FINANCIAL PERFORMANCE ANDCUSTOMER SATISFACTION;...

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

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APPROVAL

This research report done by Mumpe Drakeson has been under my supervision and is ready for

submission.

Sign------------------------ Date---------------------------

MR NUWAGABA GEOFFREY

SUPERVISOR

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DEDICATIONI dedicate this work to my mother Ms Adrine Tusinguire for her hard work and endless effort

towards my education.

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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

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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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http://en.wikipedia.org/wiki/Corporate_governance

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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http://www.entrepreneur.com/tradejournals/article/.html

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.

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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,

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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

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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.

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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 nonperforming 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


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


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


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


Agree 10 25.0

Not sure 5 12.5

Disagree 5 12.5


Total 40 100.0


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



Agree 12 30.0

Not sure 3 7.5

Disagree 5 12.5

Strongly disagree 0 0

Total 40 100.0


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



Agree 12 30.0

Not sure 5 12.5

Disagree 3 7.5


Total 40 100.0


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



Agree 5 12.5

Not sure 5 12.5

Disagree 10 25.0


Total 40 100.0


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



Agree 10 25.0

Not sure 10 25.0

Disagree 10 25.0


Total 40 100.0


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



Agree 8 20.0

Not sure 2 5.0

Disagree 6 15.0


Total 40 100.0


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



Agree 5 12.5

Not sure 10 25.0

Disagree 10 25.0


Total 40 100.0


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



Agree 5 12.5

Not sure 5 12.5

Disagree 10 25.0


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



Agree 10 25.0

Not sure 5 12.5

Disagree 8 20.0


Total 40 100.0


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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Jansen, (eds.) The Internationalization of Financial Services: Issues and Lessons for Developing

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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)………………………………………………………….

60

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

63

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)

64

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.

65

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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Date post:	31-Mar-2020
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