i
MAKERERE UNIVERSITY
CORPORATE GOVERNANCE AND PERFORMANCE OF
COMMERCIAL BANKS IN UGANDA
CASE STUDY: EQUITY BANK
PRESENTED BY
WESONGA KULUNDU WYCKLIPH
07/K/2857/EXT
BACHELOR OF COMMERCE (FINANCE OPTION)
A RESEARCH REPORT SUBMITED TO MAKERERE UNIVERSITY IN
PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF
BACHELOR OF COMMERCE DEGREE OF MAKERERE UNIVERSITY.
JUNE 2011
MAKERERE
MAKERERE
UNIVERSITY
ii
DECLARATION
I Wesonga Kulundu Wyckliph declare that this report is my original work
and has not been published and/or submitted for any other degree to
any university before.
STUDENT’S
NAME:……………………………………………………………………………
SIGNED:…………………………………………………………………………
DATE:……………………………………………………………………………
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APPROVAL
I certify that Wesonga Kulundu Wyckliph has carried out the study and
wrote this report under my supervision.
SUPERVISOR: MR. MUSIME GRACE
SIGNED………………………………….
DATE……………………………………..
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DEDICATION
I dedicate this work to my late grandmother, Mrs.Hellen Obwoko
Kulundu, to my father Mr. Daniel Wesonga Kulundu, to my mother Mrs.
Evelyn Nanzala,and to my brothers Vincent, Erick, Reuben and Wilson,
for without them acting as stimulus all through my education, I would
not have reached this far.
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ACKNOWLEDGEMENT
Foremost my gratitude and thanks go to the Almighty God for keeping
me alive and well throughout my studies.
I would also like to thank my supervisor Mr. Musime Grace for his
professional guidance all through this study. He did not only provide the
direction of carrying out this study but also provided criticisms,
corrections and mode of analysis. The integrity and quality of this work is
a result of his proper guidance.
I would like also to thank the management of Equity bank for all the
assistance and valuable information availed to me to make this study a
success.
Finally, I also extend my sincere thanks to my friends and colleagues,
especially Lalaka Julius, Agoloki Gedeon and Mogaga Tom for their Moral
and material support they provided to me when I was carrying out this
study. May God Almighty bless them abundantly.
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ABSTRACT
The study examined the relationship between corporate governance and
performance of the commercial banks in Uganda where Equity Bank was
used as a case study. The major focus was to find out whether the
commercial banks’ declining performance was as a result of poor
corporate governance practices.
In order to carry out this study successfully, three major objectives were
used which included;
To establish the level of corporate governance within the Equity
Bank.
To investigate the financial performance of Equity Bank.
To establish the relationship between corporate governance and
financial performance.
It was a combination of cross sectional and analytical research and
findings were presented according to the respective research objectives
posed for the study. The presentation of the findings was simplified by
illustrations using tables from questions administered.
The study found out that there was poor application of corporate
governance principles in the bank. As a result, the performance in terms
of profitability was found to be low.
The results reflected that there was a strong relationship between
corporate governance and performance of the bank. It was therefore
recommended that the bank should embrace the key corporate
governance principles such as accountability, transparency, disclosure
and trust in order to improve on the performance.
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LIST OF ABREVIATIONS
ACCA: Association of certified chartered accountants
BOU: Bank of Uganda
BPS: Bureau of product standards
CAMEL: Capital Adequacy, Asset quality, Management, Earnings, Liquidity
CMA: Capital market authority
FIS: Financial institution statute
GBL: Greenland bank LMT
IAS: International standards organizations network
ICB: International credit bank
IMF: International monetary fund
ROA: Return on assets
ROE: Return on equity
SPSS: Statistical package for social sciences
PSCGT: Private sector corporate governance trust
TBT: Technical barriers to trade
WTO: World trade organization
FASB: Financial accounting standards
ICGU: Institute of corporate governance of Uganda.
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TABLE OF CONTENTS
DECLARATION ............................................................................................................ii
APPROVAL ................................................................................................................. iii
DEDICATION ............................................................................................................... iv
ACKNOWLEDGEMENT ............................................................................................... v
ABSTRACT ................................................................................................................... vi
LIST OF ABREVIATIONS ....................................................................................... vii
TABLE OF CONTENTS ..........................................................................................viii
LIST OF TABLES AND CHARTS ................................................................................ xi
CHAPTER ONE .......................................................................................................... 1
1.1 Introduction and background of the study ................................................. 1
1.2 Problem statement ............................................................................................. 2
1.3 Purpose of the study .......................................................................................... 3
1.4 Research objectives ............................................................................................ 3
1.5 Research Questions ........................................................................................... 3
1.6 Scope of the study .............................................................................................. 4
1.6.1 Geographical scope ........................................................................................ 4
1.6.2 Subject scope ................................................................................................... 4
1.6.3 Time scope ........................................................................................................ 4
1.7 Significance of the study .................................................................................. 4
CHAPTER TWO ......................................................................................................... 5
LITERATURE REVIEW ............................................................................................. 5
2.0 Introduction ......................................................................................................... 5
2.1 Corporate Governance ...................................................................................... 5
2.1.1 The attributes of corporate governance .................................................... 6
2.2 TRANSPARENCY ................................................................................................. 7
2.2.1 Transparency in the bank. ........................................................................... 7
2.2.2 Transparency and corporate governance ................................................. 8
2.2.3 Dangers of transparency............................................................................... 8
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2.3 DISCLOSURE. ..................................................................................................... 8
2.3.1 Voluntary disclosure ..................................................................... 9
2.3.2 Dangers of voluntary disclosure .................................................... 9
2.3.4 Financial Disclosure ..................................................................... 9
2.3.5 Discipline and public Market Disclosure. .................................... 10
2.4 TRUST ........................................................................................... 10
2.4.1 Facets of Trust ........................................................................... 10
2.5 ACCOUNTABILITY ......................................................................... 12
2.6 Financial performance and Financial Institutions. ......................... 12
2.6.1 Capital adequacy: ....................................................................... 12
2.6.2 Asset quality: .............................................................................. 13
2.6.3 Earnings: ................................................................................... 13
2.6.4 Bank management: .................................................................... 14
2.6.5 Liquidity: .................................................................................... 15
2.7 RELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND
FINANCIAL PERFORMANCE. ............................................................... 15
2.8 Conclusion .................................................................................... 18
CHAPTER THREE .............................................................................. 19
METHODOLOGY ................................................................................. 19
3.0 Introduction .................................................................................. 19
3.1 RESEARCH DESIGN...................................................................... 19
3.2 SAMPLING AND SAMPLING PROCEDURE ..................................... 19
