ACRONYM

CGV: corporate governance

OECD: Organization for Economic Cooperation Development

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Back ground of study

The financial crises that are happening in many prominent institutions around the world have
resulted in the demand for necessary regulations, standards and ethical and professional
principles to achieve trust and reliability in the financial data that investors require. This in turn
has led to the emergence of the concept of corporate governance.

Naser (2020) explained that corporate governance is policies, practices and a set of measures put
in place to ensure that the company's managers work towards the realization of the organization's
vision and mission and ensure that shareholder wealth is maximized becomes an ethical way.
Sani (2019) emphasized that corporate governance is about directing and controlling an
organization and its structures, and also about monitoring the effectiveness of management. The
view was also taken by (Munir, Khan, Usman, & Khuram, 2019) that corporate governance is a
process by which organizations are systematically managed and controlled. The whole idea of
corporate governance according to (Rajesh, 2017) is to affirm a trustworthy and transparent
relationship between the organization and its stakeholders.

Corporate governance encompasses a range of relationships between a company's management,

its board of directors, its shareholders and other stakeholders. It provides the structure by which
the company's goals are set and the means for achieving those goals and for monitoring
performance are established (OECD, 2015). Bezawada (2020) concluded that a good CG allows
to ensure good financial performance and ensure a fair return for all shareholders of the
companies.

CGV is important because it helps organizations achieve their goals, controls risk, and assists in
formal decision-making to avoid risk (Ida Bagus et al., 2019). In addition, CGV is fundamentally
concerned with balancing the interests of stakeholders, including shareholders, directors,
employees, customers, suppliers, financiers, governments and communities. CGV differs from
every country and every company as it is related to economic, legal, social, cultural and
ownership contextual elements.

Corporate governance involves accountability, transparency and credibility, and the ability to
establish effective channels through which information can be disclosed in a way that promotes

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good company performance (Gadi, Ebelechukwu & Yakubu, 2015). All companies, especially
commercial non-profit companies and corporations, are all concerned about good corporate
governance and its importance (Melkamu, 2016). Good corporate governance is essential for any
company or institution, regardless of industry and company size (Mwangi, Obonyo & Cheruyoit,
2015).

Corporate governance in the banking industry provides the platform used to attract domestic and
foreign investors with confidence that their investment is safe and properly used to best manage
an investment (Fanta, Kemai and Waka, 2013; Mohammed and Farouk, 2014; Abdulazeez,
Ndibe and Mercy, 2016).

In addition, appropriate corporate governance structures and practices within the developing,
transition and created economies are important to ensure efficient banking in all current business
conditions (M. Karim and Kerry E., 2013). Barth et al., 2007; Nam and Lum, 2006, claimed that
poor corporate governance was a key explanation for many financial distresses, but the 2007
global financial crises demonstrated that appropriate corporate governance policies cannot be
undermined for monetary fundamentals (De Larosire et al., 2009 ; Kirkpatrick, 2009). In this
sense, Alobaidi, et al. (2017) additionally demonstrated that the financial curses occurring in
numerous distinctive organizations around the world have resulted in the need for basic policies,
measures, and moral and professional standards to achieve trust and consistent quality in the
household information needed Speculators where this has stimulated the development of the
corporate governance idea.

The unique characteristics of banks require strict government regulation through banking
supervision and a range of banking laws and regulations. The interface between these elements
determines how well a bank's performance serves the best interests of shareholders while
meeting regulatory standards. Therefore, for shareholders and regulators, the bank's corporate
governance practices are critical to the success of the bank and its day-to-day operations
(Asnakech, 2013).

The financial system in Ethiopia is characterized by an inadequate risk management system.

Insider ownership (ownership of managers and board members is preferable to outsiders running
the company; a board full of challenges; sound risk management systems and a competitive

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environment between banks are governance mechanisms that increase the financial value of
banks (Asnakech. 2013). Such corporate -Governance mechanisms include board size, gender
diversity in the board, size of the audit committee and educational qualification, experience, etc.
of the board (Yenesew, 2012).

