i

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

ii

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

iii

DEDICATION

This work is dedicated to all those who

treasure Transparency, Trust and Disclosure

In their financial activities.

iv

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.

v

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.

vi

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

vii

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

viii

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

1

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).

2

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

3

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.

4

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

5

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.

6

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

7

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;

8

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

9

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).

10

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).

11

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-

12

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

13

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.

15

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

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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

Economics 28pp 1-25.

Amihud.Y. & Mendelson.H. (2000) The liquidity Route to a lower cost of capital

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51

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