3.2.1 Study population ........................................................................ 19
3.2.2 Sample size ................................................................................ 19
3.2.3 Sampling method ....................................................................... 19
3.3.1 Sources of data ........................................................................... 20
3.3.2 Primary sources ......................................................................... 20
3.3.3 Secondary sources ...................................................................... 20
3.4 DATA COLLECTION INSTRUMENTS .............................................. 20
3.4.1 Questionnaire ............................................................................. 20
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3.4.2 Interviews ................................................................................... 20
3.5 DATA PROCESSING, ANALYSIS AND PRECENTATION................... 21
3.6 PROBLEMS ENCOUNTERED ......................................................... 21
CHAPTER FOUR ................................................................................. 22
PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS ..... 22
4.0 Introduction .................................................................................. 22
4.1 Characteristics of the respondents ................................................. 22
4.3 FINDINGS ON CORPORATE GOVERNANCE................................... 25
4.4 FINDINGS ON PERFORMANCE...................................................... 29
4.5 FINDINGS ON THE RELATIONSHIP BETWEEN CORPORATE
GOVERNANCE AND PERFORMANCE .................................................. 32
CHAPTER FIVE .................................................................................. 37
DISCUSSIONS, CONCLUSSIONS AND RECOMMENDATIONS .............. 37
5.1 INTRODUCTION ............................................................................ 37
5.2 Summary of the major findings ...................................................... 37
5.2.1 Findings on corporate governance............................................... 37
5.2.2 Findings on financial performance. ............................................. 37
5.2.3. The relationship between corporate governance and performance
of the bank .......................................................................................... 38
5.3 Conclusion. ................................................................................... 38
5.4 Recommendations ......................................................................... 39
5.5 Areas for further study .................................................................. 40
QUESTIONNAIRE: ............................................................................... 41
LIST OF REFERENCES: ...................................................................... 49
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LIST OF TABLES AND CHARTS
PAGE
Table 4.2.1: Showing findings on gender of the respondents...........................23
Table 4.2.2: Showing findings on age group of respondents..............................24
Table 4.2.3: Showing finding on the occupation of the respondents...................25
Table 4.2.4: Showing findings on the level of education.....................................25 Table 4.3.1: Showing findings on whether the bank releases annual financial reports on time.....................................................................................................26
Table 4.3.2: Showing findings on whether the bank releases its future plans and prospects to the public………………………………………………………………...27
Table 4.3.4 Showing findings on whether the bank discloses its total capital base.....................................................................................................................27
Table 4.3.5 Findings on whether the bank discloses its accounting and presentation policies............................................................................................28
Table 4.3.6: Showing findings on whether the customers trust the information they recieve from the bank...................................................................................29
Table 4.3.7 Showing findings on whether the bank has good accountability system.................................................................................................................29
Table 4.4.1: Showing findings on whether the bank experiences high profit margins annually..................................................................................................29
Table 4.4.2: Showings findings on whether the bank experiences high customer turnover annually………………………………………………………………………30
Table 4.4.3: Showing findings on whether the bank has strong capital base…..................................................................................................................31
Table 4.4.4: Showing findings on whether the bank meets its daily liquidity obligations………………………………………………………………………………31
Table 4.5.1 Showing findings on whether the proper management system has assisted in good performance of the bank………………………………………….32
Table 4.5.2: Showing findings on whether the bank transparency contributes to good performance of the bank…………………………………………………….…33
Table 4.5.3: Showing findings on whether poor management policies have had a negative impact on bank’s performance…………………………………………….34
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Table 4.5.4: Showing findings on whether the customers’ trust and confidence with the bank increase its profit levels………………………………………………34
Table 4.5.5: Showing responses on whether bank’s accountability system affects the performance of the bank …………………………………………………………36
Table 4.6.1: Relationship between corporate governance performance............37
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CHAPTER ONE
1.1 Introduction and background of the study
Corporate government is a term that broadly refers to the rules,
processes or laws by which businesses are operated, regulated and
controlled. The term can also refer to internal factors defined by offices,
stakeholders or constitution of a corporation, as well as to external forces
such as consumer groups, clients and government regulations. Corporate
governance is about promoting corporate fairness, transparency and
accountability (Financial times, 1999).
In Uganda the factors responsible for poor corporate performance
especially in Banks emanate from lack of professionalism in the peoples
approaches evidenced by lack of transparency, accountability and poor
ethical conduct (Kibirango, 1999)
Performance is the accomplishment of a given task measured against
present known standards of accuracy, completeness, cost and speed. It
can also be referred to as the outcomes from a business entity. This is
normally in terms of profitability, growth of the firm, turnover and
development. But in most enterprises is normally measured in the terms
of profitability (Pandey,1995).Profit is the different between sales and
total costs incurred by a firm (Decoster,D.T and Shaffer,1976).The
analyst or investor may wish to look deeper into financial statement and
seek out margin growth rates or any declining debt.
Corporate governance aids in securing confidence not only for
stakeholders but also for other stakeholders such as customers,
suppliers, employees and government in ensuring that firms are
accountable for their actions (Vinten, 1998). According to Dallas
Business Journal published on January 26th 2010, Equity Bank’s
business model has attracted both local and international recognition.
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Because of its good leadership, the equity Bank has undergone a
dramatic transformation from a loss making micro-finance lender to a
fully fledged and publicity listed commercial Bank with operations in
Kenya, Uganda and Sudan (Dallas Business Journal, 26th Jan 2010). As
a result of good stewardship, equity bank posted a 53% profit before tax
in its third quarter results released on 26th Jan, 2010. The achievements
by the equity Bank are attributed to effective corporate governance
system (Stephen S. Colon and Gavin Boyd, 2000).
However in the recent times, Equity Bank has faced some performance
challenge. Equity Bank is a relatively young dynamic and fast growing
indigenous microfinance institution, its main challenges are
management of growth, institution capacity building and capital needs to
support outreach (Dallas business journal, 2010). Equity Bank had a net
loss after taxes of $ 776,000 and in 2009; the bank had a $ 3.7 million
net loss (Kate Mckee, June, 2010). Commercial banks are greatly
influenced by their management thus; “The ultimate causes of individual
bank failure stem from those very failed banks themselves” (Kane et al,
1996).
1.2 Problem statement
All commercial banks in the banking sector operate to achieve
profitability, liquidity and solvency. To achieve this, there must be an
efficient asset- liability management (Thomas et al, 1982). The poor
financial performance of the equity Bank experienced in 2010 can be
attributed to inefficiency in its management system (Kate Mckee, 2010).
Insufficient financial disclosure, lack of transparency resulting from
gross management and dubious accounting actions, and insufficient
qualitative disclosure of the bank’s management policies are detrimental
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to interests of banks’ stakeholders especially depositors (Dallas Business
journal,2010). As a result, the banks’ capital assets and earnings values
are affected and hence the performance is questionable. For instance,
high financial net loss of $3.7 Million registered by the bank in 2010 is
quite alarming (Kate McKee, 2010).
