financial performance andcustomer satisfaction;...
TRANSCRIPT
MAKERERE UNIVERSITY
COLLEGE OF BUSINESS AND MANAGEMENT SCIENCE
CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE IN THE
BANKING SECTOR
THE CASE STUDY OF STANBIC BANK AND DFCU BANK
BY
MUMPE DRAKESON
07/U/10913/Ext
SUPERVISOR
MR. NUWAGABA GEOFFREY
A RESEARCH REPORT SUBMITTED TO MAKERERE UNIVERSITY IN PARTIAL
FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF BACHELOR OF
COMMERCE DEGREE OF MAKERERE UNIVERSITY.
JULY, 2011
DECLARATION
I Mumpe Drakeson, hereby declare that the work presented in this report has been a result of my own
effort and it has never been submitted by any other person in any institution of higher learning.
Sign---------------------- Date---------------------------
MUMPE DRAKESON
STUDENT
2
APPROVAL
This research report done by Mumpe Drakeson has been under my supervision and is ready for
submission.
Sign------------------------ Date---------------------------
MR NUWAGABA GEOFFREY
SUPERVISOR
3
DEDICATIONI dedicate this work to my mother Ms Adrine Tusinguire for her hard work and endless effort
towards my education.
4
ACKNOWLEDGEMENTI would like to extend sincere gratitude to the following people for standing by my side during this study.
I must begin with my Supervisor, Mr.Nuwagaba Goeffrey who introduced and relentlessly
adapted me where necessary in the world of research. May God continue to guide him in his
career.
I would like to thank my mother Ms Adrine tusinguire for her words of encouragement and
endless effort towards my education. Without you mother, I wouldn’t have made it this far,
thanks a lot for standing by my side.
To my uncles Edwin, Patrick,Moses and auntie Merabel and Grace for your support both
socially and financial support in times of need, I would like o thank you for your countless
support towards my education and my life. Thanks a lot
Special thanks go to the staff of stanbic bank, DFCU bank and ICGU for answering the study
questions that have helped in this research.
Sincere gratitude go to my sisters Privah, Doreen, Macline and my brother Nickson for their
support both social and financial in times of need. I would also like to thank my friends Conrad,
Fortunate, Elizabeth, Chris, Denis and Henry for their support towards my education. Thanks a
lot
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ABSTRACT
This study intends to establish the relationship between corporate governance and financial
performance in Stanbic bank and DFCU bank.
This research aims at establishing the relationship between the core principles of corporate
governance and financial performance in the banking sector in Uganda. Findings signify that
corporate governance predicts that there is a moderate relationship between corporate
governance and financial performance.
The significant contributors to financial performance were openness and reliability which are
both measures of trust. On the other hand credit risk as a measure of disclosure had negative
relationship with financial performance.
It’s obvious that trust has a significant impact on the financial performance; banks both local and
international shall enforce full disclosure practices and transparency practices thereby enhancing
trust in order to survive in the increasingly competitive financial landscape.
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TABLE OF CONTENTS
DECLARATION........................................................................................................................................... i
DEDICATION............................................................................................................................................ iii
ACKNOWLEDGEMENT.............................................................................................................................iv
ABSTRACT................................................................................................................................................v
TABLE OF CONTENTS..............................................................................................................................vi
LIST OF TABLES........................................................................................................................................ ix
LIST OF GRAPHS.......................................................................................................................................x
LIST OF ABBRIVIATIONS..........................................................................................................................xi
CHAPTER ONE: INTRODUCTION............................................................................................................1
1.1 Background........................................................................................................................................1
1.2 Statement of the problem.................................................................................................................3
1.3 Purpose of the study..........................................................................................................................4
1.4 Objectives of the study......................................................................................................................4
1.5 Research Questions.........................................................................................................................4
1.6 Scope of the study.............................................................................................................................4
1.7 Significance of the study....................................................................................................................5
CHAPTER TWO: LITERATURE REVIEW...................................................................................................6
2.0 INTRODUCTION.................................................................................................................................6
2.1 Good Corporate Governance seeks to promote:............................................................................8
2.2 Transparency...................................................................................................................................10
2.3 Bank Transparency..........................................................................................................................11
2.4 Disclosure........................................................................................................................................12
7
2.5 Financial Disclosure.........................................................................................................................13
2.6 Details of Disclosure........................................................................................................................13
2.7 The Concept of Trust.......................................................................................................................14
2.8 Facets of trust..................................................................................................................................15
2.10 Financial Performance and financial institutions...........................................................................17
CHAPTER THREE: RESEARCH METHODOLOGY.....................................................................................20
3.1 Sampling design...............................................................................................................................20
3.2 Population of the study...................................................................................................................20
3.2.1 Sample size...............................................................................................................................20
3.2.2 Data sources.............................................................................................................................21
3.3 Data collection method and instruments........................................................................................21
3.4 Data processing and analysis...........................................................................................................22
3.4.1 Editing.......................................................................................................................................22
3.4.2 Data analysis.............................................................................................................................22
3.5 Constraints/limitations....................................................................................................................23
CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF THE FINDINGS..............24
4.0 Introduction.....................................................................................................................................24
4.3 The level of Transparency, Disclosure and Trust..............................................................................33
...............................................................................................................................................................34
4.4 The level of financial performance..................................................................................................36
4.5 The relationship between corporate governance (transparency, disclosure and trust) and financial performance..........................................................................................................................................37
CHAPTER FIVE: DISCUSIONS OF THE FINDINGS, CONCLUSIONS AND RECOMMENDATIONS.................39
5.0 INTRODUCTION...............................................................................................................................39
5.2 Summary of the findings..................................................................................................................39
5.3 The level of corporate governance; financial transparency, disclosure and trust............................39
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5.3.1 The level of financial transparency...........................................................................................40
5.3.2 Level of disclosure....................................................................................................................41
5.3.3 Level of trust.............................................................................................................................41
5.4 Level of financial performance –objective two................................................................................42
5.5 Relationship between corporate governance and financial performance.......................................43
5.6 Conclusions......................................................................................................................................43
5.7 Recommendations...........................................................................................................................44
5.8 Areas for further research...............................................................................................................44
BIBLIOGRAPHY.......................................................................................................................................45
APPENDIX..........................................................................................................................................47
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LIST OF TABLESTable 1: category of respondents..............................................................................................................21
Table 2: Respondents by sex distribution..................................................................................................24
Table 3: The age of commercial bank clients.............................................................................................25
Table 4: Educational background..............................................................................................................26
Table 4.5:Occupation of the respondents.................................................................................................26
Table 6: financial results through quarterly reports..................................................................................28
Table 7: illustrating if banks release end of year reports...........................................................................28
Table 8: showing whether banks release balance sheet............................................................................29
Table 9: Illustrating if banks release cash flows.........................................................................................29
Table 10: showing if banks release of future plans and prospects............................................................30
Table 11: showing if banks release reports less than 30days....................................................................30
Table 12: Illustrating whether bankers uses press conferences................................................................31
Table 13: showing if banks release the amount of common shareholder.................................................31
Table 14: showing if banks disclose the risk based capital ratio................................................................32
Table 15: showing whether managers of the bank are compentent in doing their work..........................32
Table 16: Relationship between corporate governance and financial performance.................................38
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LIST OF GRAPHSFigure 1: Marital Status of Clients.............................................................................................................27
Figure 2: The level of Disclosure and performance...................................................................................33
Figure 3: The level of Trust and performance in banks..............................................................................34
Figure 4: The level of Transparency and performance in banks................................................................35
Figure 5: Performance ratios.....................................................................................................................36
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LIST OF ABBRIVIATIONSICGU: INSTITUTE OF CORPORATE GOVERNANCE
BOU: BANK OF UGANDA
USAID: UNITED STATES AGENCY FOR INTERNATIONAL DEVELOPMENT
ICB: INTERNATIONAL CREDIT BANK
GBL: GREENLAND BANK
CEO: CHIEF EXECUTIVE OFFICER
MD: MANAGING DIRECTOR
CLERP: CORPORATE LAW ECONOMIC REFORM PROGRAM PAPER
PWC: PRICE WATER COPPERS
CK: CORE CAPITAL
RWAs: RISKY WEIGHTED ASSETS
NPA: NON PERFORMING ASSETS
ROA: RETURN ON ASSETS
ROE: RETURN ON EQUITY
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CHAPTER ONE
INTRODUCTION
This chapter looks at the background of the study, statement of the problem, purpose of the
study, objectives of the study, research questions, and scope of the study and the significance of
the study.