Many researchers have examined the impact of corporate governance practices on bank financial
performance from different perspectives in different settings using a range of explanatory
variables (Yenesew, 2012; Peters and Bagshaw, 2014; Aulia, 2013; Olubukunola Ranti, 2011;
Ashenafi, et al, 2013; Bonsa, 2015. According to (Yenesew, 2012), effective corporate
governance practice improves financial performance depending on the financial performance
measure used, and therefore finds that agency theory provides a generally good Provides
explanation of the links between corporate governance practices and financial performance.
(Peter and Bagshaw 2014) found that companies' financial performance cannot be traced back to
their corporate governance quotient. Good corporate governance practices lead to better financial
performance of the bank (Ashenafi, et.al, 2013). A sound financial system relies on viable and
adequately capitalized banks, and bank performance is influenced by good corporate governance
practices and policies (Yenesew, 2012).

The main focus of this study is to examine the impact of corporate governance on the financial
performance of Abay bank share company Hawassa branch office in Ethiopia.This underlines the
importance of legal regulations and the quality of their enforcement. In Ethiopia, the banking
sector has currently become a preferred business area for many investors and other stakeholders
such as creditors, customers, the government and the public at large. However, the banking
sector in Ethiopia is developing well but is characterized by many problems such as: a limited
range of services, lack of capital markets, and the sector remains largely closed to foreign
investors.

Statement of the problem

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A weak CG structure, particularly in developing countries, poses a serious challenge to CG
practice and compliance. (Al-ahdal et al., 2020). Abobakri (2017) suggested that bank
governance has only recently become the subject of empirical studies, particularly after the onset
of the recent financial crisis. The banking industry worldwide has seen many reforms over time
ranging in size, audit committee, board composition, block ownership, operations and processes.

With the concomitant concentration that these changes in the banking industry are bringing with
them, there is a need to respond to the challenges banks are facing, particularly with regard to
strengthening their corporate governance environment. Poor corporate governance can contribute
to bank failures, with significant public costs and consequences (Rahman and Islam 2018; Hajer
and Anis 2016; Onofrei, Firtescu and Terinte, 2018). Good corporate governance promotes
efficient oversight of company assets, effective risk management and greater transparency of
financial activities help to achieve and maintain public confidence in the financial system. In
contrast, poor corporate governance can contribute to financial failures, which in turn could
trigger a run on financial institutions or a liquidity crunch. Due to the opacity of private banks
and strong state regulation, corporate governance in the financial sector works differently.
Private financial sectors are generally more opaque than non-financial institutions and there is
evidence that information asymmetries are larger than in other sectors (Asnakech, 2013).

Private commercial banks are the subject of corporate governance studies for two reasons; First,
while information asymmetries exist across all sectors, they are greater for private financial
institutions as they are generally more opaque and owned by a range of shareholders compared
to government financial institutions. (Yenesev, 2012; Levine, 2003).

Previous studies have made immense contributions to corporate governance practices and
financial performance; they tended towards the developed countries. However, developing
countries, especially Ethiopia, have received little attention in various literatures on the subject,
for example (i.e. Yenesew (2012) and Srmolo, (2012), Tura (2012), Gebremedine (2010),
Fekadu (2010) and Minga (2008) ) were carried out on corporate governance. Although
numerous studies have been conducted in large corporations operating within well-organized
corporate governance mechanisms in developed economies, this discipline area has remained
ignorant in our country of Ethiopia, especially in the financial institutions sector, which is in its
infancy. This study therefore aims to fill this gap by assessing the impact of corporate

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governance on the financial performance of a private commercial bank in the case of Abay Bank
Share Company.

Objective of the study

General objective

The main objective of this study is to assess the impact of corporate governance on the financial
performance of Abay Bank share company.

Specific Objective

In particular, this study aims to achieve the following specific objectives

1. Exploring the relationship between board size and financial performance.

2. Exploring the relationship between a board member's educational qualification and
financial performance.
3. To Analyze the influence of industry-specific experience and financial performance
of board members
4. To determine the impact of board member audit committee size on financial
performance.
5. To Analyze the relationship between board member gender diversity and financial
performance

Research Hypothesis

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Ho1. Board size has a significantly negative relationship to financial performance
Ho2. Educational qualifications of board members are significantly positively related to financial
performance

Ho3. Board members' executive experience has a significantly positive relationship to financial
performance

Ho4. Board gender diversity is significantly positively related to financial performance.