Therefore the researcher feels that there is a need to investigate the
corporate governance of the commercial banks in order to prevent their
performance decline.
1.3 Purpose of the study
The purpose of the study was to examine the relationship between
corporate governance and performance of Commercial Banks using
Equity Bank as a case study.
1.4 Research objectives
To establish the level of corporate governance within the Equity
Bank.
To investigate the financial performance of the Equity Bank.
To establish the relationship between corporate governance and
financial performance.
1.5 Research Questions
What is the level of corporate governance within the Equity Bank?
What is the Financial Performance of Equity Bank in Uganda?
What is the relationship between corporate governance and
financial performance?
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1.6 Scope of the study
1.6.1 Geographical scope
This study is going to be carried out in Kampala District at Equity Bank
head office.
1.6.2 Subject scope
The research will be limited to corporate governance as an independent
variable and performance of commercial banks as a dependent variable
using Equity Bank as case study.
1.6.3 Time scope
The study will cover a period between 2008 and 2010 of Equity Bank
operations.
1.7 Significance of the study
The findings are intended to equip the researcher on various
corporate governance levels within the commercial banks and their
impact on the banks’ performance.
The findings will also assist the companies especially the
Commercial Banks in instituting better corporate governance
principles.
The findings will also add on the volume of data already collected for future use
by other researchers, learners, policy makers, international bodies such as IMF
and World Bank, Commercial banks and other parties that may pick interest in the
matter.
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CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
Under this chapter related literature to study is reviewed mainly focusing
on the key corporate governance pillars-transparency, disclosure and
trust. Financial performance especially relating to commercial banks is
also reviewed based on the performance dimensions including capital
adequacy, asset quality, earnings and liquidity. The literature in this
chapter is divided into three key sections; first one is corporate
governance, second is financial performance, and the last is relationship
of corporate governance and financial performance.
2.1 Corporate Governance
Corporate governance refers to the manner in which the power of a
corporate is exercised in the stewardship of corporation's total portfolio of
assets and resources with the objectives of maintaining and increasing
shareholder value with satisfaction of other stakeholders in the context
of its corporate mission(PSCGT report,1999).The committee on the
financial aspects or corporate governance( the Cadbury committee)
defines corporate governance as the system by which companies are
directed and controlled.
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 the strong link between corporate
governance and stakeholder confidence (Mark, 2000).
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2.1.1 The attributes of corporate governance
Corporate governance is important because it promotes good leadership
with 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 report, 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 report, 1999) on which good governance are
formed include:
An effective body responsible for governance separate and
independent of management to promote
tranparency,accountability,probity and integrity and timely
disclosure of information relating to all economic and other
activities of the corporation.
There must be an all-inclusive approach to governance that
recognizes and protects the rights of members and all
stakeholders-internal and external.
The institution must be governed and managed in accordance with
the mandate granted to it by its founders and society and take
seriously its wider responsibilities to enhance sustainability and
prosperity.
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
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and fairness, responsibility and transparency. According to Kibirango
(2002),chairman of CMA of Uganda, concepts of Transparency,
Disclosure and Trust construe the principle of corporate citizenship,
which results from sound corporate governance (Kibirango,2002).
2.2 TRANSPARENCY
Transparency is integral to corporate governance. Higher transparency
reduces the information asymmetry between a firm's management and
financial stake holder’s (equity and bondholders), mitigating the agency
problem in corporate governance (Sandeep et al,2002).
Financial statements are transparent if they make apparent the
underlying economics of the business and it transactions. Thus
transparency involves not only concepts related to reliability (i.e.
representational, faithfulness and neutrality), but also understandability.
To be transparent, financial statements must accurately represent the
underlying economics in an unbiased manner (FASB report, 1984).
2.2.1 Transparency in the bank.
The concept of Bank transparency refers to the quality and quantity of
public information on a bank’s risk profile and the timing of its
disclosure, including the bank’s past and current decisions and actions
as well as its 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.17997 and
Rosengren, 1998)
Weak transparency makes banks’ assets risks opaque. Mayes (1997,
1998) and Mayes and Vesala (1998) regard transparency as an
instrument for improving both domestic and international banking
supervision.
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2.2.2 Transparency and corporate governance
Corporate transparency is defined as the widespread availability of
relevant and reliable information about the periodic performance,
financial position, investment opportunities, governance value and risk of
publicly traded firms, (Vinten, 1998)
A corporation can be viewed as a nexus of contracts designed to
minimize contracting costs Parties contracting with firms desire
information both about the firm’s ability to satisfy the terms of contracts
and the firm’s ultimate compliance with its contractual obligations, (Peter
et al, 2003).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 to the environment more generally by
disciplining the un-audited disclosure of managers and supplying into
the information processing activities of outsiders.
2.2.3 Dangers of transparency
While we focus on beneficial effects, there are also 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). Information
release can complicate contract negotiation and impose agency costs if
parties cannot commit to renegotiation contracts (Laffont and Tirole,
1990; Demski and Frimor, 1999). Public release of proprietary
information can distort investment behavior (Darrough, 1993).
2.3 DISCLOSURE.
Given the corporate scandals (U.S Based; Enron; WorldCom... (Heidi and
M Arleen, (2003) and Uganda based; Greenland Bank LTD,
ICB…(Japheth,2001)), restoring public trust is at the top of the agenda of
9
today’s business leaders. Greater information provision (disclosure) on
the company’s capital and central 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, 1996; Beasley et al, 2000).
2.3.1 Voluntary disclosure
Information disclosure to capital markets is based on and evolves around
accounting based financial information. However, evidence indicates that
the usefulness of financial information has been deteriorating during the
past 20 years (Lev, 1989; Lev and Zrowin,1998). Managers can improve
their communication with investors by developing disclosure strategies
(Healy and Palepu, 1993). Financial reporting is a potentially useful
mechanism for mangers to communicate with outside investors. Healy
and Palepu suggest two potential mechanisms available for managers for
improving their credibility of their financial reporting: Voluntary
Disclosure and signaling with finance polices. According to Shelly and
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 therefore should be
seen as a fundamental component of corporate disclosure.”
2.3.2 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 Marina,(1995);Healy and Palepu,(1993))
2.3.4 Financial Disclosure
Banks must provide a description of their internal rating systems and
the amount of credit exposure in each rating category. Banks must also
report historical results regarding actual losses (Lopez,2001).For market
10
risk, banks provide a general qualitative disclosure of their management
policies, the statistical methods used in their model validation and
stress-testing procedures.
Banks must also disclose various elements of their operational risk
exposures. Operational risk is commonly defined as the risk of monetary
losses resulting from inadequate or failed processes, people, and systems
or from external events.
