School of Graduate Study

Department of Accounting and Finance

Corporate Governance and Financial Performance

In Case of Selected Commercial Banks in Ethiopia

Compiled by: Yohanis Sebsibe

Advisor: Tesfa Nega (PhD)

A Research Proposal Submitted to The School of Post Graduate

Studies in Partial Fulfillment of The Requirements for The Award
of The Degree of Master of Science in Accounting and Finance
(M.Sc.) Of Gage University College

May 08, 2023

Addis Ababa, Ethiopia.
 Table of Contents
CHAPTER ONE......................................................................................................................................3
INTRODUCTION........................................................................................................................................3
1.0 Background of the study.......................................................................................................................3
1.3. Objective of the Study........................................................................................................................7
1.3.1. General Objectives of the Study......................................................................................................7
1.3.2. Specific Objectives of the Study......................................................................................................7
1.4. Hypotheses of the Study.....................................................................................................................7
1.5. Significance of the Study....................................................................................................................9
1.6. Scope and limitation of study.............................................................................................................9
1.7. Organization of the study..................................................................................................................10
CHAPTER TWO.......................................................................................................................................11
RELATED LITERATURE REVIEW.....................................................................................................11
2.1 Theoretical framework of the study...................................................................................................11
2.1.1 Agency theory.................................................................................................................................11
2.1.2 Stakeholders theory.........................................................................................................................12
2.1.3. Stewardship theory.........................................................................................................................12
2.1.4. Resource Dependency Theory.......................................................................................................12
2.3. Empirical Review..............................................................................................................................13
2.4. Research Gap....................................................................................................................................14
2.5. Conceptual framework of the study..................................................................................................16
CHAPTER THREE...................................................................................................................................17
RESEARCH METHODOLOGY.............................................................................................................17
3.1. Research Design and Approach........................................................................................................17
3.2. Source of data and type of data.........................................................................................................17
3.3. Population and Sample for the Study................................................................................................17
3.4. Data Analysis and presentation.........................................................................................................18
3.5. Research Instruments........................................................................................................................19
3.6. Reliability and Validity.....................................................................................................................19
3.7. Ethical considerations.......................................................................................................................19
Appendix I Time Schedule And Proposed Budget.................................................................................20
Time Schedule........................................................................................................................................20
REFERENCES...........................................................................................................................................22
Appendix 1..................................................................................................................................................24
 CHAPTER ONE

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 INTRODUCTION
1.0 Background of the study
Corporate governance can be defined as the process and structure used to manage the
organizations and it can be referred to as how those organizations are directed, controlled; how
policies, laws are designed; and how control environment affect the overall performance of
entrepreneurial activities in an economy. Effective and good corporate governance is important
to the proper functioning of the corporation and it improves economic efficiency and growth as
well as enhances investor confidence (Alem, 2011). But poor corporate governance can be
brought by lack of integrity on the selection criteria for choosing leaders and managers who run
corporations, lack adequate remuneration system to the management, inappropriate balance
between executive and non-executive members of the board. These leaders may lack experience,
appropriate training and proper qualifications. Recent change in ownership structure results in
increasing ownership of equity shares by institutional investors in forming corporation or share
companies (Jensen and Meckling 1976).

The standards of corporate governance set the nature of the relationship among shareholders,
members of board of directors, managers, employees and other corporations and persons with
whom the company has business links. It mainly protects the rights of the company and its
participant groups and specifies their obligations (Massie, 2000).

According to Shleifer and Vishny (1997), effective corporate governance controls the awards
given by the stakeholders and creditors and increase the profitability of the firm by investing in a
positive net present value project. It also increases access to external financing by firms, lowers
cost of capital and increases operational performance also indicated that investors are willing to
pay large premiums for companies with effective corporate governance. Hence, it can be argued
that good corporate governance will lead to increase in firm value as well as better firm
performance (ibid, 1997).
Many researchers like Kalifa (2012), Kibrysfaw (2013), Hlanganipai Ngirande (2014), and
Godfrey Ndlovu (2014), have studied based on a number of corporate governance mechanisms
including board size, board remuneration, and size of audit committee and board ownership are
frequently used.

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They have studied the impact of corporate governance mechanisms on firms‟ financial
performance from different perspectives in different environments using the aforementioned and
other related variables.
The researchers found mixed results on the relationship between corporate governance
mechanisms and firms‟ financial performance.

They have studied the impact of corporate governance mechanisms on firms‟ financial
performance from different perspectives in different environments using the aforementioned and
other related variables. The researchers found mixed results on the relationship between
corporate governance mechanisms and firms‟ financial performance.