Ho5. The size of the audit committee on a board of directors is significantly negatively related to
financial performance

Significance of study

The study has the following theoretical and practical significances

 First, this study could help us improve our understanding of corporate governance in terms of
agency theory in developing countries, particularly in Ethiopian industrial and service
companies, and determine if there are potential improvements that could be addressed
 These studies contribute to the ongoing governance literature in developing countries and
also help to alleviate the paucity of corporate governance studies in developing countries
such as Ethiopia
 It will add more knowledge about the concept of corporate governance and provide more
empirical insights into the relationship between corporate governance and financial
performance of companies
 The insights can also be applied by corporate governance policy makers at Abay Bank.
 Finally, the results of the study will also provide an insight into the prevailing situation of
corporate governance in Ethiopia, which is of interest to local and international investors,
managers and academic researchers considering the role of corporate governance

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Scope of the study

This study is limited to the Hawassa District Office of Abay Bank Share Company only. The
study period spans four years (2009 2013 E.C) with the selection for the period being to include
recent years of operation. In addition, the corporate governance variables selected for study are
limited to board size, board gender diversity, board member educational attainment, board
member experience in the financial sector and size of audit committee.

Organization of the study

The study is divided into five chapters and formulated as follows: The first chapter deals
with an introductory part, which contains the background of the study, the problem
statement, the objectives of the study, the scope, the meaning and the organization of the
study. Chapter two, theoretical, empirical, gap and conceptual framework. Chapter three
discusses the research methodology, which includes a description of the study area, research
design, data source, sampling technique, study population, sample size, model variables,
hypothesis, and data analysis. Chapter 4 presents the analysis and discussion part of this
study. Finally, in chapter five, the conclusions and recommendations that the researcher will
make after the analysis are presented.

CHAPTER TWO

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 2. LITERATURE REVIEW

2.1 Conceptual Literature Review

2.1.1 Terminological definition of Corporate governance

Corporate governance can be defined as the process and structure that is used for directing and
managing business’ affairs in order to enhance business prosperity and corporate accountability
with the ultimate objective (Mohamed, Ahmad, & Khai, 2016). Owiredu and Kwakye (2020)
said that the area of CG is monitoring, supervision and determination of a strategic direction for
the organization. Corporate Governance, therefore, refers to the manner in which the power of a
corporation is exercised in the corporation’s total portfolio of assets and resources with the
objective of maintaining and increasing shareholder value and satisfaction of other stakeholders
in the context of its corporate mission (Chenuos, Mohamed, and Bitok, 2014).

Corporate governance for banks may be described as the way the activities and business of the
banks are conducted and governed by the management team and board. Basically, corporate
governance in the nation’s banking system provides the structure and processes within which the
business of a bank is conducted with the ultimate objective of realizing long term shareholders
value while taking into account the interest of all other legitimate stakeholders (Uwuigbe 2013 ).

Historical Overview of Corporate Governance

The foundational argument of corporate governance, as seen by both academics as well as other

independent researchers, can be traced back to the pioneering work of Berle and Means (1932).

They observed that the modern corporations having acquired a very large size could create the

possibility of separation of control over a firm from its direct ownership. Berle and Means’

observation of the departure of the owners from the actual control of the corporations led to a

renewed emphasis on the behavioral dimension of the theory of the firm. Governance is a word

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with a pedigree that dates back to Chaucer. In his days, it carries with it the connotation “wise

and responsible”, which is appropriate. It means either the action or the method of governing and

it is in the latter sense that it is used with reference to companies. Its Latin root, “ gubernare’

means to steer and a quotation which is worth keeping in mind in this context is: ‘He that

governs sits quietly at the stern and scarce is seen to stir’ (Cadbury, 1992:3). Though corporate

governance is viewed as a recent issue but nothing is new about the concept because, it has been

in existence as long as the corporation itself (Imam, 2006: 32).

Corporate Governance in Ethiopia

There are a number of companies that are being formed by sale of shares to the wider public

unlike most share companies in the past which were formed among founders. (Addis Fortune,

(Addis Ababa), April 28, 2011). The emergence of publicly held share companies in Ethiopia

gives rise to a multitude of issues on corporate governance. Typically, ownership separates from

the control of dispersed shareholders and goes into the hands of few managers, which in turn

create the principal-agent relationship in such situations, agents (managers) may misappropriate

the principals‟ (shareholders‟) investments as they have more information and knowledge than

the shareholders. Where there exist few block holders in share companies, minority shareholders

could be exploited in the hands of such block holders. The agency problems that could occur

between dispersed shareholders and managers and/or block holders of share companies in

Ethiopia, therefore, necessitate good corporate governance laws and institutions. (Fekadu (2010)

Minga (2008) observes that the status of corporate governance in Ethiopia is disappointing and

notes that “the Commercial Code of 1960 does not provide adequate legislative response to

complex governance issues of the day, and the new draft corporate law has not yet been

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finalized;” and he further states that “key international conventions, codes and standards are not

ratified or adequately incorporated in the Proclamations” and that “the Decrees and Directives

lack coherence and foresights, and at times suffer from poor drafting.