2.3.5 Discipline and public Market Disclosure.
In order for markets discipline of banking institutions to be effective,
banks must be sufficiently transparent; that is banks must provide a
sufficient amount of accurate and timely information regarding their
conditions and operations to the public. Improved public disclosures of
such information lead to increased transparency and should lead directly
to more effective market discipline (Paul,2001).
In Uganda, most commercial banks reports are presented annually and
are not freely available to the public. However, the Bank of Uganda has
instructed commercial banks operating in the country to provide a
detailed breakdown of the loan portfolios in a move to enforce disclosure
regarding the banking business-lending (BOU report, 2004).
2.4 TRUST
Trust involves taking risk and making oneself vulnerable to another with
confidence that the other will act in ways that are not detrimental to the
trusting party (Wayne and Megan,2002).
2.4.1 Facets of Trust
There are at least five facets of trust which include:
Benevolence: perhaps the most common facet of trust is a sense of
benevolence-confidence that one’s well being or something one care
about will be protected and not harmed by the trusted party (Baier,
11
1986).
Trust is the assurance that others will not exploit one’s vulnerability or
take advantage even when the opportunity is available (Cumming and
Bromily, 1996). Benevolence is an important element of trust
relationships because a mutual attitude of goodwill is so important in
interpersonal relationships.
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 and Cantrell, 1984; Hosmer,1995). Reliability combines a sense
of predictability with benevolence. Reliability implies there is a sense of
confidence that individual needs will be met in positive way.
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 be trusted
(Baier, 1986; Butter and Cantrell, 1984; Mishra, 1986).
Competence is the ability to perform as expected and according to
standards appropriate to task at hand. Many organizational tasks rely on
competence. Depositors are dependent on the competence of these bank
staff. Lack of competence is not a breach of trust because the person is
expected to make some mistakes (Solomon and Flores, 2001). In such a
case failure should not be confused with betrayal because the person did
not purport to have the requisite skill.
Honesty: Honesty is the person’s character, integrity and authenticity. A
correspondence between a person’s statement and deeds demonstrates
integrity. Moreover acceptance of responsibility for one’s actions and not
distorting the truth in order to shift blame to another exemplifies
authenticity (Tschnnen-Moran.1998). Honesty is assumed when we think
of what is entailed in trust (Wayne and Megan 2002).
12
Openness: openness is the extend to which relevant information is
shared. It is a process by which individuals make themselves vulnerable
to others. the information shared may be strictly about organizational
matters or it is a giving of oneself (Butter and Cntrell,1984;
Mishra,1986). Such openness signals reciprocal trust a confidence that
neither the information nor the individual will be exploited and recipients
can fell the same confidence in return.
2.5 ACCOUNTABILITY
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). Accountability forms the
basis of the trust in organizations. Therefore when accountability
relationships are undermined then our trust in organizations is
damaged.
2.6 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
report, 2002). External factors such deregulation, lack of information
among bank customers, homogeneity of the bank business, do cause
bank failure. Some useful measures of financial performance are coined
into what is referred to as CAMEL. The acronym “CAMEL” refers to five
components of a bank’s conditions that are assessed: Capital adequacy,
Asset quality, Management, Earnings and Liquidity (Jose, 1999).
2.6.1 Capital adequacy:
Capital adequacy 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
13
Settlements. The 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 (BOU report, 2002).
2.6.2 Asset quality:
The solvency of financial institutions typically is at risk when their assets
become impaired. It is therefore important for commercial banks to
monitor indicators of quality of their assets in terms of overexposure to
specific risk trends in non-performing loans, and the health and
profitability of bank borrowers especially the corporate sector.
2.6.3 Earnings:
The continued viability of a bank depends on its ability to earn an
adequate return on its assets and capital. Good earnings and
performance enables a bank to fund its expansion, remain competitive in
the market and increase its capital (BOU report, 2002). The evaluation of
earnings performance relies heavily upon comparisons of key profitability
measure (such as return on assets and return on equity) to industry
benchmark and peer group norms (Federal Reserve Bank, 2002).
According to Kagalwala and Ram, (2003), many banks throughout the
world have disappeared due to weakness in broad parameter of risk
management functions. Banks that must survive need;
Higher return on Assets (ROA). This is a net after tax profit
divided by total assets. It is a critical indicator of profitability.
Companies which use their assets efficiently will tend to shoe a
ratio higher than the industry norm. ROA=Net income/Total
Assets.
Better return on Net after worth/equity. (ROE). It is the bottom
line measure for the shareholders measuring the profits earned for
each dollar invested in the firm’s stock. ROE=Net
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income/shareholder’s Equity.
Sound capital base i.e. The capital Adequacy Ratio (CAR).
Adoption of corporate governance ensuring transparency to
shareholders that is equity holders, regulators and the public.
2.6.4 Bank management:
Sound management is key to bank performance. Poor management of
Banks is often the primary source of commercial bank’s performance
failure. According to Federal Financial Institutions Examination Council
Report published in May 2004, elements of poor bank management
include;
Bank managers engaging in excessive luxurious expenditures like high
salaries, expensive buildings or offices, lavish furnishing and expensive
cars,…, without taking into account the earning capacity of the banks.
Other managers engage in outright fraud thus eroding the bank’s
profitability, liquidity and solvency.
Managers lending to unprofitable enterprises that leads to non-
performing loans and asset liability mismatch.
Managers engaging in connected or insider lending to themselves,
owners/shareholders, their immediate beneficiaries or lending to
connected borrowers at no or less than their lending interest and
other lending terms which are contrary to the bank’s lending
policies and banking laws.
Managers collecting asymmetric information on evaluating
credit/loan applicants which lead to adverse selection or just
intentionally convincing for a bribe.
Diversifying in ungazetted activities like trading or acquiring loans
and other practices contrary to banking laws.
15
Delayed actions by government can also cause bank performance failure.
If a bad outcome is not followed by an appropriate punitive action, the
managers may expect that their moral hazard behavior and hidden
adverse attributes will not be punished (Masaiko, Aoki, 1996)
2.6.5 Liquidity:
Initially solvent financial institutions may be driven towards closure by
poor management of short term liquidity. Liquidity is the degree to which
debt obligations coming due in next 12 months can be paid in cash or
asset that will be turned into cash (William,2000). The matching and
controlled mismatching of the maturities and interest rates of assets and
liabilities is fundamental to the management of the bank. It is unusual
for banks ever to be completely matched since business transacted is
often of uncertain term ant of different types. An unmatched position
potentially enhances profitability and also increases the risk of losses
(The Ugandan Banker, June 2001).
2.7 RELATIONSHIP BETWEEN CORPORATE GOVERNANCE 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 much as 28% more 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 Malaysia are prepared
to pay 20% premium for companies with superior corporate governance
16
practices.
