument was reliable in using statistical package for social scientists version 10.
40
4.5.2 Pearson’s Correlation test
This was used to establish the relationship between corporate governance and financial
performance of selected commercial banks. It was used to test the relationship between the major
factors extracted after factor analysis.
4.5.3 Factor Analysis
It was used to extract the most important factors used in measuring the variables. Varimax
rotation methods and principal component Analysis extraction method were used to extract and
reduce the items into few and relevant components. Coefficient of + 0.3 deleted from matrix
greater than one were extracted.
4.5.4 Regression Analysis
This was used to find the influence of dependent variables on independent variables of selected
commercial Banks in Uganda. An analysis of variance (ANOVA) was produced reflecting
dependent and independent variables along with financial ratio.
41
CHAPTER FIVE
5.0 DISCUSSIONS, CONCLUSIONS AND RECOMMENDATIONS
This chapter presents a discussion of findings observed in chapter four based on the literature
review, conclusions , recommendations and areas of further study. The study is divided into three
sections; Interpretation and discussion of results, Discussion of results and conclusion and
recommendation
5.1. Summary of the findings
Here the findings are interpreted and discussed in relation to literature review, the level of the
constructs of corporate governance and financial performance and the relationship of the
variables.
5.1.1. Level of Corporate Governance; Financial Transparency, Disclosure and Trust.
Corporate governance was presented by the three major constructs financial transparency,
disclosure, and trust which constitutes the key pillars of corporate governance (PCSGT. 1999,
Kibirango 2002). Each construct is presented in the following sections
5.1.2. Levels of Financial Transparency
Under completeness of financial results the majority of customers shows that they strongly
Disagree and Disagree that the bank provide complete financial results, a total percentage of
96.6% customers strongly Disagree and Disagree and also shows that majority of Bank
customers are not sure of the period the Bank releases financial results, a total of percentage
102.10 customers,
5.1.3. Level of Disclosure
Majority of Bank supervisors discloses most of the items about 68% of the respondents strongly
Agree and Agree that BOU discloses the amount of common shareholders equity. 9.7% of the
respondents are not sure and 22.3% of the respondents strongly Disagree and Disagree .on
disclosing the capital base about 67.3% of the respondents strongly Agree and Agree that BOU
discloses the amount of capital base. 12.7% of the respondents are not sure and 20 of respondents
strongly Disagree or Disagree about this. About 83% of the respondents strongly Agree and
Agree that BOU discloses amount of tier 1 capital, 5.3% not sure and 11.7% strongly Disagree
and Disagree with this on disclosing deductions from tier 1 and tier 2 capital by BOU all
42
respondents equally had same views SA&A and NS on disclosing the amount of preference
shares 60% of the respondents strongly Agree and Agree with this, 26.7% are not sure and
13.3% Disagree or strongly Disagree with this.
This implies that majority of BOU supervisors indicated that commercial banks discloses most of
the matters.
5.2.1. Level of Financial Performance-
Secondary data from commercial banks annual reports from 2006 to 2010 were used to extract
the summary of the bank financial performance Based on Capital Adequacy, Asset Quality,
Earnings and Liquidity (B.O.U 2002). The ratios, graphs and charts are usesd .
Capital adequacy, is measured by CK/RWAs ratio, in most banks was above the central banks,
required level of 10%foreinstance Stanbic Bank with12.5% in 2010 and 13.1%in 2009. Asset
Quality, was measured by Total advances and , also indicated that most were above the FIS
(1993) requirement of 25%. Liquidity which is measured by liquidity Assets/ Total Deposits
and /Total Deposits ratios, indicates that in the over all commercial banks were highly liquid
over the trend 2009 to 2010 this implied a weakness in the financial performance of commercial
banks.
5.2.3. Relationship between Corporate Governance and Financial Performance
Using SPSS version 10, Pearson Correlation was performed to determine the degree of
relationship between corporate Governance (financial transparency, disclosure and trust) and
financial performance, it was disclosed that all the dimensions of financial transparency,
Disclose and trust had positive relationships with most of financial performance dimensions. For
instance capital adequacy, earnings, assets are highly showed positive correlations with openness
competence honestly and kindness. This is also in agreement with the MckInsey quarterly survey
mark (2000) and the corporate Governance survey (2000) by the Kuala Lumpar stock Exchange
and accounting Firm PWC that noted that there is a link between corporate governance and
financial performance due to the investor‟s willingness to inject more funds in a well governed
firm.