Many researchers like Kalifa (2012), Kibrysfaw (2013), Hlanganipai Ngirande (2014), and
Godfrey Ndlovu (2014), have studied based on a number of corporate governance mechanisms
including board size, board remuneration, and size of audit committee and board ownership
which are frequently used. They have studied the impact of corporate governance mechanisms
on firms‟ financial performance from different perspectives in different environments using the
aforementioned and other related variables. The researchers found mixed results on the
relationship between corporate governance mechanisms and firms‟ financial performance.
Financial services organizations are very important factor for growth and success of projects in
developing countries (Tarawneh, 2006). Banks are the important component of any financial
system and they play important role of channeling the savings of surplus sectors to deficit
sectors. The Ethiopian financial sector is more of dominated by the banking sector. Banks play a
vital role in the process of economic growth and transformation of Ethiopia since the efficiency
and competitiveness of banking system defines the strength of any economy. The Ethiopian
banking sector comprises of one development bank, and seventeen commercial banks out of
which sixteen banks are privately owned commercial banks. According to Mulugeta (2010) the
key regulatory features were interest rate regulation, credit restrictions, equity market controls
and foreign exchange controls.
According to Mulugeta (2010), Ethiopia has established strategic framework for the financial
sector, and emphasize the importance of further strengthening corporate governance and
accountability of financial institutions, and improving the capacity of financial sector

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professionals. Ensuring better corporate governance of corporations, financial institutions and
markets is increasingly recognized as a pre-condition for the countries development and it is
directed and supervised by the NBE. The NBE monitors and controls the banking business and
functions as regulators of the country's money supply.

1.2. Statement of Problems

The standard of corporate governance sets the nature of the relationship among shareholders,
members of board of directors, managers, employees and other stakeholders with whom the
company has business links. It mainly protects the rights of the company and its participant
groups which are mentioned above and specifies their obligations. Therefore, corporate
governance principles are important in terms of setting the rights and obligations of the said
groups and ensuring investor confidence.

The commercial banks are corporations that have a dominant position in developing economic
financial systems, and they are important engines of economic growth of a country (Levine,
1997). Banking failure would affect the entire financial system and economy of a country.
Therefore, in order to ensure the improvement of the company performance, economic efficiency
and growth, and to enhance investors‟ confidence; strong, effective and good corporate
governance has to be developed and implemented.
Most previous studies like conducted by Yasser (2011), Al-Manaseer et al. (2012), and
Kyereboah Coleman (2007) have been undertaken on large firms operating within well-
organized corporate governance mechanisms in developed economic system and in countries
where there are capital markets. When we see developing countries specifically in Ethiopia some
studies on corporate governance have been conducted previously.
Methodology of data gathering and analyzing focused by some of the studies were limited only
on secondary data. In addition, this study focuses on the privately-owned commercial banks
since majority of banks in Ethiopia are those banks and they are significantly differing on some
aspects as compared to the government owned commercial banks. And most of our private
commercial banks are almost at the same size, level or category and may help in order to reach
on reasonable results.

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This also could help to see their linkage with the corporate governance mechanisms. Previously
there were no any studies conducted by focusing only on privately owned commercial banks.
Therefore, it is difficult to generalize the same result from the findings of the studies that were
done in developed countries, for relatively small size Ethiopian commercial banks governance
mechanisms. Ethiopian banking sector's corporate governance is characterized by the absence of
an organized share market and the country has different rules, regulations, practices, and
economic features which needs to conduct a separate study using various perspectives, meaning
they were concentrated on agency theory which is the central need to cooperate governance are
to protect the interest of shareholders only have not been conducted within a well-organized
corporate governance mechanism. This study has been conducted to provide empirical evidence
particularly on the effect of corporate governance mechanisms on commercial bank's financial
performance.
To come up with a better insight; this study will cover by assessing and including selected
corporate governance mechanisms major areas of board of director characteristics, regulation
aspects, shareholder and depositor related issues (specifically the independent variables: board
gender diversity, director’s educational qualification, number of board sub-committee, meeting
frequency of board, board ownership, regulations of legal reserve and liquidity and depositor
influence). Hence this paper will have sought to determine the relationship between selected
corporate governance mechanisms, which have been sufficiently uncovered variables in the
previous studies in order to further be explained and financial performance of the commercial
banks with in the given period of time which was measured by the return on asset (ROA).

This study could fill the gaps and serves as points of reference for further research in corporate
governance and provides empirical evidence on the effect of corporate governance mechanisms
on financial performance of the banks by taking in to consideration the variables, observations
and sampling methodologies related to the realities of the bank’s governance mechanism in
Ethiopia.