Coombes and Watson (2000) also estimated that institutional investors
are willing to pay as high as a 28% premium for shares of strong
governance firms in emerging markets. Investors would be willing to pay
up to an 18% premium on a strong governance structure for a US or
British company and a 22% and 20% premium for strong governance
firms in Italy and Indonesia, respectively.
In their review of corporate governance, Felton et al. (1996) highlight
that investors with low turnovers in their portfolios pursue a value
instead of a growth asset management philosophy and evaluate strong
corporate governance highly.
Newell and Wilson (2002) found that firms with a positive governance
structure had higher price-to-book ratios, which is an indication of a
premium being paid for shares. They also found that firms that moved
from a poor to a good corporate governance structure had between a 10%
and 12% increase in their market valuation.
Vinten (1998) stated 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. The dominant form of corporate
governance for these firms is the board of directors.
According to the report prepared by Ronald F. Premuroso and Som
Bhattacharya in November 28th 2007 about the relationship between
corporate governance and financial performance, they found out that
17
firms' corporate governance ratings are significantly and positively
related to their decisions to voluntarily form technology committees.
Specifically, firm performance ratios such as return on assets, return on
equity, and net profit margin appear to be associated with firms'
decisions to form board-level technology committees (Ronald and Som,
2007).
Corporate governance theories and principles have led to effective
management and performance of banks. However previous researchers
have looked at the theories leaving gaps for further studies. For instance;
Jensen and Meckling, (1976), considered the firm as a nexus of
contracts associating the firm and the entire group of resource
contributors. Their limited objective of explaining the capital structure
led to construct more simplified model taking into consideration only two
agency relationships. The first linked the manager to the shareholders
and the second linked the firm to the financial creditors. This initial
modeling that gave priority placement to the analysis of the relationship
between the managers and the shareholders, where the shareholders
play the role of the “principles”, and the managers that of “agents”,
dominates normative research and reflection today.
According to Shleifer et Vishny, (1997), the corporate governance
mechanisms constitute a means of forcing the managers to “maximize”
the shareholders’ value. This perspective has particularly dominated the
studies relating to the board of directors, the annual shareholders’
meetings, the remuneration systems for managers, the legal and
accounting regulations and takeovers as well.
Fama (1980) asserted that the system of governance is comprised of
“internal” mechanisms implemented intentionally by the stakeholders or
by the legislator and “external” mechanisms resulting from the
spontaneous functioning of the markets. The “internal” mechanisms
18
such as the voting rights attributed to the shareholders, the board of
directors, the remuneration systems, and the audits decided by the
managers….or “external” mechanisms, such as the market of managers
and takeovers, are all mechanisms which have been highly contested,
including in United States.
Fayol (1814) mentioned the 14 principles of administration in which he
believed that authority was the right to command to get the work done.
According to him, while some authority should be given to the
subordinates to make decisions, all major policy decisions should be
made at the top management level. Whether the shareholders have rights
to make crucial decisions governing the corporate is a phenomenon that
has dominated the studies today.
2.8 Conclusion
The above sections of literature have uncovered that corporate
governance comprises attributes such as financial transparency,
disclosure and trust among others. This review also revealed that
financial transparency and disclosure enhance trust between the
stakeholders and organizations like commercial banks. Financial
performance is also reviewed and capital adequacy. Earnings and
liquidity shown as the key dimensions of measuring performance of
commercial banks.
19
CHAPTER THREE
METHODOLOGY
3.0 Introduction
This section presents how the study was designed and carried out. It
discusses the research design, the sampling procedure, data collection
methods, instruments and how data was analyzed.
3.1 RESEARCH DESIGN
The research study used a descriptive research design. The purpose of
the research was to describe the relationship between corporate
governance and performance of Equity Bank.
3.2 SAMPLING AND SAMPLING PROCEDURE
3.2.1 Study population
The target study population consisted of all Equity Bank staff members
and customers.
3.2.2 Sample size
The sample size was 40 respondents, comprising of management of
Equity Bank and employees.
3.2.3 Sampling method
The researcher used purposive sampling method since the research was
a case study approach on a particular company. The researcher
administered the questionnaire only to the staff members of the bank
and respondents with knowledge and demonstrable experience and
expertise in the area of corporate governance and those concerned with
the organizational performance.
20
3.3 DATA COLLECTION
3.3.1 Sources of data
Data was collected mainly from two sources, which were primary source
and secondary source.
3.3.2 Primary sources
Primary data was collected from respondents through filling of
questionnaires, through formal interviews with managers, heads of
departments and customers.
3.3.3 Secondary sources
Secondary data was mainly collected from management reports and
publications of the Equity Bank. The purpose of collecting the secondary
data was to collaborate and strengthen the primary data.
3.4 DATA COLLECTION INSTRUMENTS
3.4.1 Questionnaire
Primary data was collected using self-administered structured
questionnaires; both open ended and closed questions were used.
Responses were sought using questionnaires.
3.4.2 Interviews
The researcher also used face to face interviews guided by interview
guide.
21
3.5 DATA PROCESSING, ANALYSIS AND PRECENTATION
The data collected was scrutinized to eliminate any errors. Editing of
data was also done to check the completed responses for the purpose of
detecting and eliminating errors. Analysis of data was done using
computer program SPSS. The data was presented by the use of frequency
distribution tables.
3.6 PROBLEMS ENCOUNTERED
Disclosure of some of the relevant information like earnings was
not easy since Equity Bank found it a way of exposing secret
commercial information to the competitors. This led to a delay in
accessing information (the bank annual reports) since the
researcher had to explain the actual purpose and confidentiality of
the research report.
Funds were not enough since the researcher required to travel to
Equity Bank headquarter, typing and printing of research work in
various drafts and copies.
Time allocated to complete the research report was limited.
Therefore researcher was put on stress to ensure that he
completed the study within the allocated time.
22
CHAPTER FOUR
PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS
4.0 Introduction
This chapter provides study findings, data analysis and interpretation of data on
the information collected on the Corporate governance and Performance of
Equity Bank. In this study all the responses from the study area were analyzed
and are here by presented using qualitative and quantitative approaches.
Findings are presented following the set up of the objectives of the study and in
form of tables.
4.1 Characteristics of the respondents
This section shows the general information of the respondents. All sampled
respondents were employees and customers of Equity Bank. They were asked to
fill the questionnaires sample. The characteristics of the respondents include
Age, gender, Occupation, and education level.
Table 4.2.1: Showing findings on gender of the respondents
Gender
Frequency Valid Percent Cumulative Percent
Male 28 70 70
Female 12 30 100.0
Total 40 100.0
Source: Primary Data
Findings from table 4.2.1 reveal that majority of the respondents- 70% were
Male, whereas 30% were Female. This shows that most of the respondents who
participated in the study about Corporate governance and performance of the
23
Bank were males and this is because the researcher through random sampng
happened to get more males than females. This could also imply that women
are declined to keep their funds with the equity bank institution.
