EFFECT OF CORPORATE GOVERNANCE IN FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN ETHIOPIA

Abstract

This study aims at examining the Effect corporate governance in firms' financial performance using ten years data from the year 2005 to 2014 with a sample of nine Ethiopian commercial banks. The study assessed the relationship between selected corporate governance variables, and bank performance as measured by ROA. Corporate governance variables considered in this study includes board size, board gender diversity, board members educational qualification, industry specific experience, audit committee size and frequency of board meeting. The study controls the effect of bank size and age, of the banks. Explanatory research design was employed to establish the causal relationship between corporate governance and performance measure variables .The study uses both primary and secondary source of data .Primary data was collected using questioner which is completed by board secretary and senior management of the sample commercial banks as they were in better position to comment on corporate governance issues and the secondary data was collected from the National bank of Ethiopia. The study utilizes panel data and fixed effect regression model analysis methodology by using Eviews 7 soft ware in drawing conclusion about the study .The findings of the regression results indicated that large size board and audit committee negatively influences financial performance; whereas board members educational qualification, industry specific experience and board composition positively associated with financial performance. In general, the findings suggest that banks with effective corporate governance mechanisms improve financial performance depending on the measure used even if not all corporate governance mechanisms are significant. Based on the finding and conclusion reached the researcher forwards the following major recommendation attention should be given for the board size of banks to be small in number to optimal level with better educational qualification since small board size with better educational qualification is more effective in monitoring managers and help to improve performance. , boards of banks are dominated by male and board gender diversity is very limited in Ethiopian commercial banks for the last ten years. Thus, there is much to be done to improve the gender balance of boards in Ethiopian banks with a great care about their qualification and competency, Ethiopian commercial banks should include experienced board in other financial sector to improve their financial performance as if the helps the firms to improve their performance by sharing their past experience. Finally, the researcher recommends that Ethiopian commercial banks should make their audit committee size small to improve their performance. Because, as this study revealed large size audit committee negatively influences performance. Keywords