43
Multiple linear regressions was also performed to determine potential predictors of corporate
governance with financial performance and results indicated that corporate governance predicts
34.5% of the variance in the general financial performance of commercial banks in Uganda. The
results are consistent with research under taken by Mark (2000). Reliability and openness are the
key dimensions of trust, which is a product of disclosure and financial transparency in financial
institutions. This scholar remarks that investors are willing to pay as much as 28% more of the
shares of well governed (reliable and open) organizations. This additional payment shall
consequently boost financial performance.
The findings also revealed that credit risk had a negative relationship with financial performance;
this is consistent with existing literature that shows that banks major business is leading (B.O.U,
2003). Lending is associated with credit exposure in case of default and losses owing to default
(Lopez 2001).
Under trust 380 customers out of 1337 customers strongly agree and agree that Bank managers
are
competent, reliable, kind, open and honest to them,452 are not sure and 505 strongly Disagree
and Disagree with this.
5.4 CONCLUSION
The strongest dimension of financial transparency is completeness of financial results (Ari, 2000,
Robert and Abbie, 2003) failure to observe the core pillars of corporate Governance like trust,
Transparency and Dissolution when dealing with stakeholders and customers has lead
commercial Banks to score poorly in financial performance.
All in all corporate Governance is guided by the three core principles of Disclosure, trust and
Transparency.
44
5.5 RECOMMENDATIONS
Commercial Banks need to establish mechanisms to enforce proper Governance practices like
trust, Transparency and Disclosure of financial information with customers and stake holders by
delivering the financial reports to Bank of Uganda in time so as to gain a better public image in
the society and also to boost their financial performance.
5.6 AREAS FOR FURTHER RESEARCH
Due to resource and time constraints some issues could not be studied hence a call for areas of
further research in the following.
Uganda Capital Market Authority on Corporate Governance.
Accountability and financial performance of institutions in Uganda stock Exchange
performance and corporate Governance of listed institutions.
Uganda stock exchange performance and corporate governance of listed institutions
45
LIST OF REFERENCES
Abelson, R.P. & Turkey, J.W.(1970). Efficient Conversion of Non- Metric
Information into Metric Information “in Tufte, E.R.(ed), The quantitative Analysis of Social
problems, Reading Mass: Addition Wesley,
Aggrey R.O. (2003, May 2003). NBC & Citi Bank Record Losses The Monitor. P.14
Ahmed, A.S. Takeda C& Thomas (1999).Bank Loan loss Provisions: Re-examination of Bank
Capital management, Earnings Management and Signaling Effects, Journal of Accounting and
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APPENDICES APPENDIX (A)
MAKERERE UNIVERSITY
QUESTIONNAIRE TO BE FILLED BY SELECTED COMMERCIAL BANK
CUSTOMERS IN UGANDA
Dear Sir/ Madam,
Am carrying out a study about the relationship between corporate governance and financial
performance in selected commercial banks in Uganda. The purpose of the study is purely for
academic purposes aiming at fulfilling one of the conditions for the award of Bachelor of Degree
of Commerce in Accounting.
I thus humbly request you to spare few minutes to answer the following questions. Your
responses will be treated with utmost confidentiality.
PERSONAL INFORMATION
Please tick in the appropriate box (√) or write in the line space provided.
i) Please indicate the age group you belong
Under 20 years 21-30 years 31-40 years 41-50 Above 50
ii) Gender Male Female
iii) Education Background
Secondary Post-Secondary University Professional Post-graduate
Other (Specify)…………………………………………………………………….
iv) Occupation
Student Business person Civil servant House wife
Other (specify)………………………………………………………………….
v) Your Bank
Stanbic Orient Cairo CERUDEB
52
SECTION A
Rank the following items regarding your Bank, Choose (√) only one option suiting your level of
agreement or disagreement.
Use the weights below.
Strongly agree Agree Strongly disagree Disagree Not sure
1 2 3 4 5
i) Completeness
My Bank releases information regarding the following financial reports.