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 1.3. Objective of the Study
1.3.1. General Objectives of the Study

The main objective of this study seeks to examine the relationship between corporate governance
and financial performance of banking sector by taking evidence from selected commercial banks
in Ethiopia.
1.3.2. Specific Objectives of the Study

The specific objectives of the study include: -

Examine the association between board gender diversity and commercial bank financial
performance.
Ascertain the influence of the directors‟ educational qualification on commercial bank
financial performance.
Identify whether availability of board sub-committees affect commercial bank financial
performance.
Explain the relationship between meeting frequency of board and commercial bank
financial performance.
Investigate the relationship between board ownership and the financial performance of
the commercial banks in Ethiopia.
Investigate the relationship between the ratio of total deposit to total asset and the
commercial bank financial performance.

1.4. Hypotheses of the Study

In line with the broad purpose statement and research objective, the following hypothesis has
been developed for the study.
Board size
The size of the board is measured by the number of board members as has been done by many
authors such as Hermalin and Weisbach (1999, 2002), (Ferede, 2012), (Akpan, 2015) and
(Jensen & Meckling, 1976). In their various studies, the size of the board has been seen to have
an inverse relationship with firm performance. Jensen M. (1993) argues that a larger board leads
to less effective monitoring due to coordination and process problems inherent in large board

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size. Larger boards can be less participative, less cohesive, and less able to reach consensus.
Small board size was favored to promote critical, genuine and intellectual deliberation and In
contrast, a number of scholars have contended that larger boards have their benefits and when
board size increases firm performance also goes up as more board members provide greater
monitoring, advice and make available better linkages to the external environment (Chenuos,
Mohamed, & Bitok, 2014). Moreover, Klein (2002) suggested that larger boards able to promote
effective monitoring due to their ability to distribute the work load over a greater number of
observers.
Moreover, Results from (Akpan & Amran, 2014) study showed that board size has positive
significant influence on company performance Therefore, depending on the above theory and
related literature the first alternative hypothesis is stated as:
Ha1: There is a statistically significant relationship between board size and commercial banks
financial performance.

Board meetings frequency

Vefeas (1999) reported a statistical significance and negative relationship between frequency
board meetings and corporate performance. He also finds that operating performance
significantly improves following a year of abnormal board activity. Meeting Frequency has a
significant negative impact on ROA and an increasing in meeting frequency will reduce the
ROA. (Ms.S.Danoshana & Ms.T.Ravivathani, 2013). Moreover, Akpan (2015) found that board
meetings negatively and significantly relate with company performance. Another study
conducted on public listed companies in Malaysia using five years data 2003 to 2007 of 328
companies, shows that the higher the number of meetings the worse the firm performance
(Amran, 2011).
Whereas, Karamanou et al (2005) found a positive association between frequency board meeting
and management earnings forecasts, using a sample of 157 firms in Zimbabwe from 2001-2003;
Mangena & Tauringana (2008) report a positive relationship.
Moreover, Ntim & Osei (2011) found a statistically significant and positive association between
the frequency of corporate board meetings and corporate performance, implying that South
Africa boards that meet more frequently tend to generate higher financial performance.
Therefore, the hypothesis is stated as:
Ha2: Frequency of board meeting is positively associated with commercial banks performance

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Size of Board Audit committee
Empirical findings on the effect of size of audit committee and corporate performance show
mixed results. Ms.S.Danoshana et al (2013) found that increasing Audit Committee Size will
result high financial performance, because detailed discussion on the financial statement of the
companies will lead to get more ideas regarding the reports and it will guide to increase the
firm’s performance.
However, in Ethiopia banking industry, Ferede (2012) found that large number of audit
committee has a negative and significant effect on financial performance. He added that Limiting
audit committee size to reasonable number improves audit committee effectiveness. Therefore,
the hypothesis is stated as:
Ha3: Size of audit committee in a board has a significant positive relationship with the financial
performance of commercial banks
Their paper claimed that experience of directors enables them to guide, steer and monitor the
firm more effectively. In other words, their knowledge of the industry, its opportunities and
threats and their connections to the industry participants based on their experience enables them
to contribute substantively in the firm performance. Moreover, Ferede (2012) found that a
positive association is found between industry specific experience and return on asset and return
on equity in Ethiopian Banking Industry. Therefore, the hypothesis is stated as:
Ha4: There is a significant positive association between board members experience in the
Finance sector and commercial banks financial performance.
Ha5: Investigate the relationship between the ratio of total deposit to total asset and the
commercial bank financial performance.

