Corporate Governance and its Effect on Financial Performance of the Ethiopian Private Commercial Banks
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Date
2017-02
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Addis Ababa University
Abstract
The paper takes a look at the effects of corporate governance on the financial performance of private
commercial banks in Ethiopia. This exploratory study seeks to analyze the effect of different
corporate governance mechanisms, particularly board gender diversity, directors’ educational
qualification, variety number of internal board sub-committee, meeting frequency of board, board
ownership, regulations of legal reserve and liquidity and depositor influence, on the financial
performance of 8 privately owned commercial banks of Ethiopia. And the study also controls the
effect of private commercial banks size. The financial performance measure was Return on Asset
(ROA). In order to achieve this objective, the study uses mixed research approach that is by adopting
quantitative method research approach by combining documentary analysis of secondary data which
was collected from the National Bank of Ethiopia (NBE). And capturing and administrating primary
data using structured questionnaire which were completed by board secretary and delegated staffs as
he/she is in a better position to comment on corporate governance affairs. Panel data covering 11
year period from 2005-2015 was analyzed and regression result with recommendation are displayed
for the selected 8private commercial banks. The cross section fixed effect technique has been applied
to find out the most significant variables from considered corporate governance variables. The
findings indicated that board gender diversity and liquidity ratio does not have a significant effect on
the financial performance of selected private commercial banks.Board members educational
qualification is positively but insignificantly related with the financial performance.Similarly, variety
number of internal board sub-committee, meeting frequency of board, and board ownership had
statistically insignificant positive effect on private commercial bank financial performance. In
additionprivate commercialbank size had statistically significant positive effect on private
commercialbank financial performance. Legal reserve ratio and depositor influencehave negative
significanceat 5% level and positive significanceat 10% level effect on the financial performance of
selected private commercial banks.
Keywords: Banking Sector, Private Commercial Bank Financial Performance, Corporate
Governance Mechanisms.
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Keywords
Banking Sector, Private Commercial Bank Financial Performance, Corporate Governance Mechanisms.