1.1 BackgroundCorporate governance issues are receiving greater attention in both developed and developing
countries as a result of the increasing recognition that a firm’s corporate governance affects both
its economic performance and its ability to access long-term low cost investment capital.
According to Hermes (2004), corporate governance has come to mean many things.
Traditionally and at a fundamental level, the concept refers to corporate decision making and
control, particularly the structure of the board and its working procedures. Jennifer (2002)
defines corporate governance as a set of interlocking rules by which corporation shareholders
and management govern their behavior. In each country, this is a combination of a legal system
that sets some common standards of governance and systems of behavior determined by firms
themselves.
Corporate governance is the process used to manage the business affairs of the company
towards enhancing business prosperity and corporate accountability with the objective of
realizing long-term shareholder value, while taking into account the interests of the other
shareholders. (www.cabinetoffice.gov.uk/CSIA/ia_governance/glossary.asp). The principal
players are the shareholders, management, and the board of directors. Other stakeholders include
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employees, suppliers, customers, banks, and other lenders, regulators, the environment and the
community at large (http://en.wikipedia.org/wiki/Corporate_governance).
According to James Wolfensohn former World Bank Group President, corporate governance is
about promoting corporate fairness, transparency and accountability. According to financial
Times (1999), Governance is a requisite for survival and a gauge of how predictable the system
for doing business in any country is. In developing countries, the importance of governance is to
strengthen the foundation of society and chip into the global economy.
As corporate entities themselves, banks must have the requisite components of corporate
governance in place to carry out the intermediation function effectively.
The role of the board of directors and the management must be carefully defined and performed.
The functions of Audit Committees and compensation committees must be explicitly outlined
and meticulously adhered to. In the current environment where bank financing is predominant,
banks need to insist, as a condition of making loans, that firms have in place good corporate
governance systems and possibly provide assistance and advice in this area.
Banks face a wide range of complex risks in their day-to-day business, including risks relating to
credit, liquidity, exposure concentration, interest rates, exchange rates, settlement, and
internal operations. The nature of banks' business - particularly the maturity mismatch between
their assets and liabilities, their relatively high gearing and their reliance on creditor confidence
- creates particular vulnerabilities. The consequences of mismanaging their risks can be severe
indeed - not only for the individual bank, but also for the system as a whole thus the need to
take into account corporate governance. Alan Bollard (2003).
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In Uganda, the factors responsible for poor corporate performance especially in banks emanate
from lack of transparency, accountability and poor ethical conduct Kibirango (1999).commercial
banks failures have been linked to self-inflicted causes resulting from bank owners; ICB
(International Credit Bank), GBL (Greenland Bank), and Cooperative Bank were afflicted with
the one-man management syndrome of corporate governance, exemplified by Thomas Kato
(ICB), Suleiman Kiggundu (GBL) and USAID (Co-op Bank).
The B.O.U. closure of the above mentioned banks was intended to awaken the owners, directors
and managers of the other commercial banks to institute sound corporate governance principles
and foster better financial performance. After closure of these banks, 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/= and the banks liabilities
swelled to 5bn/= in year 2002 from Ugandan Shs 2.3bn in 2001.Citibanks profits fell from
Ugandan Shs. 4.1bn in 2001 to 2.3bn/= in 2002. Aggrey (2003) found out that the Balance sheet
position of Stanbic Bank (U) limited 2001 declined by 14.24 per cent compared with a growth of
19.19 percent in 2000.
1.2 Statement of the problem.The banking sector in Uganda has continued to register unsatisfactory corporate governance
record as indicated by closure of International Credit Bank, Greenland Bank (1999) and
TransAfrica Bank Ltd B.O.U. (2002) and other international governance scandals such as
Maxwell in the UK and Enron in the US. This may be attributed to failure to comply with the
corporate governance ideals of trust, transparency, disclosure and accountability. Failure to
nurture a strong culture of corporate governance could result to increased exposures and finally
poor financial performance. According to the acting deputy governor of Bank of Uganda there
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are two key challenges facing the banking sector in Uganda namely good corporate governance
and expanding the outreach. In another study by Millstein and Mac Avoy, (2003) its reported
that the performance gap between well and poorly governed firms exceeds 25% the total return
generated by such firms.
1.3 Purpose of the study.The purpose of the study was to examine the relationship between corporate governance and
financial performance of the banking sector in Uganda.
1.4 Objectives of the study.i. To establish the level of transparency, disclosure and trust within the banking sector in
Uganda.
ii. To examine the relationship between corporate governance and performance in Uganda
iii. To examine the financial performance of the banking sector in Uganda.
1.5 Research Questionsi. What is the relationship between corporate governance and financial performance in the
selected commercial banks in Uganda?
ii. What is the level of transparency, disclosure and trust within the selected commercial
banks in Uganda?
iii. What is the financial performance of the selected commercial banks in Uganda?
1.6 Scope of the study.The study is to be conducted on selected commercial banks that is Stanbic and Dfcu Banks all
located in Kampala Uganda.
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The research will be limited to the core pillars of corporate governance that is transparency,
disclosure, and trust in the selected commercial banks in Uganda. Financial performance will
also be studied by measuring capital adequacy, earnings and profitability and liquidity ratios.
1.7 Significance of the studyi. The findings will assist companies especially the commercial banks in instituting better
corporate governance principles.
ii. The study will provide Literature that will form a foundation for further research in
corporate governance for scholars and also contributing to international accounting and
finance literature
iii. The study will help investors intending to join the banking sector to plan ways of
improving performance so as to capture a large market share.
iv. The study will help to create effective and sustainable corporations that contribute to the
welfare of society by creating employment and solutions to emerging challenges.
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CHAPTER TWO
LITERATURE REVIEW
2.0 INTRODUCTIONThis chapter discusses the opinions, findings from different authors, publications, magazines,
websites and all other possible sources as abasis foundation for this research study.