1.5. Significance of the Study

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 The result of this study will contribute to commercial banking firms by identifying relevant
corporate governance mechanisms and how these governance mechanisms related to
financial performance.
 For the researchers who want to conduct further research on similar subjects it shows
knowledge gap and pave the way for their new finding
 The result of this study will also contribute to the existing literature by providing evidence on
the relation between corporate governance mechanisms and banks’ financial performance.
1.6. Scope and limitation of study
The study will be investigated of corporate governance variable that probably influence the
performance of banks. But the current study focused on some corporate governance variable to
see their relationship with bank performance. This includes: board size, board meeting
frequency, liquidity, board experience in finance sector and board audit size. In addition, the
study covered only the commercial banking industry which consists of government and private
banks. The study period is for 13 years, ranging from 2010 to 2023. One of the limitations was
that this study relied on accounting-based return, return on asset (ROA), to measure bank
financial performance because of lack of secondary market to use market-based returns. Adusie
(2011)

1.7. Organization of the study

This study is organized in to five chapters. The first chapter deals with the statement of
problem, the objectives, hypotheses, significance and scope and limitations of the study. The
second chapter focuses on the literature review followed by the third chapter focus on the
methodology and the variables used. The fourth chapter that deals with data presentation and
analysis based on the collected data. The last chapter presents the conclusion and
recommendation part of the study.

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 CHAPTER TWO
RELATED LITERATURE REVIEW
2.1 Theoretical framework of the study

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Corporate governance is the relationship among shareholders, board of directors and the top
management in determining the direction and performance of the corporation. It includes the
relationship among the many players involved (the stakeholders) and the goals for which the
corporation is governed (Kim & Rasiah, 2010). According to Imam and Malik (2007) the
corporate governance theoretical framework is the widest control mechanism of corporate factors
to support the efficient use of corporate resources. The challenge of corporate governance could
help to align the interests of individuals, corporations and society through a fundamental ethical
basis and it fulfills the long-term strategic goal of the owners. It will certainly not be the same for
all organizations, but will consider the expectations of all the key stakeholders (Imam & Malik,
2007). So, maintaining proper compliance with all the applicable legal and regulatory
requirements under which the company is carrying out its activities is also achieved by good
practice of corporate governance mechanisms.
There are a number of theoretical perspectives which are used in explaining the impact of
corporate governance mechanisms on firms’ financial performance. The most important theories
are the agency theory, stakeholders’ theory and resource dependency theory (Maher &
Andersson, 1999).

2.1.1 Agency theory

According to Habbash (2010) agency theory is the most popular and has received greater
attention from academics and practitioners. The agency theory is based on the principal agent
relationships. The separation of ownership from management in modern corporations provides
the context for the functioning of the agency theory. In modern corporations the shareholders
(principals) are widely dispersed and they are not normally involved in the day to day operations
and management of their companies rather they hire mangers (agent) to manage the corporation
on behalf of them (Habbash, 2010). The agents are appointed to manage the day to day
operations of the corporation. The separation of ownership and controlling rights results conflicts
of interest between agent and principal. To solve this problem or to align the conflicting interests
of managers and owners the company incurs controlling costs including incentives given for
managers.

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According to agency theory the agent strives to achieve his personal goals at the expense of the
principal. Mangers are mostly motivated by their own personal interests and benefits, and work
to maximize their own personal benefit rather than considering shareholders’ interests and
maximizing shareholders wealth. To reduce agency problem there must be better monitoring and
controlling mechanisms which helps to ensure that managers pursue the interests of shareholders
rather than only their own interests.

2.1.2 Stakeholders theory

Stakeholder theory is an extension of the agency theory, where the agency theory expects board
of directors to protect only the interests of shareholders. However, stakeholder theory extends the
narrow focus of agency theory on shareholders’ interest to stakeholders to consider the interests
of many different groups and individuals, including interest groups related to social,
environmental and ethical considerations (Freeman et al., 2004).