1 2 3 4 5
Bank releases balance sheet
Bank releases profit and loss accounts
Bank releases cash flow statements
Bank releases future plans and prospects
Bank releases details of risks
ii) Timeliness of release of results
1 2 3 4 5
Bank releases less than 30 days
Bank release reports 30-40 days
Bank releases before 4:00 pm
iii) Bank releases financial reports in this period
1 2 3 4 5
Bank releases quarterly reports
Bank releases semi-annually reports
Bank releases at end of year
iv) Means of information dissemination
1 2 3 4 5
Bank uses press conference with media
Bank uses faxed/ e-mailed news
Others (specify)…………………………………………………………….
53
SECTION B
Rank the following items regarding your Bank; choose (√) only one option that suits your level
of agreement or disagreement basing on the following scale.
Strongly agree Agree Strongly disagree Disagree Not sure
1 2 3 4 5
1. Capital structure
1 2 3 4 5
Bank discloses the amount of common shareholders equity
Bank discloses the total capital base
Bank discloses the amount of tier 1 capital
Bank discloses amount of preference shares
2. Capital Adequacy
1 2 3 4 5
Bank discloses the risk exposure of balance sheet assets
Bank disclose the risk-based capital ratio
Bank discloses whether it has an internal
Process for assessing capital adequacy and for setting
appropriate levels of capital
3. Credit Risk
1 2 3 4 5
Bank discloses whether credit scoring is used
When granting credit
Bank discloses quantitative and qualitative information
about credit risk measurement models used.
4. Other risks
1 2 3 4 5
Bank provides qualitative disclosure of interest rate risk
Bank discloses quantitative and qualitative information
and strategies for liquidity risk management
54
SECTION C
Rank the following items; choose (√) only one option suiting your level of agreement or
disagreement. Use the following scale for each item.
Strongly agree Agree Strongly disagree Disagree Not sure
1 2 3 4 5
1.
Openness 1 2 3 4 5
The Managing Director ICEO openly shares personal
information with managers
Bank managers do not tell clients what is going on
Managers in Bank are open with each other
2.
Honesty 1 2 3 4 5
Managers in the Banks have faith in the integrity of
managing Director
Managers in this Bank have faith in the integrity of their
colleagues
Customers have faith in the managers word
3.
Competence 1 2 3 4 5
Bank managers believe that its clients are competent
Managers in this bank do their job well
Managers are competent in their work
55
4.
Benevolence 1 2 3 4 5
The managing Director does not show concern for
managers
Managers look out for each other
5.
Reliability 1 2 3 4 5
Managers in this bank can rely on the Managing
Director
The managing Director in this bank typically acts in the
best interests of Bank managers
Customers in this Bank are reliable
56
SECTION D
Rank the following items; choose(√) only one option suiting your agreement or disagreement
level. Use the scale below.
Strongly agree Agree Strongly disagree Disagree Not sure
1 2 3 4 5
Performance Indicator
1.
Capital Adequacy 1 2 3 4 5
Strong capital level in Bank
Satisfactory capital level in the Bank
Less than satisfactory level in the Bank
Deficient capital level in the Bank
Critically deficient capital level in the Bank
2.
Liquidity 1 2 3 4 5
Strong liquidity within the Bank
Satisfactory liquidity within the Bank
Less than satisfactory liquidity in the Bank
Deficient Liquidity in the Bank
Critically deficient liquidity in the Bank
57
3.
Earnings 1 2 3 4 5
Strong earnings within the Bank
Satisfactory liquidity within the Bank
Less than satisfactory liquidity
Deficient liquidity
Critically deficient liquidity
4.
Asset Quality 1 2 3 4 5
Strong asset quality in the Bank
Satisfactory asset quality
Less than satisfactory asset quality
Deficient asset quality
Critically deficient asset quality
Thank you very much may the Lord Bless you”;
58
APPENDIX (B)
LISTED COMMERCIAL BANKS IN UGANDA
No of branches
1) ABC Capital Bank
2) Bank of Africa 3
3) Bank of Baroda 11
4) Barclays Bank 40
5) Cairo international Bank
6) Centenary Bank 37
7) Citi Bank Uganda ltd
8) Crane Bank 11
9) DFCU
10) Diamond Trust Bank 12
11) Eco Bank 7
12) Equity Bank 27
13) Fina BANK 5
14) Global Trust Bank 8
15) Housing Finance Bank 12
16) Imperial Bank Uganda
17) National Bank of commerce
18) Orient Bank
19) Stanbic Bank 67
20) Standard chartered 10
21) Tropical Bank 7
22) United Bank of Africa 1
By 1st march 2011 Minimum capital will be 10billion
59