Fekadu (2010) underlines the growing separation between ownership and control in Ethiopia,

and he submits some empirical evidence in this regard. Relying on the data and literature on

corporate governance, he shows the deficiency of the Commercial Code in protecting the rights

of minority shareholders in the context of publicly held companies. He raises crucial issues such

as: “what powers does the board have? Who is it accountable to? How is it organized? What are

its standards of liability?” among others.

Tewodros (2011) discusses the legal regime applicable to governance of share companies in

Ethiopia. He explores the theoretical background and legal framework of corporate governance

and examines the rules of governance in light of available standards. In particular, he discusses

the structural choice, appointment and removal, powers, duties and responsibilities,

remuneration, and the working methods and mechanism for controlling the boards of directors.

Tewodros states that “a share company is managed by its board which is composed of directors

appointed by the general meeting of shareholders.

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Theoretical framework for Corporate Governance

In most studies conducted concerning corporate governance and banking performance, the
agency, stewardship, and stakeholders theory has been widely used.

2.1.1 Agency theory

The theory of principal-agent problem occurs when one person or entity i.e. the agent is able to
make decisions on behalf of another person or entity i.e. the principal. Agency theory was
propounded by Stephen Ross and Barry Mitnick in 1970. The literature on corporate governance
attributes two factors to agency theory. The first factor is that corporations are reduced to two
participants, managers and shareholders whose interests are assumed to be both clear and
consistent. A second notion is that humans are self-interested and disinclined to sacrifice their
personal interests for the interests of the others (Daily, Dalton,& Cannella, 2019).

2.1.2 Stewardship theory

The stewardship theory, on the other hand, originates from sociology and psychology. The
stewardship theory maintains that managers are not motivated by individual goals but rather they
are stewards, whose motives are aligned with the objectives of their principal shareholders; as
opposed to the agency theory which claims that conflict of interest between managers and
shareholders is inevitable unless appropriate structures of control are put in place to align the
interests of managers and shareholders. The stewardship perspective suggests that stewards
(managers) are satisfied and motivated when organizational success is attained even at the
expense of the stewards‟ personal goals. Furthermore, while the agency theory suggests that
shareholder interests will be protected by separating the posts of board chair and CEO, the
stewardship theory argues that shareholder interests will be maximized by assigning the same
person to the posts of board chair and CEO to give more responsibility and autonomy to the CEO
as a steward in the organization (Fanta, Kemal, & Waka, 2013).

According to Hamid(2011), the theory also argues that an organization requires a structure that
allows harmonization to be achieved most efficiently between managers and owners. He
therefore stated that this situation is attained more steadily if the chairman of the board was the

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same as the CEO. Hence expectations of corporate leadership would be clearer and consistent for
both subordinate mangers and other members of the corporate board as well. Thus there would
be no room for uncertainty as to who has authority or responsibility over a particular matter.
Therefore the organization would enjoy the benefits of unity of direction and strong command
and control.

2.1.3 Stakeholder theory

Stakeholder theory was propounded by Dr. F. Edward Freeman, a professor at the university of
Virginia in 1984. This theory centers on the issues concerning the stakeholders in an
institution. It stipulates that a corporate entity invariably seeks to
provide a balance between the interests of its diverse
stakeholdersto ensure that each interest constituency receives
some degree of satisfaction Abrams (2019). However, there is an
argument that the theory is narrow because it identifies the
shareholders as the only interest group of a corporate entity.
The traditional definition of a stakeholder is “any group or
individual who canaffect or is affected by the achievement of the
organization’s objectives” Freeman (2019). With an original view
of the firm, the shareholder is the only one recognized by business
law in most countries because they are the owners of the
companies.Given this, the firm has a fiduciary duty to maximize
their returns and put their needs first. In more recent business
models, the institution converts the inputs of investors, employees,
and suppliers into forms that are saleable to customers hence
returnback to its shareholders

2.1.4 Resource dependency theory

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Resource dependency theory is known to have been developed by Jeffrey Pfeffer and Gerald R.
Salancik in their work; the external control of organizations. It was made clear that
interdependence influenced how the objectives of firms were achieved. It was made clear that
organizations engaged in exchanges and transactions with other groups or firms and therefore
dependence affected organizational decisions (Soni, 2014).