The subject of corporate governance in developing economies has recently received a lot of
attention in the literature Oman et al (2001). The corporate governance of banks in developing
economies has been almost ignored by researchers Caprio and Levine (2002). Even in developed
economies, the corporate governance of banks has only recently been discussed in the literature
Macey and O’Hara, (2001).
Corporate governance is the international term associated with the trend towards greater
corporate responsibility and the conduct of business within acceptable ethical standards.
Transparency, accountability, and openness in reporting and disclosure of information, both
operational and financial, are internationally accepted to be vital to the practice of good
corporate governance. (http://www.dpsa.gov.za/batho-pele/docs/afripubserday)
The corporate governance of banks in developing economies is important for several reasons for
example,
Banks have an overwhelmingly dominant position in developing-economy financial systems, and
are extremely important engines of economic growth King and Levine (1993).
As financial markets, banks are usually underdeveloped and banks in developing economies are
typically the most important source of finance for the majority of firms.
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As a means of providing a generally accepted means of payment, banks in developing countries
are usually the main depository for the economy’s savings.
Many developing economies have recently liberalized their banking systems through
privatization and disinvestments thus reducing the role of economic regulation. Consequently,
managers of banks in these economies have obtained greater freedom in how they run their
banks.
Corporate Governance is concerned with the establishment of an appropriate legal, economic,
and institutional environment that would facilitate and allow business enterprises to grow, thrive,
and survive as institutions for maximizing shareholder value while being conscious of and
providing for the well-being of all other stakeholders and society.
(http://www.ecgi.org/codes/documents/principles).
A broader definition is found in Cochran and Wartick’s (1988) publication. Corporate
Governance: A Review of the Literature, which suggests that corporate governance, is “an
umbrella term that includes specific issues arising from interactions among senior management,
shareholders, boards of directors, and other corporate stakeholders”.
Corporate governance” refers to the private and public institutions, including laws, regulations
and accepted business practices, which in market economy; govern the relationship between
corporate managers and entrepreneurs “corporate insiders" on one hand, and those who invest
resources in corporations, on the other Oman, (2001). Other writers like Cochran and Warwick
(1988) define corporate governance as: "...an umbrella term that includes specific issues arising
from interactions among senior management, shareholders, boards of directors, and other
corporate stakeholders."
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In the current environment where bank financing is predominant, banks need to insist, as a
condition of making loans, that firms have in place good corporate governance systems and
possibly provide assistance and advice in this area. Commercial banks have a critical and
fundamental role to play within and between countries. They need to support the concept and
practice of good corporate governance at the individual bank level and more importantly; they
need to form an industry view of their role in facilitating the process of growth and development
(http://www.entrepreneur.com/tradejournals/article/.html).
Financial institutions can be vulnerable to the same economic tensions and conflicts of interest
that have compromised corporate governance at more high-profile firms over the past few years
(ht//www.ggf.org/).
2.1 Good Corporate Governance seeks to promote:♦ Efficient, effective and sustainable corporations that contribute to the welfare of society by
creating wealth, employment and solutions to emerging challenges.
♦ Responsive and accountable corporations
♦ Legitimate corporations that are managed with integrity, probity, and transparency
♦ Recognition and protection of stakeholder rights
♦ An inclusive approach based on democratic ideals, legitimate representation and participation.
In 1997, the Commonwealth Treasury went a little further in the context of the Corporate Law
Economic Reform Program Paper (CLERP) Directors’ Duties and Corporate Governance,
defining corporate governance as “the term used to describe the rules and practices put in place
within a company to manage information and economic incentive problems inherent in the
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separation of ownership from control in large enterprises. It deals with how, and to what to
extent, the interests of various agents involved in the company are reconciled and what checks
and incentives are put in place to ensure that managers maximize the value of the investment
made by shareholders.”
Thus, it would appear that corporate governance is and will remain something of an enigma; that
certain je ne sais quoi that is evident in all successful companies. Recent research conducted by
the University of Newcastle and Horwath Chartered Accountants and Management Consultants
suggests a positive link between good corporate governance and shareholder value. What is
certain, however, is that corporate governance comes down to two fundamental ideas: doing the
right things and doing things right
Commonly accepted principles of corporate governance include:
Rights and equitable treatment of shareholders: Organizations should respect the rights of
shareholders and help shareholders to exercise those rights. They can help shareholders exercise
their rights by effectively communicating information that is understandable and accessible and
encouraging shareholders to participate in general meetings.
Interests of other stakeholders: Organizations should recognize that they have legal and other
obligations to all legitimate stakeholders.
Role and responsibilities of the board: The board needs a range of skills and understanding to
be able to deal with various business issues and have the ability to review and challenge
management performance. It needs to be of sufficient size and have an appropriate level of
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commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix
of executive and non-executive directors.
Integrity and ethical behavior: Organizations should develop a code of conduct for their
directors and executives that promote ethical and responsible decision-making. It is important to
understand, though, that systemic reliance on integrity and ethics is bound to eventual failure.
Disclosure and transparency: Organizations should clarify and make publicly known the roles
and responsibilities of board and management to provide shareholders with a level of
accountability. They should also implement procedures to independently verify and safeguard
the integrity of the company's financial reporting. Disclosure of material matters concerning the
organization should be timely and balanced to ensure that all investors have access to clear,
factual information.
The three basic tenets of Corporate Governance that will be reviewed include; Transparency,
Disclosure and Trust and this is in relation to the banking sector financial performance in
Uganda.
2.2 TransparencyTransparency is integral to corporate governance, higher transparency reduces the information
asymmetry between a firm’s management and financial stakeholders (equity and bondholders),
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 the Asian in the later half
of 1997 continuing with the recent failures of powerful companies in the US like Enron peter
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(2003). In Uganda lack of transparency is attributed to the closures of commercial banks Yunusu,
(2001).Financial statements are transparent if they make apparent the underlying economies of
the business and its transactions. thus transparency involves not only concepts related to
reliability(representational, faithfulness and neutrality) but also understability ,to be transparent
financial statements must be representationally faithful and neutral i.e. must accurately represent
the underlying economics in un biased manner FASB,(1984).
2.3 Bank TransparencyThe concept of Bank transparency is broad in scope it 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 its plans for the future. The transparency of the
banking sector as a whole also includes public information on bank regulations and on safety net
operations of the central bank Enoch et al, (1997) and Rosengren, (1998).
Weak transparency makes banks’ asset risks opaque; Stock market participant’s including
professional analysts encounter difficulties in measuring banks creditworthiness and risk
exposures Morgan et al, (1999) and Jordan (2000)). Ball (2001) argues that timely incorporation
of economic losses in the published financial statement that is; conservatism 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.
23
Variables Used to Measure Corporate transparency comprises 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.
2.4 DisclosureIn response to recent corporate governance scandals, companies have responded by adopting a
number of regulatory changes. One component of these changes has been increased disclosure
requirements (US Based; Enron, WorldCom… Heidi and Marleen (2003) and Uganda Based;
Greenland Bank Ltd, ICB... Japheth (2001)) restoring public trust is at the top of the agenda of
today’s business leaders. Greater information provision “disclosure” on the company’s capital
and control structures – can be an important means to achieve this goal. High quality and
relevant information is crucial for exercise of governance powers. Full Disclosure seeks to avoid
financial statements fraud Beasley et al, (2000). Prior studies have concentrated on disclosure of
items such as management earnings forecasts Johnson et al,(2001), Lev and Penman (1990) or
interim earnings Leftwich and Zimmerman (1981), have examined a very general disclosure
index of financial and/or non - financial items Chow and Wong –Borren, (1987).