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According to Freeman et al. (2004), stakeholder theory begins with the assumption that values
are necessarily and explicitly a part of doing business. It asks managers to articulate the shared
sense of the value they create, and what brings its core stakeholders together. It also pushes
managers to be clear about how they want to do business, specifically what kinds of relationships
they want and need to create with their stakeholders to deliver on their purpose. According to
stakeholder theory the purpose of the firm is to serve and coordinate the interests of its various
stakeholders such as shareholders, employees, creditors, customers, suppliers, government, and
the community. According to Habbash (2010), stakeholder refers to any one whose goals have
direct or indirect connections with the firm and influenced by a firm or who exert influence on
the firm’s goal achievement. These include management, employees, clients, suppliers,
government, political parties and local community. According to this theory, the stakeholders in
corporate governance can create a favorable external environment which is conducive to the
realization of corporate social responsibility. Moreover, the stakeholders in corporate governance
will enable the company to consider more about the customers, the community and social
organizations and can create a stable environment for long term development. The benefit of the
stakeholder model emphasis on overcoming problems of underinvestment associated with
opportunistic behavior and in encouraging active co-operation amongst stakeholders to ensure
the long-term profitability of the business firm (Maher & Andersson, 1999)
The common criticisms for stakeholder theory is that how to align the stakeholders conflicting
interests since the difficulties result from how to administer different stakeholders with various
needs and demands. It is not possible to treat all stakeholders equally (Habbash, 2010).
Moreover, it is not practical for all stakeholders to be effectively represented in corporate
governance recommendations as this may undermine the welfare of company (Habbash). The
other critique of the stakeholder model is that managers or directors may use “stakeholder”
reasons to justify poor company performance (Maher & Andersson, 1999).

2.1.3. Stewardship theory

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In contrast to agency theory, stewardship presents a different model of management, where
managers are considered good stewards who will act in the best interest of the owners
(Donaldson & Davis, 1991) the exponents of stewardship theory assume that management
aspires to high objectives by high levels of responsibility and achievement, and self-motivation,
and also protecting the firm through collective actions. In stewardship theory, management acts
selflessly for the benefits of the firm and owners (Pelayo-Maciel et al., 2012).

2.1.4. Resource Dependency Theory

According to Abdullah & Valentine (2009), resource dependency theory concentrates on the role
of board of directors in providing access to resources needed by the firm. According to this
theory the primary function of board of directors is to provide resources to the firm and they are
viewed as an important resource to the firm. Directors are considered as a provider of resources
to the firm, such as information, skills, business expertise, access to key constituents such as
suppliers, buyers, public policy makers, social groups as well as legitimacy. The resource
dependence model suggests that the board of directors could be used as a mechanism to form
links with the external environment in order to support the management in the areas where
knowledge gap is occurred to ensure the achievement of organizational goals (Wang, 2009).The
agency theory concentrated on the monitoring and controlling role of board of directors whereas
the resource dependency theory focus on the advisory and counseling role of directors to a firm
management. The dual role of boards is recognized. However, board structure has relied heavily
on agency theory concepts, focusing on the control function of the board (Habbash, 2010).

2.3. Empirical Review

Findings of reputable researchers on corporate governance and how it affects performance of
banks were critically reviewed in this section of our research work. Their views, location,
methodology used, results of findings and their recommendations were discussed. Ashenafi,
Kalifa and Yodit (2013) examined corporate governance and impact on bank performance in
Ethiopia. A quantitative method of data analysis was employed which involved descriptive and
inferential statistical analysis and multivariate regression analysis. The descriptive statistics were
used to analyze the means and standard deviations of regression variables. In addition, before
conducting regression analysis, various tests were conducted for Classical Linear Regression
Model (CLRM) assumptions. The regression results show that explanatory variables such as

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capital adequacy ratio (CAR), board size (BDSZ), and existence of audit committee (AUDC)
have statistically significant negative effect on bank performance while square of capital
adequacy ratio (CAR2) and bank size (BKSZ) have a statistically negative effect on performance
measured using ROE. Ownership type (OWTP), loan loss provision (LLP) and loan to deposit
ratio (LDR) are found to have no significant effect on bank performance. Therefore, the study
recommended the following:
1. As a means to strengthen the commercial banks in Ethiopia, the government of National bank
of Ethiopia should be concerned about the level of both the internal and external corporate
governance mechanisms of banks.
2. Shareholders should actively take part in establishing good corporate governance in the banks
they own in order to earn better and sustainable profits.
3. The National Bank of Ethiopia should encourage banks to implement good corporate
governance practices through enacting rules and regulations.
4. Keeping the number of directors in a bank board to a minimum size is recommended, as long
as the minimum size enables the board to perform its supervision activities properly.
5. Commercial banks should increase their branches as well as their size in order to improve
profitability due to economies of scale.
6. The government and financial institutions as well as business community should work towards
the establishment of a formal capital market institutions especially stock exchange which
enhances corporate governance, and competition among businesses in the country.