Davis and Cobb (2009) are of the view that RDT is made up of three core ideas which includes;
social context matters, organizations having strategies to enhance their autonomy and pursue
interest and powers. They summarized the RDT with an advice to top managers which was to:
“Choose the least-constraining device to govern relations with your exchange partners that will
allow you to minimize uncertainty and dependence and maximize your autonomy.”

Xia, Wang, Lin, Yang and Li (2016) were also of the view that allainces were formed as a
response to chalanges from both market and social forces. They however stated that although the
resource dependence logic posits that firms enter into alliances to stabilize resource flows
between different markets and also to increase market power in their primary industry, it remains
unclear whether the social power of firms, generated from alliance networks, may motivate firms
to respond differently to the dependence logic of alliance formation.

Linkage between Corporate Governance and Firm Performance

Better corporate governance is supposed to lead to better corporate performance by preventing

the expropriation of controlling shareholders and ensuring better decision-making. In expectation
of such an improvement, the firm’s value may respond instantaneously to news indicating better
corporate governance. However, quantitative evidence supporting the existence of a link between
the quality of corporate governance and firm performance is relatively scanty (Imam, 2006).

Good governance means little expropriation of corporate resources by managers or controlling

shareholders, which contributes to better allocation of resources and better performance. As
investors and lenders will be more willing to put their money in firms with good governance,
they will face lower costs of capital, which is another source of better firm performance. Other

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stakeholders, including employees and suppliers, will also want to be associated with and enter
into business relationships with such firms, as the relationships are likely to be more prosperous,
fairer, and long lasting than those with firms with less effective governance.

Implications for the economy as a whole are also obvious. Economic growth will be more
sustainable, because the economy is less vulnerable to a systemic risk. With better protection of
investors at the firm level, the capital market will also be boosted and become more developed,
which is essential for sustained economic growth. At the same time, good corporate governance
is critical for building a just and corruption-free society. Poor corporate governance in big
businesses is fertile soil for corruption and corruptive symbiosis between business and political
circles. Less expropriation of minority shareholders and fewer corruptive links between big
businesses and political power may result in a more favorable business environment for smaller
enterprises and more equitable income distribution (Iskander and Chamlou, 2000).

Corporate Governance Mechanisms

Corporate governance generally refers to the process or mechanism by which the affairs of
businesses and institutions are directed and managed, with a view to improve long term value of
shareholders while taking into account the interests of other stakeholders interested in the
wellbeing of an entity. Corporate governance is divided into external and internal corporate
governance. Internal corporate governance covers public’s interest, employees’ interest, and
owners’ interest. While external corporate governance is defined as a mechanism through which
governments’ responsibility to control the operations of banks are exercised based on the
prevailing bank regulations (Ben, Patrick & Caleb, 2015).

Researchers often categorize corporate governance mechanisms into two categories, i.e. internal
and external corporate mechanisms. The internal mechanism is divided into five basic categories,
they are: the board of commissioners (roles, structures and incentives), managerial incentives,
capital structure, constitutions and corporate regulations, and internal control system. Whereas
external mechanism is divided into five categories, they are: law and regulations, market, capital

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market information and analysis, accounting market, finance and law, and special sources of
external control (Gillan, 2006 cited in Dharmastuti &Wahyudi, 2013).

Determinants of firm performance

Board Size

It is widely recognized that the board size is a crucial internal mechanism of corporate
governance and plays a major role in a firm’s management. For this reason, board size and its
impact on firm financial performance is one of the most argued issues in corporate governance
(Ozcan and Ali, 2016).

Board Gender composition

Board gender composition refers male-female proportion of board of directors. Gender

composition of the board of directors is one current governance issue facing corporate
organization today. Greater female representation on boards provides some additional
skills and perspectives that may not be possible with all-male boards (Boyle, 2011)

Board competency

Board Competency refers to Educational Qualifications of individual board members.