Disclosure should include, but not be limited to, material information on, the financial and
operating results of the company, Company objectives, Major share ownership and voting
rights., Remuneration policy for members of the board and key executives, and information
about board members, including their qualifications, the selection process, other company
directorships and whether they are regarded as independent by the board., Related party
transactions, Foreseeable risk factors., Issues regarding employees and other stakeholders,
24
Governance structures and policies, in particular, the content of any corporate governance code
or policy and the process by which it is implemented
Dangers of Voluntary Disclosure
The most common arguments 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 Mavrinac (1995), Healy and Palepu (1993),
Reich and Cylinder (1997).However, it is worth noting that as competition continues to bite, the
“basket of secret” information tends to reduce.
2.5 Financial DisclosureFinancial disclosure, which is a key component of the newly proposed Basel Capital
Accord, is reviewed in the following paragraphs. In April 2003, the Basel Committee on
Banking Supervision BCBS, (2003), headquartered 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 purpose of pillar three is to complement the other pillars by presenting an
enhanced set of public disclosure requirements focusing on capital adequacy. This pillar is
examined in more detail than the f irst 2 pillars given that disclosure represents one of the key
variables in the scope of this study.
2.6 Details of Disclosure Disclosure addresses the issue of improving market discipline through effective public
disclosure. Specifically, it presents a set of disclosure requirements that should improve market
25
participants’ ability to assess banks’ capital structures, exposures, management processes, and,
hence, their overall capital adequacy. The proposed disclosure requirements consist of qualitative
and quantitative information in three general areas: Corporate structure, capital structure and
adequacy, and management. Corporate structure refers to how a banking group is organized; for
example, what is the top corporate entity of the group and how its subsidiaries are consolidated
for accounting and regulatory purposes. Capital structure corresponds to how much capital is
held and in what forms, such as common stock. The disclosure requirements for capital adequacy
focus on a summary discussion of the bank’s approach to assessing its current and future capital
adequacy.
2.7 The Concept of TrustTrust means many things. Everyone knows intuitively what it is to trust; yet articulating a precise
definition is not a simple matter Wayne & Megan (2002). Trust is difficult to define because it is
so complex, in fact, Hosmer (1995) has observed.
“There appears to be widespread agreement on the importance of trust in human conduct, but
unfortunately there also appears to be an equally widespread lack of agreement on a suitable
definition of the construct”.
Trust is a multifaceted construct, which may have different bases and phases depending on the
context; it is also a dynamic construct that can change over the course of a relationship Wayne
and Megan,(2002).
Trust is an essential component for business to be conducted. In light of the recent corporate
financial scandals of Enron, Greenland bank Ltd and others and it’s most infamous outcome-the
Sarbanes Oxley organizational trust has become more important than ever. Trust is a necessary
26
antecedent for cooperation and leads to constructive behavior vital for relationships Barney,
(1981).
2.8 Facets of trustThere are at least five facets of trust that can be gleaned from the literature on trust Tschannen-
Moran and Hoy (2001). Benevolence, reliability competence, honesty, and openness are all
elements of trust.
Benevolence perhaps the most common facet of trust is a sense of confidence that one’s well
being or something one cares about will be protected and not harmed by the trusted party Butter
& Cantecell, (1984) ,Hoy & Kupersmith (1985) Mishra (1996).
Reliability at its most basic level trust has to do with predictability that is, consistency of
behavior and knowing what to expect from others(Butter & Cantrell, (1984), Hosmer,(1995). In
and of itself, however, predictability is insufficient for trust. We can expect a person to be
invariably late, consistently malicious, inauthentic, or dishonest when our well-being is
diminished or damaged in a predictable way, expectations may be met, but the sense in which we
trust the other person or group is weak.
Competence: Good intentions are not always enough when a person is dependent on another but
some level of skill is involved in fulfilling an expectation an individual who means well may
nonetheless not be trusted Baier,(1986) Competence is the ability to perform as expected and
according to standards appropriate to task at hand, many organizational tasks rely on
competence.
27
Honesty: Honesty is the person’s character, integrity and authenticity Rotter (1967) defined trust
as “the expectancy that the word, promise, verbal or written statement of another individual or
group can be relied upon”. Statements are truthful when they confirm to “what really happened
“from that perspective and when commitments made about future actions are kept. A
correspondence between a person’s statements and deeds demonstrates integrity.
Openness: Openness is the extent to which relevant information is shared; it is process by which
individuals make themselves vulnerable to others. The information shared may be strictly about
organizational matters or it may be personal information, but it is a giving of oneself Butter &
Cantrell, (1984), (Mishra, 1996) such openness signals reciprocal trust a confidence that neither
the information nor the individual will be exploited and recipients can feel the same confidence
in return. Individuals who are unwilling to extend trust through openness end up isolated
Kramer, Brewer & Hanna, (1996). In Uganda, as in many other countries, there is a rooted
distrust in most of the public sector Shleifer& Vishny, (1993) this may also be the case for the
private sector in which the commercial banks fall.
2.9 Relationship of Transparency, Disclosure, Trust, and Financial Performance
Transparency, disclosure, and trust, which constitute the integral part of corporate governance,
can provide pressure for 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).
According to the corporate governance survey 2002, carried out by the Kuala Lumpur stock
exchange and accounting firm Price Water House Coopers (PWC), the majority of investors in
28
Malaysia are prepared to pay 20% premium for companies with superior corporate governance
practices.
2.10 Financial Performance and financial institutions Financial soundness is a situation where depositor’s 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 such as deregulation; lack of information
among bank customers; homogeneity of the bank business, connections among banks do cause
bank failure.
The role of corporate governance has been gaining momentum over the past two centuries.
Although initially established as a legal requirement for incorporation, corporate governance has
become a critical link between firms and those who have vested interests in the firm. Vinten
(1998) states that corporate governance is needed not only to protect the interests of the
stockholders but also other stakeholders. Corporate governance is mandated to ensure the
interests of public sector and private-sector organizations are represented. In addition, corporate
governance aids in securing confidence not only for stockholders but also for other stakeholders
such as customers, suppliers, employees, and the government in ensuring that firms are
accountable for their actions.
Some useful measures of financial performance, which is the alternative term as financial
soundness, are coined into what is referred to as CAMEL. The acronym "CAMEL" refers to the
five components of a bank's condition that are assessed: Capital adequacy, Asset quality,
Management, Earnings and Liquidity. A sixth component, a bank's Sensitivity to market risk was
added in 1997; hence, the acronym was changed to CAMELS.
29
Note that the bulk of the academic literature is based on pre -1997 data and is thus based on
CAMEL ratings.
Ratings are assigned for each component in addition to the overall rating of a bank's financial
condition Jose, (1999). Capital Adequacy: This ultimately determines how well financial
institutions can cope with shocks to their balance sheets. The bank monitors the adequacy of its
capital using ratios established by The Bank for International Settlements. According to bank off
Uganda, (2002) Capital adequacy in commercial banks is measured in relation to the relative risk
weights assigned to the different category of assets held both on and off the balance sheet items.