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7. Finally, future research should focus on assessing corporate governance mechanisms and firm
performance from the perspective of different stakeholders such as employees, management,
shareholders and depositors of commercial banks.
According to Smallman (2004) where shareholder wealth is maximized, the steward’s utilities
are maximized too, because organizational success will serve most requirements and the
stewards will have a clear mission. He also states that, stewards balance tensions between
different beneficiaries and other interest groups. Therefore, stewardship theory is an argument
Put forward in firm performance that satisfies the requirements of the interested parties resulting
in dynamic performance equilibrium for balanced governance. According to Abdullah &
Valentine (2009), resource dependency theory concentrates on the role of board of directors in
providing access to resources needed by the firm. According to this theory the primary function
of board of directors is to provide resources to the firm and they are viewed as an important
resource to the firm. Directors are considered as a provider of resources to the firm, such as
information, skills, business expertise, access to key constituents such as suppliers, buyers,
public policy makers, social groups as well as legitimacy. The resource dependence model
suggests that the board of directors could be used as a mechanism to form links with the external
environment in order to support the management in the areas where knowledge gap is occurred
to ensure the achievement of organizational goals (Wang, 2009). The agency theory concentrated
on the monitoring and controlling role of board of directors whereas the resource dependency
theory focus on the advisory and counseling role of directors to a firm management. The dual
role of boards is recognized. However, board structure has relied heavily on agency theory
concepts, focusing on the control function of the board (Habbash, 2010).

2.4. Research Gap

As per the review of the literature most of the empirical studies that have been conducted with
the purpose of examining the relationship between corporate governance mechanism and bank
financial performance belong to the companies outside Ethiopia.
Even if the topic is boldly researched the above literature review revealed the existence of
controversial conclusions that results from different studies made so far. The empirical analysis
of good corporate governance practices in relation to banks is still at young stage and it is
important to conduct more studies in this field to enhance private commercial banks‟

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 development
In case of Ethiopia, very small work has been done with the aim of examining the effect of
corporate governance mechanism.
The study conducted by Habtamu (2012), tests the relationship between some internal corporate
governance mechanism and bank performance. The research used only some of the board
characteristics as corporate governance proxies and established relationship between those board
proxies and bank financial performance. And the agency theory was used by the study as a
model which is less relevant when there is regulation or government intervention and imperfect
market which is an environment on which banks operates.
In general, most of the previous studies have some gap like there was insufficiency in sampling
and limited number of observations and corporate governance variables, and they have
concentrated on both governmental and privately-owned commercial banks.
The lack of sufficient research on the effect of internal corporate governance mechanism on bank
financial performance in the context of Ethiopia and the existence of knowledge gap in the area
are the causes for undertaking this study.
As far as the researcher's knowledge concerned there is no sufficient and robust research that has
been conducted to provide empirical evidence particularly on the effect of corporate governance
mechanisms on firm's financial performance of private commercial banks in Ethiopia.
Furthermore, most previous studies were made in countries where there are capital markets and
the findings may not apply to country such as Ethiopia where there is no organized stock
exchange market
Finally, this study has a contribution to the literature and provides empirical evidence on the
effect of corporate governance mechanisms on financial performance of private commercial
banks in Ethiopia by taking in to consideration the variables, observations, sampling data and
methodology related to the realities of the commercial bank’s governance mechanism in
Ethiopia.

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 2.5. Conceptual framework of the study
Based on the agency theory the following diagrammatic framework is developed.

Separation of Ownership
& Control

(Agency Problem)

Minimize
Decrease

Corporate Governance
Mechanisms
 Small board size I Financial Control variables
n
Performance  Bank Size
 Board gender diversity
c
 Return on asset
r  Bank Growth Rate
 Board members
e
educational qualifications  Return on equity
a  Bank Leverage
 Board members business
s
management experience
e
 Board members industry
specific experience

 Small size audit

committee
Source: Researchers design

FIGURE 2.1

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 CHAPTER THREE
RESEARCH METHODOLOGY
3.1. Research Design and Approach
The primary aim of this study is to examine the relationship between corporate governance
mechanisms and financial performance. To achieve this objective explanatory type of research
design with a mixed approach, more of quantitative Therefore, by using a mixed approach it is
able to capitalize the strength of quantitative and qualitative approach and remove any biases that
exist in any single research method.

3.2. Source of data and type of data

In order to achieve the objective of the study the researcher used both primary and secondary
data source. The secondary data collected from the audited financial statements of sample banks
from NBE and the primary data was collected through the use of questionnaires.