Qualifications of individual board members are important for decision making. Board
members with higher qualifications benefit the firms through a mix of competencies and
capabilities which helps in creating diverse perspectives to decision making. Presence of
more qualified members would extend knowledge base, stimulate board members to
consider other alternatives and enhance a more thoughtful processing of problems.
Members with higher educational qualifications in general and research and analysis
intensive qualification like PhDs in particular will provide a rich source of innovative
ideas to develop policy initiatives with analytical depth and rigor that will provide for
unique perspectives on strategic issues (Joel, 2012). Several studies have found a positive
relationship between competencies and firm performance. Directors' specialist knowledge will be
valuable to the creation of a strong and informed board (Saat, Karbhari, Heravi, & Nassir, 2011)

Size of Board Audit committee

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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. Thus, it is expected that there is a significant Negative
relationship between size of audit committee and financial performance

Review of empirical study

This section of literature review concentrates on previous studies that have been conducted in
relation to this study. There were mixed results concluded by previous studies pertaining to the
relationship between corporate governance mechanisms and firms’ financial performance. The
important empirical studies are summarized below in this section.

Uadiale (2010) examines the impact of board structure on corporate financial performance in
Nigeria. He found as the existence of strong positive association between board size and
corporate financial performance. It investigates the composition of boards of directors in
Nigerian firms and analyses whether board structure has an impact on financial performance, as
measured by return on equity and return on capital employed. Based on the extensive literature,
four board characteristics (board Composition, board size, board ownership and CEO duality)
have been identified as possibly having an impact on corporate financial performance and these
characteristics are set as the independent variables. The Ordinary Least Squares (OLS)
regression was used to estimate the relationship between corporate performance measures and
the independent variables. Further he noted as exists of positive association between outside
directors sitting on the board and corporate financial performance. However, a negative
association was observed between directors’ stockholding and firm financial performance
measures. In addition, the study reveals a negative association between return on capital
employed (ROE) and CEO duality, while a strong positive association was observed between

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ROE and CEO duality. The study suggests that large board size should be encouraged and the
composition of outside directors as members of the board should be sustained and improved
upon to enhance corporate financial performance.

Study by Habtamu (2012), examined the impact of corporate governance on the

performance of banks. The study applied panel data of ten Ethiopian commercial
banks that covered for the period of 2004/05 to 2009/10. The paper used independent
sample t-test and pooled OLS panel data regression models to investigate the impact
of some internal corporate governance variables on major profitability indicator i.e.,
ROA and ROE. The estimation results showed that, board size, gender diversity in
boardroom and CEO experience are found to have negative effect on the financial
performance of banks measured using ROA and ROE. Audit committee and board
meeting frequency are found to positively affect ROE, with no effect on ROA. Finally
board composition is found to have no effect on both financial performance measures.

On the other hand, Kelifa (2012) examined the relationship between selected internal
and external corporate governance mechanisms and bank performance as measured by ROE and
ROA. The study used mixed methods approach, particularly structured review of documents and
in depth interviews. By using a panel data of 9 banks for 7 year (from 2005 up to 2011) and OLS
as analyzing technique, the result revealed that board size and existence of audit committee in the
board had statistically significant negative effect on bank performance in terms of both ROE and
ROA; whereas bank size had statistically significant positive effect on bank performance in
terms of both ROE and ROA.

In another study, Assefa and Megbaru (2013) conducted a study on the effect of corporate
governance mechanisms on the financial performance of commercial banks in Ethiopia between
2004 and 2010. The study used both primary and secondary data. Furthermore, primary data
were collected through conducting focus group discussion with selected staff of banks of
commercial banks in Ethiopia. Collected data were analyzed using correlation analysis and
pooled panel time series data with cross sectional nature. The result of the study shows that the
size of the board was significantly and negatively associated to bank’s performance measures
(ROA; ROE and NPM). The study recommended that regulatory authorities in Ethiopia should

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 ensure that mechanisms of corporate governance are well implemented by all banks since it is
capable of influencing financial performance of commercial banks in Ethiopia.

CONCEPTUAL FRAMEWORK

The conceptual framework model was developed from the literature review and it shed
light on the methodology that will be use in the study . It is a guide to this research and shows
how the independent variables affect the financial performance (dependent variable) of ABAY
BANK S C. Five variables are selected while assuming other variables remain constant during
the research

Independent variables

Dependent variable
Board size

Board competency

FINANCIAL
Audit committee size PERFORMANCE (ROA)

Board gender
Composition

Board Experience Source: Concept Map by the Researcher

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 Chapter 3
RESEARCH METHODOLOGY

3. Introduction
The purpose of this chapter is to present the methodology that is used in the study. The chapter
presents Description of study area research design, target population and sampling technique,
method of data collection, method of data analysis and model specification of the study.