Asset Quality: The solvency of financial institutions typically is at risk when their assets
become impaired, so it is important to monitor indicators of the quality of their assets in terms of
overexposure to specific risks trends in non- performing loans, and the health and profitability of
bank borrowers especially the corporate sector. Credit risk is inherent in lending, which is the
major banking business. It arises when a borrower defaults on the loan repayment agreement. A
financial institution whose borrowers default on their repayments may face cash flow problems,
which eventually affect its liquidity position.
Ultimately, this negatively impacts on the profitability and capital through extra specific
provisions for bad debts Bank of Uganda, (2002).
Earnings: The continued viability of a bank depends on its ability to earn an adequate return on
its assets and capital. Good earnings performance enables a bank to fund its expansion, remain
competitive in the market and replenish and /or increase its capital.
A number of authors have argued that, banks that must survive need higher Return on Assets,
better return on net worth/Equity, sound capital base i.e. the Capital Adequacy Ratio, adoption of
30
corporate governance ensuring transparency to stakeholders that is equity holders, regulators and
the public.
Liquidity: Initially solvent financial institutions may be driven toward closure by poor
management of short-term liquidity. Indicators should cover funding sources and capture large
maturity mismatches. An unmatched position potentially enhances profitability but also increases
the risk of losses according to the Ugandan Banker, (June 2001). The “M” represents
Management, given that this paper is hinged on financial performance, the management
component in not considered in the measure.
Conclusion
Generally, literature on corporate governance comprises attributes such as financial transparency,
disclosure and trust among others and it is revealed that financial transparency and disclosure
enhance trust between the stakeholders and organizations like commercial banks. Capital
Adequacy, Earnings and Liquidity are the key dimensions of measuring financial performance in
Commercial Banks.
31
CHAPTER THREE
RESEARCH METHODOLOGY
3.0 Introduction
This chapter provided a methodology used in undertaking the study of corporate governance and
financial performance in the Banking sector in Uganda. The methodology covered Research
design, study population, sample size and sampling designs, sources of data, data collection
methods, data analysis techniques and limitations in the study process.
3.1 Sampling designA simple random and purposive sampling method was used. Simple random sampling was used
so as to avoid sampling biases. Purposive sampling was used to select those persons who have an
idea about corporate governance and financial performance.
3.2 Population of the study
The study included depositors (account holders) and staff in Stanbic bank and Dfcu Bank. Other
stakeholders considered include ICGU staff
3.2.1 Sample size
A sample size of 40 respondents was selected and this was distributed as shown in the table
below.
32
Table 1: category of respondents
Category Respondents
Account holders(Stanbic) 15
Account holders (Dfcu) 15
Staff at ICGU 10
Total 40
3.2.2 Data sourcesBoth primary and secondary data sources were employed in the study process. Primary data was
from the respondents mentioned above and secondary data especially annual reports were from
ICGU library materials and institute of Bankers library.
3.3 Data collection method and instrumentsFor valid and reliable data, the researcher used the following instruments.
3.3.1 Questionnaire
This is one of the major instruments that were used in data collection. The questionnaires both
structured and unstructured were used. Perceptions and beliefs were sought to a five point Likert
scale, five being the highest.
33
3.3.2 Interview method
The researcher also used the interview method in addition to the questionnaires and this involved
questions clearly written on paper that were administered by the researcher to the respondents.
This was further used to affirm the information given in the questionnaire.
3.3.3 Observation method.
The researcher also used observation method as a data collecting instrument. Observation
involved analyzing responses and understanding the respondents view while answering the
research questions.
3.4 Data processing and analysisEditing and coding of the responses was done before processing and analysis of the data
collected
3.4.1 EditingThis was carried out to ensure that the data obtained from respondents is accurate, reliable and
consistent. This involved proper and careful scrutinizing of the questionnaires to check the
missing portions, omissions, incompleteness and inconsistence.
3.4.2 Data analysisThe data was subjected to various statistical analysis techniques including tabular presentation
and use of simple ratios and percentages. The data was analyzed and presented on the basis of
study objectives.
34
3.5 Constraints/limitationsA number of limitations were encountered; among these were the misconceptions people
normally have about people carrying out research that they have a lot of money to give out to
respondents.
i. Other informants fear to release information, which problem was solved by assuring the
respondents that the researcher is carrying out the research for purely academic purposes
and by assuring them, that the information given would be treated with confidentiality
and no body’s name would be mentioned during report writing.
ii. In some instances, the researcher had to interview respondents in acting positions, where
the targeted respondents could not be met all together.
iii. The funds were limited for the intended work. This limitation was tackled by seeking
financial assistance from relatives and friends.
iv. The study dealt with financial information which is not always released at ease but the
researcher convinced them that it’s for strictly academic purposes.
35
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF THE FINDINGS
4.0 IntroductionThis chapter presents the findings and discussions of data compiled from the study. It is divided
into three main sections, the first section deals with the general characteristics of the respondents
and the firms in the sample. The second section discuses the findings from the study and presents
results in form of frequency tables, graphs and charts. Section three analyses and discuses the
relationship between the various variables in the study.
4.1 Background characteristics of the respondents
Table 2: Respondents by sex distribution
Gender Frequency Percentage (%)
Male 31 77.5
Female 09 22.5
TOTAL 40 100
Source: Primary data.
A total of 40 questionnaires were sent to the respondents in selected commercial banks and staff
of ICGU. Out of 40 respondents 31 were males and 9 were females as shown in table 2. This
would imply that women are disinclined to keep their funds out of the commercial banking
institutions.
36
Table 3: The age of commercial bank clients
Range Frequency Percent (%)
under 20 years 5 12.5
21-30 years 15 37.5
31-40 years 2 5
41-50 years 10 25
Above 50 years 8 20
Total 40 100
Source: primary data
Table 3 shows that the majority of the clients fall in 41-50 years age bracket giving a total of 20
with a percentage of 40 percent. This could imply that this is the most economically active age
group that can follow the activities of banks especially on issues like transparency and
disclosure. Those below 41 years are 5 with a 10% and above 50 years are 5 with a 10%.Those
below 41 are in most cases unemployed and may therefore not require the services of
commercial banks
37
Table 4: Educational background
Academic qualification of the respondents is presented in table 4.3.
Options Frequency Percent (%)
Students 7 17.5
Post secondary level 11 27.5
University level 3 7.5
Professional level 10 25
Post graduate 9 22.5
40 100
Source: primary data
In table 4, the highest numbers of respondents have completed the post secondary level with the
percentage of 27.5 percent. This indicates that most of the respondents have attained
qualifications necessary to give a view that can be used in the study.