3.3. Population and Sample for the Study

According to official website of the NBE, currently there are 29 commercial banks operating in
Ethiopia, however the researcher was select only banks under operation at least two years before
starting point of sample period (2010). Commercial banks did not have information for the
required period and their year of service was below ten years were excluded in the sampling
frame to make the balanced data structured, i.e. every cross section follows the same regular
frequency with the same start and end dates. Therefore, purposive sampling was employed so as
to include all commercial banks established and serving with in the specified period of time from
2010 to 2023. Sample size was determined by the availability of information on the variables
under the study. The size for sample was 13 commercial banks operating over the period of ten
years and the rest of commercial banks were not having a chance to be included.

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 Table 3.1 list of sample selected bank

S. N Name of bank Year of establishment

Commercial banks of Ethiopia (CBE) 1963 E.C
1
Awash Banks S.C (AB) 1994 E.C
2
Dashen Bank S.C (DB) 1995 E.C
3
Bank of Abyssinia S.C (BoA) 1996 E.C
4
Wegagen Bank S.C (WB) 1997 E.C
5
United Bank S.C (UB) 1998 E.C
6
Nib International Bank S.C (NIB) 1999 E.C
7
Cooperative Bank of Oromia S.C(CBO) 2004.E.C
8
9 Addis International Bank S.C (AIB) 2003 E.C

10 Hibret Bank S.C (HB) 1990 E.C

11 Abay Bank S.C (AB) 2002 E.C

12 Dashen Bank S.C (DB) 1987 E.C

13 Lion International Bank S.C (LIB) 1998 E.C

3.4. Data Analysis and presentation

The method of analysis used in the study is descriptive statistics, correlation and linear
regression methods. The descriptive statistics used to quantitatively describe the important
features of the variables using mean, maximum, minimum and standard deviations. The
correlation and regression analysis will be used to identify the relationship between the
independent, dependent and control variables using correlation and regression analysis. The
correlation analysis shows only the degree of association between variables and does not permit

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the researcher to make causal inferences regarding the relationship between variables. Therefore,
multiple panel linear regression analysis also used to test the hypothesis and to explain the
relationship between corporate governance variables and financial performance measures by
controlling the influence of some selected variables. Stat version 21 also used for analysis and
the results were presented through tables, percentage and diagram.

3.5. Research Instruments

This study will use questionnaires, guided interviews, guided observation, and record sheets.
This is because of the nature of data to be collected, the time available, as well as by the
objectives of the study. The researcher will be concerned with views, option, perception and
feelings from the environment. Such information will be corrected through the questionnaires,
and interviews, and because the study will be conversed with variable that cannot be directly
observed.

3.6. Reliability and Validity

To ensure the content reliability, the research will use either the test -retest method or cron batch
alpha, method for the two tests, results will be analysed using peason’s correlation coefficient
(PLCC) and the T-test for PLCC if the significance will be equal or inferior to 0.05 then
instrument will be reliable for T test, if significance will be equal or greater than 0.05, the
instrument will be reliable.

3.7. Ethical considerations

The researcher will seek for authorization from potential respondents. The researcher will ensure
free will consent from participants. The names or identifications of the respondents will be
anonymous and information collected from them treated with utmost confidentiality

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 Appendix I Time Schedule And Proposed Budget
Time Schedule
Months
Month of the Proposal February March April. May June. July
Description 2023 2023 2023 2023 2023 2023

Pre writing

Proposal Submitted

Relevant Data Collection

Create A document With

Problem Statement Frame
Work

Gather any addition data

required

Complete and Presenting the

final work

Submitting My Final
document

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 BUDGET SCHEDULE
Particular Quantity Amount (UGX)

Stationary Paper 5 Reams 500*5 2500

Ink 1 Cartridge 1500

Binding materials 10 500

Transport costs 3500

Data Analysis 4,000

Up keep 3,000

Miscellaneous 2,000

Total Expense Total 17,000 ETB

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REFERENCES

Abdullah, H., & Valentine, B. (2009). Fundamental and ethics theories of corporate governance.
Middle Eastern Finance and Economics, 4, 89-96.

Alchian, A.A. and Demsetz, H. (1972). Production, Information Costs and Economic
Organization. American Economic Review, 62, 772-795.

Aljifri, K. & Moustafa, M. (2007). The Impact of Corporate Governance Mechanisms on the
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Administrative Sciences, 23 (2), 71-93.

Andres, P.D. & Vallelado, E. (2008). Corporate Governance in Banking: The Role of the Board
of Directors, Journal of Banking and Finance, 32, 2570-2580.

Arouri, H., Hossain, M., and BadrulMattakin, M. (2011). Ownership Structure, Corporate
Governance and Bank Performance: Evidence from GCC Countries. Corporate
Ownership and Control, 8(4), p365-370.