Table 4.2.2: Showing findings on age group of respondents
Age
Frequency Valid Percent Cumulative Percent
Under 20 - 1 2.5
21-30 33 82.5 82.5
41-50 5 12.5 95
Above 50 2 5 100
Total 40 100.0
Source: Primary Data.
Findings from table4.2.2 shows that majority of the respondents who contributed
to the study were in the age bracket of (21 – 30) totaling to 82.5% of the
respondents. This could imply that this is the most economically active age group
that can follow the activities of the banks especially on issue regarding
transparency and disclosure. Those below 20 years were few with only 2.5%,
those with between 41-50 years were 12.5% whereas 2% had 50 years and
above. Those below 20 years could still be at school and even unemployed and
therefore may not require the services of the bank.
24
Table 4.2.3: Showing finding on the occupation of the respondents
Occupation Frequency Valid percent Comulative percent
Student 15 37.5 37.5
Bussiness person 20 50 87.5
Civil servants 5 12.5 100
House wife - - -
Engineer - - -
Total 40 100
Source: Primary Data.
Table 4.2.3 reveals that 37.5% were students, 50% were Business people, and
12.5% were civil severnts. This shows that majority of the employees in Equity
Bank were business people implying that they are much aware of the various
corporate governance systems being exercised by equity bank since, they are
not only the employees to the bank but also investors who carry out most of their
transactions with the bank.
Table 4.2.4: Showing findings on the level of education:
Education level Frequency Valid Percent Cumulative Percent
Secondary level - - -
Post secondary 2 5 5
University level 12 30 35
Professional level 20 50 85
Post graduate 6 15 100
Total 40 100
Source: Primary Data.
25
A big response from respondents indicated that 50% were of proffessional level
followed by 30% who were of university level. The study found out that most of
the repondents who are on the proffessional level are eployees in the bank
followed by those of the university level who were found to be customers to the
bank.
4.3 FINDINGS ON CORPORATE GOVERNANCE
To assess the various corporate governance variables, questionnaires were used
and findings were analysed as follows;
Table 4.3.1: Showing findings on whether the bank releases annual
financial reports on time.
Responses Frequency Percent
Strongly agree 6 15
Agree 4 10
Strongly disagree 10 25
Disagree 9 22.5
Not sure 11 27.5
Total 40 100.0
Source: primary data.
Results indicate that 10% of the respondents agreed that bank releases the
annual financial results timely, 15% strongly agreed, 25% srtongly disagreed,
while 22.5% disagreed whereas 27.5% of the respontents were not sure. This
gave a net postive response of 12.5%. This is an indication that the majority of
the respontents do not get the financial performance reports of the equity bank
on time which could otherwise help them to gauge the bank’s prosperity.
26
Table 4.3.2: Showing findings on whether the bank releases its future plans and prospects to the public
Source: primary data.
The above results show that a total of 80% percent of the respondents did not
agree that Equity Bank releases its future plans and prospects. 17.5% agreed
whereas 2.5% were not sure. This indicates that the bank is not transparent
enough as regarding to its future plans and prospect
Table 4.3.4 Showing findings on whether the bank discloses its total capital base
Source: primary data.
Responses Frequency Percent
Strongly agree 5 12.5
Agree 2 5
Strongly disagree 2 5
Disagree 30 75
Not sure 1 2.5
Total 40 100.0
Responses Frequency Percent
Strongly agree 2 5
Agree 5 12.5
Strongly disagree 10 25
Disagree 15 37.5
Not sure 8 20
Total 40 100.0
27
From the above analysis, only 17.5% of the total number of respontents agreed
that bank discloses its total capital base. 52.5% disagreed whereas 20% was not
sure. This shows how weak the disclosure system is in the bank.
Table 4.3.5 Findings on whether the bank discloses its accounting and presentation policies.
Results in the table indicate a net positive response of 18.75%. This implies that
most of the customers to the bank are not aware of the bank’s accounting
presentation policies which could otherwise help to promote their loyalty with the
bank.
Responses Frequency Percent
Strongly agree 5 12.5
Agree 10 25
Strongly disagree 7 17.5
Disagree 8 20
Not sure 10 25
Total 40 100.0
Source: primary data.
28
Table 4.3.6: Showing findings on whether the customers trust the information they recieve from the bank
Responses Frequency Percent
Strongly agree 6 15
Agree 27 67.5
Strongly disagree 3 7.5
Disagree 2 5
Not sure 2 5
Total 40 100.0
Source: Primary data.
The table above shows that 67.5% agreed that the customers trust the
information they receive from the bank whereas 7.5% of the respondents
strongly disagreed. This implies that the performance of the bank is highly
contributed by the trust the customers have with it.
Table 4.3.7 Showing findings on whether the bank has good accountability system
Responses Frequency Percent
Strongly agree 7 17.5
Agree 28 70
Not sure 2 5
Strongly disagree 1 2.5
Disagree 2 5
Total 40 100.0
Source: Primary Data.
From the above table, the majority of the respontents-70% agreed that managers
in Equity Bank are accountable to their work. Those who disagreed were 7.5%
whereas 2.5% of the respontents was not sure. This implies that there is good
29
managegerial accountability in the bank which has helped to promote its good
performance in terms of profitability.
4.4 FINDINGS ON PERFORMANCE
Table 4.4.1: Showing findings on whether the Bank experiences high profit margins annually
Responses Frequency Percent
Strongly agree 4 10
Agree 14 35
Not sure - -
Strongly disagree 6 15
Disagree 16 40
Total 40 100.0
Source: Primary Data.
Results indicate that 45% of the respondents agreed that the bank experiences
high profitabity mergin, whereas a total of 55% disagreed and non of the
respontents was not sure. This shows that bank experiences low profit margin
which could be due to low customer turnover to the bank.
30
Table 4.4.2: Showings findings on whether the Bank experiences high customer turnover annually
Responses Frequency Percent
Strongly agree 5 12.5
Agree 12 30
Not sure - -
Strongly disagree 3 7.5
Disagree 20 50
Total 40 100.0
Source: Primary Data
Results indicate that 42.5% of the respondents agreed that the bank realises
high customer turn over whereas a total of 57.5% disagreed. Non of respontents
interviewed was not sure. This could imply that the Bank experiences low
customer turnover in a year and this results to its low profitability.
Table 4.4.3: Showing findings on whether the bank has strong capital base
Responses Frequency Percent
Strongly agree 5 12.5
Agree 16 40
Not sure - -
Strongly disagree 2 5
Disagree 17 42.5
Total 40 100.0
Source: Primary Data.
31
Results indicate that 52.5% of the respondents agreed that the Bank has strong
capital base, 5% strongly disagreed whereas 42.5% disagreed. The above
results could imply that the bank experiences relatively strong capital base which
could be attributed to good management system that enables the bank to attain
its financial objecives.