Table 5:Occupation of the respondents
Occupation Frequency Percent (%)
Manager 12 30
Business person 15 37.5
Civil servant 5 12.5
Teller 8 20
Total 40 100
Source: primary data
38
Most of the respondents in the above table are managers this takes a percentage of 56 percent
and tellers take a percentage of 38 percent. This indicates that the financial performance of these
banks can easily be attained
Figure 1: Marital Status of Clients
Separated (7.5%)
Divorced(5%)
Married
62.5%
Single
25.0%
39
4.2 Corporate Governance Indicators
Table 6: financial results through quarterly reports
Response Frequency Percent
Strongly agree 20 50.0
Agree 10 25.0
Not sure 5 12.5
D1sagree 2 5.0
Strongly disagree 3 7.5
Total 40 100.0
Source: primary data
50 percent of the respondents strongly agree that their banks disseminate financial results on a quarterly basis, and 25 percent agreed to the question. This implies that the performance of banks can be easily assessed continuously throughout the year.
Table 7: illustrating if banks release end of year reports
Responses Frequency Percent
Strongly agree 15 37.5
Agree 10 25.0
Not sure 5 12.5
Disagree 5 12.5
Strongly disagree 5 12.5
Total 40 100.0
Source: primary data
57.5% of the respondents at least agree that their banks release end of year reports. This implies that an overall evaluation and monitoring of performance of the banks is done in Stanbic and DFCU banks.
40
Table 8: showing whether banks release balance sheet
Response Frequency Percent
Strongly agree 20 50.0
Agree 12 30.0
Not sure 3 7.5
Disagree 5 12.5
Strongly disagree 0 0
Total 40 100.0
Source: primary data
Majority of the respondents agreed that their banks release balance sheets. No one was strongly disagreed to this question. This implies that the financial assets and liabilities aof the banks are used in monitoring performance of the banks.
Table 9: Illustrating if banks release cash flows
Responses Frequency Percent
Strongly agree 18 45.0
Agree 12 30.0
Not sure 5 12.5
Disagree 3 7.5
Strongly disagree 2 5.0
Total 40 100.0
Source: primary data
45% of the clients strongly agree and 30% agree. These two classes form the majority of respondents. This is a clear indication that cash flow statements are used by DFCU and Stanbic banks in analyzing bank performance
41
Table 10: showing if banks release of future plans and prospects
Responses Frequency Percent
Strongly agree 5 12.5
Agree 5 12.5
Not sure 5 12.5
Disagree 10 25.0
Strongly disagree 15 37.5
Total 40 100.0
Source: primary data
More than 60% of the respondents disagreed to this question which means that banks keep their future plans confidentially. This is because they do not want their plans to be taken up by their competitors.
Table 11: showing if banks release reports less than 30days
Response Frequency Percent
Strongly agree 5 12.5
Agree 10 25.0
Not sure 10 25.0
Disagree 10 25.0
Strongly disagree 5 12.5
Total 40 100.0
Source: primary data
A quarter of all respondents are not sure about this question, one quarter disagrees and one quarter agrees to this question. This implies that banks do not release reports befor the end of a month
42
Table 12: Illustrating whether bankers uses press conferences
Response Frequency Percent
Strongly agree 20 50.0
Agree 8 20.0
Not sure 2 5.0
Disagree 6 15.0
Strongly disagree 4 10.0
Total 40 100.0
Source: primary data
According to the table above, three thirds of the respondents agreed that banks use press conferences to disseminate their performance results. This can ensure tranperency and improve on the performance of banks
Table 13: showing if banks release the amount of common shareholder
Response Frequency Percent
Strongly agree 5 12.5
Agree 5 12.5
Not sure 10 25.0
Disagree 10 25.0
Strongly disagree 10 25.0
Total 40 100.0
Source: primary data
Half of all respondents did not agree to this question, yet 25% were not sure. This implies
that banks do not show amounts of capital contribution worth of common share holders
43
Table 14: showing if banks disclose the risk based capital ratio
Response Frequency Percent
Strongly agree 5 12.5
Agree 5 12.5
Not sure 5 12.5
Disagree 10 25.0
Strongly disagree 15 37.5
Total 40 100.0
Source: Primary data
More than 50% of respondents do not agree to this question. This implies that banks do not disclose their risk based capital ratio
Table 15: showing whether managers of the bank are compentent in doing their work
Response Frequency Percent
Strongly agree 15 37.5
Agree 10 25.0
Not sure 5 12.5
Disagree 8 20.0
Strongly disagree 2 5.0
Total 40 100.0
Source: primary data
A large proportion (60.5%) of respondents agreed that managers are competent in doing their work. This show the trust clients have in bank managers which is both a result and a product of good performance
44
4.3 The level of Transparency, Disclosure and Trust.
Figure 2: The level of Disclosure and performance
On the capital adequacy structure dimension it is indicated that banks on average do not provide
information on the amount of shareholders equity and total capital base. Still under the
dimension of disclosure the biggest percentage of customers indicated that they either are not
aware or have never received information concerning the total capital base. On capital adequacy
most customers indicated that they are not aware about the existence of various items under this
dimension such as risk based capital ratio. On risks majority of the respondents indicated that
they are not aware about the credit risks of commercial banks, this would imply that commercial
banks do not disclose such information to customers for instance out of 40 respondents 53
percent indicated that they are not sure whether commercial banks use credit scoring when
granting credit.
0
5
10
15
20
25
30
35
conference common shareholders
holders equity capital risks information
disclosure
45
Under asset quality majority indicated that they are not aware about asset quality of the
commercial banks which would imply that commercial banks do not disclose this information.
for instance out of 35 respondents 20 over 56 percent indicated that banks do not provide
information on off-balance sheet activities yet it is one of the most important items on the asset
quality.
Figure 3: The level of Trust and performance in banks
On average the commercial banks are not open to their clients on matters concerning the banks;
the majority indicated that managers do not tell them what is really going on in the bank with
over 39 percent and 23 percent not knowing anything.
On the dimension of competence 57.9 percent indicated that managers are not competent and
58.4 percent indicated that managers do not do well.
On honesty the majority of the clients totaling to 30 out of 40 respondents with over 54 percent
indicated that when managers tell you something you do not believe it which would mean that
0
5
10
15
20
25
30
35
40
45
honesty benovelence competence reliabilitytrust
46
clients do not trust commercial bank managers. On reliability 66.2 percent of the respondents
indicated that banks could not count on the customers to pick their bank statements and enquiry
of new charges which would imply that there is no trust between the bank managers and
customers.
Figure 4: The level of Transparency and performance in banks
Under financial transparency specifically in the release of financial periodic reports it’s shown
that majority of customers are not aware about the quarterly reports.
Under completeness most of the customers indicated that they were not sure on the complete sets of financial results for instance 88 percent of the respondents strongly disagreed on the completeness of banks balance sheets. Under the timeliness dimension majority of customers indicated that they were not sure of the date and time of release. On the other hand customers indicated that banks used faxed emailed news release only and this takes a percentage of 46.9 Percent.
0
5
10
15
20
25
30
35
40
45
50
periodic releases financial statements timeliness means of dissemination
transparency variables
Series1
47
4.4 The level of financial performanceThe dimensions of financial performance (capital adequacy, asset quality, earnings and liquidity)
were used to find the level of financial performance in selected commercial banks in Uganda.
Secondary data especially from commercial banks annual reports and prospectus were used to
extract the summary of the bank’s financial performance. The ratios, figures and charts are
presented as follows.