Ashenafi Beyene Fanta, Kelifa Srmolo Kemal, Yodit Kassa Waka. Corporate Governance and
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Bauer, R., Frijns, B., Otten, R. & Tourani-Rad, A. (2008). The impact of corporate governance
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251.

Berger, A., Clarke, G., Cull, R., Klapper, L., and Udell, G. (2005). Corporate Governance and
Bank Performance: A Joint Analysis of the Static, Selection, and Dynamic Effects of
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p2179–2221.
Bokpin, A. (2013). Ownership structure, corporate governance and bank efficiency: an empirical
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Cadbury, A. (2002): Overview of Corporate Governance: A Framework for Implementation. The

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Financial Intermediation, Vol.16, pp 584-597.

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Chugh, L. C., Meador, J. W., & Kumar, A. S. (2011). Corporate governance and firm
performance: evidence from India. Journal of finance and Accounting, 7, 1–10.

Creswell John, 2009, „Research Design‟ Qualitative, Quantitative, and Mixed Methods
Approaches), third edition by SAGE publications.inc.2009
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Empirical Investigation. Economic and Political Weekly, pp. 1263-1266.

Fekadu Petros Gebremeskel (2010), “Emerging Separation of Ownership and Control in

Ethiopian Share Companies: Legal and Policy Implications”, 4(1) Mizan Law Rev.p.1-
30.

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Objective Revisited”. Organization Science, 15 (3), 364–369.

Gantenbein, P. & Volonte, C. (2011). Director Characteristics and Firm Performance. WWZ
Discussion Paper 2011/11. University of Basel.

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A comparative study between chemical and pharmaceutical sector in Pakistan.
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Imam, Mahmood Osman. (2006): Firm Performance and Corporate Governance through
Ownership Structure: Evidence from Bangladesh Stock Market. International Journal of
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Prowse, S. (1997): The Corporate Governance System in Banking: What do We Know? BNL
Quarterly Review, March. Pp. 760- 781

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 Appendix 1
The study Questionnaires
Note for the respondents: Dear respondents, the purpose of this questionnaire is to conduct a
study on the relationship between corporate governance variables and financial performance of
commercial banks in Ethiopia for partial fulfillment of the requirement for MSC in accounting
and finance. Your response supposed to have a paramount contribution for the success of the
study and I would like to request your genuine responses for each questionnaire. I would like
also to assure you that the information provided here will be used only for academic purposes
and thus will be treated with maximum confidentiality.

Thank you in advance for your cooperation!!!

1. Years you have served in the organization (Please Tick)

a) Below 10 years
b) 11-20
c) 21-30
d) 31-40
e) Above 40years
2. Your position in the organization (Please Tick)
a) CEO
b) Middle level manager
c) Supervisor
d) Any other (Specify)
Part 2. Composition of the board
1. Size of the board
a) Less than 5 members’
b) 5 to 10 members’

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 c) 11 to 15 members
d) More than 15 members

Part 2. Composition of the board

1. Size of the board
a) Less than 5 members’
b) 5 to 10 members’
c) 11 to 15 members
d) More than 15 members
Comment (s) (if any)
2. Academic qualification and experience of each board member (tick as appropriate)
a) Entrepreneurship
b) Accounting and Financial management
c) Legal
d) Banking expert’s
e) Human resource management
f) Others
3. Have the Board established supervisory committees other than the main Board?

Name of the Yes No

Committee

Audit committee

Remuneration committee

Legal Committee

3. If your bank has an audit committee, what is the number of the audit committee members?

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 a) One
b) Two
c) Three
d) Four
f) Any other

f) Any other

6. How many of the board of directors have experience in finance sector experience?
a) One _
b) Two
c) Three _
d) Four _
e) All
f) Any other _
7. How many times in a year does the Board meet?
a) Once a year
b) Semiannually
C) Quarterly
d) Monthly

e) Other Specify
8. Are there any board members who had earlier working experience on banking area or
Financial Institutions like insurance, microfinance now in your company?
YES NO

In what ways do these members contribute better than other directors?

9. Do you think boards that meet more frequently tend to generate higher financial
performance?
YES NO

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 IF NO, please justify it?

Part II: Please fill the number for each period for questions listed below.
Fiscal Year in Gregorian calendar

S. Item 2010/ 2011/ 2012/ 2013/ 2014/ 2015/ 2016/ 2017/ 2018/ 2019/
N 11 12 13 14 15 16 17 18 19 20
1 Total number of
directors sitting
on the board
2 Number of
board members
who served in
the
same capacity
in other banks
or other
financial
institution
earlier

4 Total number of
audit committee
members

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