Table 4.4.4: Showing findings on whether the bank meets its daily liquidity obligations
Responses Frequency Percent
Strongly agree 4 10
Agree 10 25
Not sure 12 30
Strongly disagree 4 10
Disagree 10 25
Total 40 100.0
Source: Primary Data.
Results indicate that a total of 35% of the respondents agreed that the bank
attains its liquidity obligations, also a total of 35% disagreed while 30% of the
respontents were not sure. Lack of attainment of the bank of its liquidity
obligations could be attributed to the inconsistencies in management system
which include poor tranparency and disclosure system that tend to scare off
some customers and other investores.
32
4.5 FINDINGS ON THE RELATIONSHIP BETWEEN CORPORATE
GOVERNANCE AND PERFORMANCE
Table 4.5.1 Showing findings on whether the proper management system has assisted in good performance of the bank
Responses Frequency Percent
Strongly agree 30 75
Agree 8 20
Not sure - -
Strongly disagree - -
Disagree 2 5
Total 40 100.0
Source: primary data
Results indicate that 75% strongly agreed that the management of the bank has
aided its performance whereas 20% of the respondents agreed. The total
respondents who disagreed was only 5%. This implies that whenever the bank
puts proper management system in place, it realises high performance levels in
terms of profitability.
33
Table 4.5.2: Showing findings on whether the bank transparency contributes to good performance of the bank
Responses Frequency Percent
Strongly agree 11 27.5
Agree 14 35
Not sure 3 7.5
Strongly disagree 4 10
Disagree 8 20
Total 40 100.0
Source: Primary Data.
Results indicate that a total of 62.5% respondents agreed that the tranparency of
the bank management boosts its performance in terms of profitability. Those who
did not agree were 30% whereas 7.5% were not sure. This could mean that
transparency of the bank has had a positive effect on the bank’s performance in
terms of profitability.
Table 4.5.3: Showing findings on whether poor management policies have had a negative impact on bank’s performance
Responses Frequency Percent
Strongly agree 25 62.5
Agree 6 15
Not sure - -
Strongly disagree 2 5
Disagree 7 17.5
Total 40 100.0
Source: Primary Data.
34
Results indicate that 62.5% of the respondents stronlgy agreed that poor
management has had negative effects on the bank performance while 15%
agreed. A total of 23% of the respndents disagreed. This implies that whenever
there is inefficiecy in the management system, there occurs a deterioration in
bank’s profit margin. This means that for the bank to make high returns its
management must be effective.
Table 4.5.4: Showing findings on whether the customers’ trust and confidence with the bank increase its profit levels
Responses Frequency Percent
Strongly agree 21 52.5
Agree 9 22.5
Not sure - -
Strongly disagree 2 5
Disagree 8 20
Total 40 100.0
Source: Primary Data.
Results indicate that 52.5% of the respondents strongly agreed that the trust and
confidence the customers have with the bank increases its performance in terms
of profitability. 22.5% of the respondents agreed, 5% strongly disagreed
whereas 20% of the respondents disagreed. This implies that the performance
of the bank highly depends on the level of trust and confidence the customers
have with the bank.
35
Table 4.5.5: Showing responses on whether bank’s accountability system affects the performance of the bank
Responses Frequency Percent
Strongly agree 10 25
Agree 25 62.5
Not sure - -
Strongly disagree - -
Disagree 5 12.5
Total 40 100.0
Source: Primary Data.
Results indicate that 87.5% of the respondents agreed that the accountability
system has an effect to the performance of the bank whereas only 12.5% of the
respondents disagreed . This implies that the quality of accounting system in a
corporate helps a lot in determining its returns. When the bank has a good
accounting personnel and ensures that each worker is accountable to the task he
performs, there will result high returns. Poor accountability in the bank results to
its poor profitability.
36
Table 4.6: Findings on the Relationship between corporate governance performance
Corporate governance
performance
Corporate governance
Performance
Correlation Coefficient
Sig. (2-tailed)
N
Correlation Coefficient
Sig. (2-tailed)
N
1.000
.
40
.549**
.000
40
.549*
.000
40
1.000
.
40
** Correlation is significant at 0.01 level (2 tailed)
Source: primary data.
In table 4.6.1,a correlation was observed for the corporate governance and
performance of Commercial Banks.Pearson correlation coefficient of .549 was
observed. This indicated that corporate governance positively affects
performance of Equity Bank where the correlation is significant at 0.01 level.
There is therefore significant postive relationship between corporate governance
and performance of the bank in that a good corporate governance system leads
to a better bank performance and when the corporate governance is poor, also
poor bank performance will be realised.
37
CHAPTER FIVE
DISCUSSIONS, CONCLUSSIONS AND RECOMMENDATIONS
5.1 INTRODUCTION
This chapter presents a summary of the findings and draws conclusions and
recommendations that are meant to help Equity Bank on its way to improving its
corporate governance as well its performance.
5.2 Summary of the major findings
5.2.1 Findings on corporate governance
It was found out that the bank experiences low levels of corporate governance
systems. For example the findings showed a net positive response of only 12.5%
regarding the bank tranparency on its annual financial report release. The
findings also indicated that the bank’s disclosure level is low as proved by a
positive response of only 17.5% in relation with its total capital base disclosure.
On whether the bank trust the information they get from the bank, only a net
positive response of 36.25% was realised.
5.2.2 Findings on financial performance.
The findings showed that the performance of the bank was not good and this
caused the profit margin of the bank to decline. This is shown by a net positive
response of 45% which indicated that profitability magin of the bank was not
high. The study also found that the bank does not attain its annual financial
obligations as surported by a net positive response of only 35%. It was also
38
found out that the bank’s annual customer turnover was not pleasing as only
42.5% of the respondents were found to be in favour.
5.2.3. The relationship between corporate governance and
performance of the bank
It was established that there is a positive relationship between corporate
governance and performance of the bank. It is expected that if corporate
governance practices improve,the bank will register high returns in terms of
profitability. For instance, the study found the correlation coefficient of .549 as
shown in table 5.6.1 above.
The study also found out that whenever good corporate principles such as
transparency, disclosure and trust are practiced, the firm tends to register high
performance levels in terms of profitability.
5.3 Conclusion.
According to the first objective, corporate governance practices were found to be
effective in some instances.For example, the accounability level in the bank was
found to be high as indicated by a positive reponse of 70%. The level of trust the
customers have with bank was also found to high by 62.5%. However, the bank
needs to strenghthen other key corporate governance principles such as
transpareny and disclosure which were found to be too low.
According to the Second objective, the financial performance of bank was found
to be unsatsfying. For instance, it was established that the bank registers low
profit levels annually and that the bank does not attain its daily liquidity
obligations. If the inefficiency in the bank management persistst, then the strong
39
capital base of the bank will be destabilised. This calls for the corporate
governance principles to be emphasised in bank for its survival.