Figure 5: Performance ratios
Performance ratios 2002 2003
Stanbic Bank
ROE 25 35
CK/RWAs (%) 26 22
NPA/Total advances (%) 3.1 3.0
Specific Provisions/NPA (%) 16 26
ROA 3.3 4.7
Liquidity Assets/Total deposits (%) 118 103
Total advance/Total deposits (%) 47 59
DFCU BANK
CK/RWAs (%) 33 39
NPA/Total advances (%) 9.8 11.9
Specific Provisions/NPA (%) 67 65
ROA (%) 6.8 2.6
ROE 3 11
Liquidity Assets/Total deposits (%) 60 68
Total advances/Total deposits (%) 79 52
Source: Secondary data from commercial banks annual report 2003
48
Core capital (CK), Risky weighted assets (RWAs)
Nonperforming Assets (NPA), Return on Assets (ROA), Return on equity (ROE).
Capital adequacy which is measured by CK/RWAs ratio in most banks was above the central
banks, required level of 12%.Asset quality which is measured by NPA/Total advances and
specific provisions also indicated that most banks were above FIS (1993) requirement of
25%.Earnings which is measured by ROE and ROA ratios indicated that some banks earnings
performance were below zero. Liquidity which is measured by Liquidity Assets/Total deposits
and Total advances/Total deposits ratios indicated that in the over-all commercial banks were
highly liquid over the trend to 2003 which implied a weakness in financial performance of
commercial banks.
The presentation of the trends was intended to establish the level of financial performance (the
third research study objective) and for purposes of correlating the financial performance with
the independent variable (corporate governance).The data above can be depicted in the graphs
4.5 The relationship between corporate governance (transparency, disclosure and trust) and financial performance.To answer the second research question of the study the Pearson correlation test was used as
described below. To test the relationship between the major variables, Pearson’s coefficient was
used and the findings are presented under the following subsection.
49
Table 16: Relationship between corporate governance and financial performance
Corporate governance financial performance
Corporate governance
Correlation Coefficient 1.000 .665
Sig. (2-tailed) . .000
N 40 40
financial perfomance
Correlation Coefficient .665 1.000
Sig. (2-tailed) .000 .
N 40 40
** Correlation is significant at the .01 level (2-tailed).
Tables 16 illustrate the correlation between variables of corporate governance and general
financial performance. The spearman’s rank correlation coefficients is greater than 0.05 (0.665)
meaning that they are significant at 0.01 level of significance. It’s observed that the variables of
interest were positively and significantly related.
The results were consistent with the literature from which the variables are extracted.
Therefore there is a moderate positive relationship between financial transparency and financial
performance. Good corporate governance in form of transparency, trust and disclosure, leads to a
better financial performance of a bank.
50
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.0 INTRODUCTIONThis chapter presents a summary of findings observed and inferred from the data presented in
chapter four; the summary of findings is based on the literature available in chapter two. This
chapter also provides the conclusions and recommendations and areas of further study .the study
is divided into three sections, interpretation and discussion of results, conclusion and
recommendations.
5.2 Summary of findings.In this section the findings in Chapter four are interpreted and discussed in relation to chapter
two. The level of constructs of corporate governance; financial transparency, disclosure and trust
and financial performance and the relationship of these variables are discussed.
For bank disclosure the strongest dimension is credit risk which agrees with the new Basel
capital Accord (2003) and Lopez (2001) and for trust, reliability, openness and honesty
constitute the strongest dimensions to gauge trust in commercial banks which is in conformity
with the study undertaken by Butter and Cantrell (1984) and Wayne and Megan (2002).
5.3 The level of corporate governance; financial transparency, disclosure and trust.Corporate governance in this study was represented by three major constructs financial
transparency, disclosure and trust as reviewed in chapter two of this report. These constitute the
key pillars of corporate governance Kibirango (2002)
51
5.3.1 The level of financial transparencyThe financial transparency dimensions specified by Robert and Abbie (2003) were engaged in
order to single out the opinions and responses from the stakeholders and commercial banks
customers. the findings generally show that under financial transparency specifically in the
release of financial periodic reports the majority of customers 54.5 percent were not aware about
the quarterly reports. This is not consistent with research undertaken by Enoch et al (1987) and
Rosen (1998) who noted that bank transparency involves presenting public information. on the
other hand the information may be presented but is not understood by the customer as suggested
by the work of Beatty et al (1995) who argue that interpreting bank accounting data is not easy.
the findings still on transparency revealed that bank of Uganda receives quarterly reports and end
of year financial reports which is consistent with recommendations of the FASB 1984 that
emphasizes that bank information must be presented to individuals who have reasonable
understanding of business and economic activities and willing to study the information with
reasonable diligence. Under completeness most of the customers indicated that they were not
sure on the complete sets of financial results for instance 88 percent of all the respondents
strongly disagreed on the completeness of banks balance sheets.
Under the timeliness dimension of financial transparency, it was established that customers were
not sure of the date and time of release of financial reports. This infers that these commercial
banks might delay in presenting the financial statements in order to maneuver the financial
performance thus poor transparency.
The study undertaken by Ball (2001) noted that timely incorporation of economic losses in the
published financial statements increases the effectiveness of corporate governance
52
Findings of this study point out that, commercial banks do not exercise strong financial
transparency practices which may be explained by the dangers of transparency as advanced by
Hirshheifer (1971) and Marshal (1974).these scholars identify potential adverse consequences of
public information. They argue that early release of public information can destroy risk-sharing
opportunities.
5.3.2 Level of disclosureOn the capital structure dimension it was established that banks on average do not provide
information on the amount of shareholders equity (54.3%) and total capital base (41.3%).
Under this dimension of disclosure the biggest percentage of customers indicated that they are
either not aware or have never received information concerning the capital base. These banks
failure to effectively present items like capital and preference shares discourages the ability of
customers and other stakeholders to assess the banks financial performance.
On capital adequacy it was discovered that customers are not aware of the existence of various
items like risk based capital ratio. similarly they are not aware of credit risk and credit scoring,
moreover it was recognized that most customers were not sure of any asset quality amounts
disclosed for instance out of 40 respondents 35 indicated that commercial banks do not provide
information on off-balance sheet activities yet its on the asset quality dimension as that if not
checked may lead to other bank failures as observed as one of the key aspects that prompted the
closure of Greenland Bank ltd which absolutely did not reveal over ug.shs 37 bn worth of
investments BOU press release (1999).
5.3.3 Level of trustOn average the commercial banks are open to their clients on matters concerning the banks
whereby the majority indicated that mangers do no tell them what is really going on in the bank.
53
Over 62% were not sure and affirmed this statement. The lack of openness in these commercial
banks may raise distrust as noted by Mishra (1996) who noted that openness signals reciprocal
trust a confidence that neither the information nor the individual will be exploited and recipients
can feel the confidence.
On competence it was found out that 57.9 percent of the mangers are not competent and 58.4%
indicated that mangers do not do well their jobs well. On honesty from the findings majority of
the clients totaling to 54 percent indicated that when managers tell something you can believe it.
On reliability 66.2 percent indicated that banks could not count on the customers to pick their
bank statements and enquiry of new charges which would imply that the banks do not trust their
clients. it should therefore be noted that reliability combines a sense of confidence hence one
need not neither invest energy worrying about whether the person will come through nor makes
alternative mental provisions. Commercial banks in Uganda should enforce this interdependence
in order to build trust.