3.1 Description of study area

Hawassa is located in the Southern Nations Nationalities and peoples Region on the shores of
Lake Hawassa in the Great Rift Valley; 275 km south of Addis Ababa and 1,125 km north of
Nairobi, Kenya. The city lays on the Trans-African High Way-4: an international road that
stretched from Cairo (Egypt) to Cape Town (S.Africa). Geographically the city lays between
6055’0’’ to 706’0’’Latitude North and 38025’25’’ Longitudes East. Hawassa city is bounded by
Lake Hawassa in the West, Oromia Region in the North, Wendogenet woreda in the East and
Shebedino woreda in the south. Hawassa served as the Capital of Sidama Regional state . The city
administration has an area of 157.2 sq.kms, divided into 8 sub-cities and 32 kebeles,. These Eight sub-
cities are Hayek Dare, Menehariya, and Tabor, Misrak, Bahil Adarash, Addis Ketema, Hawela-Tula and
Mehal sub-city (Hawassa City Administration, Socio-Economic Profile, 2007).

An elevation of 1708 meters and rain fall mostly occurs in the summer season. In 2007 E.C the
daily minimum and maximum temperature are almost moderate and only for the few days of the
year when either minimum temperature is 10.7 oC or the average maximum temperature are
31.5oC (Hawassa City Administration, Socio-Economic Profile, 2007). The study will be
conducted at Abay bank S C hawassa district office.

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Data source: Hawassa City Administration, Socio-Economic Profile (2007).

3.2 Research design

The primary aim of this study attempts to examine the impact of corporate governance on the
financial performance of Abay bank S.C .To achieve this objective explanatory type of research
design will be employed by deriving quantitative data from the annual report of the bank. The
rational for choosing explanatory research design is; it used to examine the cause and effect
relation between dependent and independent variable.. The research will be quantitative research.
Meant for, the researcher will use regression model, to analyze the data which is collected from
the annual report of the bank

3.3 Sources and Method of Data Collection

The main source of data is secondary data from the annual reports and financial statements of the
bank .The study will use secondary data over the period of 2009 to 2013 for four years. Data will

be collected from audited financial report of the bank. The data for this study is limited to

thefinancial statement of listed banks whose annual reports are available on the Nigeria

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StockExchange (NSE) under the period of study (2003 – 2017). These periods are chosen base
onthe availability of data. All data will be collected on annual base and the figures for the
variables were on June 30 of each year under study.

3.3 Population of the Study

The population of interest of this study will be Abay bank hawassa district office staff; those
have been served for decades and above operation. All of them will be taken as a target

population for the purpose of this study. Therefore, the population size is 15 banks

3.4 Sample Size and Technique of the study

The study will adopted the census approach as it was unnecessary for sampling or sample size
determination. Data used in the study were extracted from corporate financial statements and annual
reports of the banks submitted to the NSE . Depends on entirely on the expert judgment, the
researcher will use Census sampling Techniques for the study. The reason to Census or
enumeration method is limted number of staff are found

3.5 Measurement of Validity and reliability test

VALIDITY

Oyeniyi, et. al (2016); Wayne (2014} etc. have identified that, though, a reliable data does not
necessarily mean a valid data, but a valid data mean's a reliable data. Hence assessing the validity
of a secondary data means assessing its reliability.

RELIABILITY

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Assessing secondary data reliability can entail reviewing existing information about the data,
which may include interviewing officials of audited Organisation; performing simple analysis on
the sample of data, including advanced electronic analysis; tracing to and from source
documents; and reviewing selected system controls (Shuttleworth, 2009). This collaborate
Corillo (2014) who argue that, an assessment of the reliability of data will involve an assessment
of the method(s) used to collect the data. Corillo (2014) also argue that, it will depend on the
source of the data been assessed. For example, for documentary source, it is unlikely that there
will be a formal methodology describing how the data were collected. But in report attention is
given to how the data were analysed and how the result are report.