In the third objective, the relationship between corporate governance and
performance was found to be strong. For example, the study found out that
whenever the bank practices corporate governance principles such as
transparency, disclosure and trust, there is always a high financial returns
experienced.
5.4 Recommendations
Commercial banks have got to establish mechanisms to enforce proper
governance practices such as disclosure and transparency.This will
automatically build a bond of trust with customers who in turn are likely to
turn into shareholders when the respective commercial banks are listed on
both local capital market like Uganda Stock Exchange(USE) or on
International Capital Market like the New York Exchange (NYE).
Commercial banks operating in Uganda like any form of business
organization in today’s dynamic landscape should focus on proper
governance practices not only to boost and enhance their financial
performance,but as path to gaining a better public image,thus recognised
by the society in which they operates. This will also help to boost their
operations and survival.
40
5.5 Areas for further study
Due to resource and time contraints, some issues could not be studied and
constitute areas for further research. The following areas are therefore
recommended for further studies;
Corporate governance and performance of listed financial institutions.
Corporate governance and performance of small scale business
enterprises in Uganda.
Accountability and financial performance in the financial institutions in
Uganda
41
Date:………………..
Dear Sir/Madam,
The researcher is a Makerere University Student carrying out a study
about the relationship between Corporate Governance and Performance
of commercial banks in Uganda using Equity Bank as a case study. The
purpose of this research is purely academic and aimed at fulfilling one of
the conditions for the award of Bachelor of Commerce degree of Makerere
University.
I humbly request you to spare a few minutes to answer the following
questions. You responses will be treated with utmost confidentiality.
GENERAL INFORMATION
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 years 41-50 years Above 50 years
2. Gender : Male Female
3. Education Background
Secondary
level
Post
secondary
University
level
Professional level Post Graduate
Other (Please specify)
………………………………………………………………………………………………
………
4. Occupation
MAKERERE
MAKERERE
UNIVERSITY
QUESTIONNAIRE:
42
Student Business person Civil servant House wife engineer
5. Other (Please specify)
…………………………………………………………………………………
……………………
Section B
Corporate governance Tick (√) only one option that suits your level of agreement or
disagreement.
5. The bank releases its annual financial performance reports timely
Strongly agree Agree Not sure Disagree Strongly disagree
6. The bank releases its future plans and prospects to the public
Strongly agree Agree Not sure Disagree Strongly disagree
7. The bank has good accountability system
Strongly agree Agree Not sure Disagree Strongly disagree
9. The bank discloses its total capital base
Strongly agree Agree Not sure Disagree Strongly disagree
10. The bank discloses its main competitors to the public
Strongly agree Agree Not sure Disagree Strongly disagree
43
11. The workers in bank are reliable
Strongly agree Agree Not sure Disagree Strongly disagree
12. The managers in bank are competent in doing their work.
Strongly agree Agree Not sure Disagree Strongly disagree
13. The managers in the bank are accountable to their work
Strongly agree Agree Not sure Disagree Strongly disagree
14. The banking services and products are made known to the public.
Strongly agree Agree Not sure Disagree Strongly disagree
15. The bank makes its financial statements and reports known to its
customers
Strongly agree Agree Not sure Disagree Strongly disagree
16. The bank informs its customers incase of interest rate fluctuations
Strongly agree Agree Not sure Disagree Strongly disagree
17. The bank makes its profits and losses known to its customers
Strongly agree Agree Not sure Disagree Strongly disagree
44
Section C.
Performance in terms of profitability.
18. The bank experiences high profitability margin
Strongly agree Agree Not sure Disagree Strongly disagree
19. The bank experiences high customer turn over in a year
Strongly agree Agree Not sure Disagree Strongly disagree
20. The bank is the leading financial service provider in the District.
Strongly agree Agree Not sure Disagree Strongly disagree
21. The bank provides a variety of financial services and products to
its customers
Strongly agree Agree Not sure Disagree Strongly disagree
22. The bank experiences stable Net after worth/equity
Strongly agree Agree Not sure Disagree Strongly disagree
23. The bank experiences higher Returns on Assets (ROA) in a year.
Strongly agree Agree Not sure Disagree Strongly disagree
45
24. The bank has a strong capital base
Strongly agree Agree Not sure Disagree Strongly disagree
25. The bank meets its daily liquidity obligations
Strongly agree Agree Not sure Disagree Strongly disagree
26. The bank experiences high earnings in a year.
Strongly agree Agree Not sure Disagree Strongly disagree
27. The bank has good management system
Strongly agree Agree Not sure Disagree Strongly disagree
28. The bank experiences high asset quality
Strongly agree Agree Not sure Disagree Strongly disagree
Section D.
The relationship between Corporate Governance and Performance in
terms of profitability.
29. Proper management system has assisted in good performance of
the Bank
Strongly agree Agree Not sure Disagree Strongly disagree
46
30. The bank transparency has attracted many customers which has
led to increase bank profitability
Strongly agree Agree Not sure Disagree Strongly disagree
31. Poor management systems have had a negative impact on the
performance of the bank
Strongly agree Agree Not sure Disagree Strongly disagree
32. The earnings per year of the bank decline due to inefficiency in
management system
Strongly agree Agree Not sure Disagree Strongly disagree
33. The profitability margin of the bank goes high due to good
management policies
Strongly agree Agree Not sure Disagree Strongly disagree
34. Good management system increases the number of shares sold by
the bank
Strongly agree Agree Not sure Disagree Strongly disagree
35. The efficiency in the bank disclosure system has boosted the
customer morale with bank
Strongly agree Agree Not sure Disagree Strongly disagree
47
36. The customers’ trust and confidence with bank have contributed to
its high profitability.
Strongly agree Agree Not sure Disagree Strongly disagree
37. The bank has good accountability personnel which help to boost its
performance.
Strongly agree Agree Not sure Disagree Strongly disagree
38. The bank has competent workers who help to uplift its profit
margin
Strongly agree Agree Not sure Disagree Strongly disagree
39. The profit margin of the bank depends on the accountability of the
staff personnel
Strongly agree Agree Not sure Disagree Strongly disagree
40. Lack of honest of some workers has had a negative effect on the
bank’s performance
Strongly agree Agree Not sure Disagree Strongly disagree
**Thank you for your kindheartedness in filling this questionnaire**
48
Interview Guide
Corporate Governance and performance of the equity bank.
1. Position of the respondent
2. Does equity Bank follow the corporate Governance principles like
Transparency and Bank Disclosure?
3. What are the reasons for you answer in question 2 above?
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4. How do you determine your banks financial performance?
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5. What is the relationship between corporate governance and
performance of the bank in terms of profitability?
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49
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