5.4 Level of financial performance –objective twoSecondary data especially from respective commercial banks annual reports from 2001 were
used to extract the summary of the bank’s financial performance based on capital adequacy, asset
quality. Earnings and liquidity as recommended by BOU for measuring financial performance
(Bou 2002).the ratios. Graphs and charts were presented in chapter four.
Capital adequacy which is measured by CK/RWAs ratio in most banks w as above the central
banks required level of 12%.asset quality which was measured by NPA/Total advances and
specific provisions also indicated that most banks were above the requirement of 25%.earnings
which are measured by ROE and ROA ratios indicated that some banks earnings performance
54
was below zero. Liquidity which is measured by Liquidity assets/Total deposits and Total
advances/Total deposits ratios indicated that in the over-all commercial banks were highly liquid.
5.5 Relationship between corporate governance and financial performance.Using spearman’s correlation it was found that out that there is a moderate relationship between
corporate governance and financial performance for example capital adequacy, earnings, assets
showed moderate correlation with openness, competence, honesty and kindness. This is also in
agreement with the McKinsey quarterly survey (2000) by the Kuala Lumpur stock exchange and
accounting firm PWC that noted that there is link between corporate governance and financial
performance due to investor’s willingness to inject more funds in a well-governed firm.
5.6 ConclusionsA number of conclusions emerge from the amalgamation of the data and the literature on
corporate governance and financial performance of commercial banks in Uganda. first the study
ha revealed that the strongest dimensions of each construct under corporate governance for
instance the strongest dimension of financial transparency is completeness of financial results.
this concurs with the study undertaken by Ari (2000) and Robert and Abbie (2003).second the
study found that commercial banks whether local or international score poorly on utilizing
corporate governance principles when dealing with bank customers and on the other hand the
linkage between the banks and other stakeholders like ICGU and BOU seems to be transparent
with moderate disclosure and high level of trust.
The study also revealed that corporate governance (transparency, trust and disclosure) predicts
34.5% of the variance in the general financial performance of commercial banks in Uganda and
that the significant contributor to financial performance is openness and reliability.
55
5.7 RecommendationsCommercial banks need to strengthen the corporate governance principles especially on
dimensions of timelines in delivering the financial reports to BOU and presenting the details of
loan advances.
Commercial banks have got to establish mechanisms to enforce proper governance practices like
disclosure and transparency. These will automatically build bond of trust with these customers
who in turn in are likely to turn into shareholders when the respective commercial bank is listed
both on the local capital market like USE and on international capital markets like the New York
stock exchange (NYSE).
Commercial banks operating in Uganda like any form of business organization into days
dynamic financial landscape should focus on proper governance practices and principles not only
to boost and enhance their financial performances but as path to gaining a better public image
thus recognized by the society in which the bank operates as socially receptive commercial bank
which may cement the banks operations and survival.
5.8 Areas for further researchI recommend further studies in the following areas:
Accountability and financial performance of the financial sector in Uganda.
Corporate governance of public listed companies in Uganda.
Improving corporate disclosure process in commercial banks in Uganda.
56
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58
APPENDIX
MAKERERE UNIVERSITY
Dear sir/Madam,
Iam carrying out a study about the relationship between corporate governance and financial
performance in selected commercial banks in Uganda. The purpose of this research is purely
academic and aimed at fulfilling one of the requirements for the award of a degree of commerce
of Makerere University Kampala.
I humbly request you to spare a few minutes to answer the following questions. Your responses
will be treated with utmost confidentiality.
59
QUESTINAIRE
SECTION A
PERSONAL INFORMATION-BIO DATA
Please tick (√) in the appropriate box or write in the line space provided.
1) Please indicate the age group you belong.
Under 20
years
21-30 years 31-40 41-50 Above
2) Gender Male Female
3) Educational Background
Student Post secondary
level
University level Professional
level
Post graduate
Other (please specify)………………………………………………………………
4) Occupation
Student Business person Civil servant House wife Engineer
Other (please specify)………………………………………………………….
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SECTION B (FINANCIAL PERFORMANCE)
Rank the following items regarding your bank; choose (√) only one option that suits your level of
agreement or disagreement.
1) Bank releases financial results through quarterly reports.
Strongly agree agree not sure disagree strongly disagree
2) Bank releases semi-annually reports.
Strongly agree Agree not sure disagree strongly disagree
3) Bank releases end of year financial reports.
Strongly agree Agree not sure disagree strongly disagree
4) My banker releases information regarding the following reports.
Strongly
agree
agree Not
sure
disagree Strongly
disagree
Bank releases balance sheets
Bank releases profit and loss account
Bank releases cash flow statements
Bank releases segmental information
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Bank releases details of borrowings
Bank releases details of risks
Bank releases of future plans and prospects
5) Timeliness of release of results.
Strongly
agree
agree Not
sure
disagree Strongly
disagree
Bank releases reports less than 30 days post
half year end
Bank releases reports 30-59 days
Bank releases reports 60 or more days
Time of day
Bank releases reports before 3 p.m
Bank releases reports after 3 p.m
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5) Means of dissemination
Strongly
agree
agree Not
sure
disagree Strongly
disagree
My banker uses press conferences with media
Banker uses fax/email news releases
Others
i. Capital structure
Strongly
agree
agree Not
sure
disagree Strongly
disagree
Bank releases the amount of common shareholders
equity
Bank releases the total capital base
Bank releases the amount of preference shares
ii. Capital adequacy
Strongly
agree
agree Not
sure
disagree Strongly
disagree
Bank discloses whether it has an internal process for
assessing capital adequacy and for setting appropriate
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levels of capital
Bank discloses the risk based capital ratio
iii. Risks
Strongly
agree
agree Not
sure
disagree Strongly
disagree
Bank discloses whether credit scoring is used when
granting credit
Bank provides qualitative measures of interest
Discloses any other information about risks.
iv. Asset quality
Strongly
agree
agree Not
sure
disagree Strongly
disagree
Bank provides information about off balance sheet
activities
Bank uses collateral, covenants, credit insurance to
reduce risk exposure.
SECTION C (CORPORATE GOVERNANCE)
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Strongly
agree
agree Not
sure
disagree Strongly
disagree
Openness
Bank managers do not tell clients what is really going on
in the bank
The MD/CEO openly shares personal information with
managers
Competence
Managers in the bank are competent in doing their work
Bank believes that its clients are competent in bank
services
Benevolence/kindness
The MD does not show concern for managers
Managers in this bank typically look for each other
Honesty
Managers have faith in the integrity of the MD
MD keeps his/her word
When managers tell you something you can believe it.
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Reliability
The MD in this bank typically acts in the best interests of
bank mangers
Mangers in this bank can rely on the MD
Customers are reliable.
Rank the following items regarding your banks financial performance.
Performance indicator Strongly agree Agree Not sure disagree Strongly
disagree
capitalization
Strong capital level
The bank is Satisfactory
Deficient capital level
Asset quality
Banks have strong asset
quality
Satisfactory asset quality
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Deficient liquidity
Earnings
Banks have Strong earnings
Satisfactory earnings
Deficient liquidity
Liquidity
Strong liquidity
Satisfactory liquidity
There is Deficient liquidity in
the bank
Thank you for your time and kindheartedness in filling this questionnaire.
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