It should be noted that, since researchers determine the reliability of research instrument/process
.and not the data (Wayne, 20 14), the situation is different ·for both types of data. This is because
it is easier to assess the, reliability of basic primary data collection instruments like
Questionnaire. Interview, Observation and Reading (Annum, 2017) because of the availability of
initial run of data, But assessing an existing 'document (in the form of government publication,
earlier research, personal records and clients' records, Vivek, 2011), or non-document (in the
form of tape and video recordings, pictures, drawings, films and television programmes,
DVO/CD, Weijun, 2008) the tools available from which secondary data are gathered may not be
easily execute with direct statistical tools . This may be assessed by the use of a step by step'
method of analysis.

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Source: Adapted from Flintermann (2014)

3.6 Method Of Data Processing And Analysis

To test the proposed hypotheses, descriptive statistical and inferential statistics will be used.
Descriptive statistics such as minimum, maximum, mean, standard deviation of the variables
(both dependent and independent) will be used to describe the nature and dispersion of the data
over the research period and across the banks. Then, correlation analyses will be used to see the
existence and degree of linear relationship between dependent and independent variables.

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Finally, multiple regression analysis will be employed to assess the level of impact the
independent variables on the dependent variable. Data collected from different sources will be
analyzed by using SPSS 20 software package.

3.7 model specification

In examining the impact of corporate governance on financial performance of abay bank
hawassa district office, the econometric model developed from ground and gap in the existing
literature is as follows

Model Specification
Y = f(X)
X = Corporate Governance
Y = Financial performance

Secondary Data
x1 = Board Experience (BE)
x2 = Board Size (BS)
x3 = Board competency (BC)
x4 = Board Diversity (BD)
x5 = Audit Committee (AC)

Sub-Variables for X are;

X = (x1, x2, x3, x4, )

Secondary Data model specification

TP = α + β1BEit + β2BS it + β3BC it + β4BD it + β4AC
β0 = Intercept
β1 – β4 = Coefficient of independent variable
µi = error term

Y-dependent variable

X- Independent variable

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α- constant

3.9 Ethical consideration

Before the research will be conducted on the bank, the researcher will informethe participants
of the study about the objectives of the study, and consciously consider ethical issues in
seeking consent, avoiding deception, maintaining confidentiality, respecting the privacy, and
protecting the anonymity of all respondents. A researcher must consider these points because the
law of ethics on research condemns conducting a research without the consensus of the
respondents for the above listed reasons.

4. work plan and budget breakdown

4. Research Work Plan

4.1 Time
In order to manage the research work effectively, a work plan has been developed to
indicate all the activities that will be carried with in research project period.
No Activities Time
1. Identification of the problem and topic selection Jan 01 to 10, 2022
2. Writing and Submission of first draft proposal Feb 02 to 15,
2022
3. Taking feedback Up to
February17 ,

26
 2022
4. Modifying the proposal based on the feedback Up to February
19, 2022
5. Collecting both primary and secondary data Up to March 30,
2022
6. Data analysis and interpretation April 1 to 15,
2022
7. Writing summary, conclusion and April 1 to 30;
recommendation 2022
8. Writing the thesis April 1 to
30.2022
9. Editing and submitting the first draft of the paper May 1 to 5, 2018
10. Taking feedback May 8 to 20;
2022
11. Modifying and submitting the final thesis to the Up to June 6
department 20,2022

4.2. Budget Plan the paper

The budget breakdown for the overall activities of the intended research work is given
as follows.
S Cost Un Quan Pr To
/ item it tity ic tal
N e co
pe st
r
un
it
1 Compute Pac 5 12 40
r paper ket 0 0
2 Duplicati Pac 6 90 34
ng Paper ket 0
3 Duplicati Tu 1 20 20
g ink be 0 0

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4 Photoco Pag 1000 0. 30
py e 50 0
services
5 Flash Pie 2 30 50
disk 16 ce 0 0
GB
6 Black Pie 15 40 60
disk(RW ce 0
)
7 Printer Pie 1 12 10
toner ce 00 0
8 Pencils/ Pie 10 10 10
Eraser… ce 0
9 Data Ho 60 60 20
enumerat ur 0
ors’
wage
1 Drivers Ho 60 80 30
0 wage ur 0
1 Students Ho 70 10 63
1 travel ur 0 0
and
wage
1 Fuel and Litt 400 18 72
2 lubricant re 00
s
1 Telepho - - - 25
3 ne, 00
internet/
Fax
1 TOTAL 15,000
3

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29