Corporate Governance Mechanism and Financial Performance: A study on Selected Commercial Banks in Ethiopia.

Abstract

Corporate governance provides the structure through which the objectives of the company are set, and the means of achieving those objectives and monitoring performance are determined. The purpose of this study was to investigate the relationship between corporate governance mechanisms and financial performance of Ethiopian commercial banks. From the total of 17 commercial banks which are operating in the country, eight commercial banks have been selected for the study by way of a purposive sampling. The study use ROA as dependent variable and Whereas, independent variables like (board size, board meeting frequency, audit committee size, board experience in finance sector and liquidity ) and control variable like bank size and leverage have been used . To achieve this objective descriptive and explanatory type of research design with a mixed approach, more of quantitative, was employed .Primary data was collected using structured questionnaires completed by the CEOs as they were in a better position to comment on corporate governance affairs. Secondary data was collected from the NBE. The finding revealed that, board size and liquidity have negative and significant impact on the performance of Ethiopian commercial banks. On the other hand, board meeting frequency, audit committee size, board experience in finance sector and bank size had a positive and significant impact on banks performance. Finally, it is recommended that, all commercial banks should have reasonable small board size in order to increase profitability. The banks should have optimum board member with experience in finance sector. The board of directors should meet at least once monthly by having a good agenda to generate superior financial performance. The bank governor(NBE) needs to revisit its policy or it should take some corrective actions like paying at least equal interest with that of the deposit in order to enhance the performance of the sector in general. In addition having adequate audit committee in the board member advisable to assists the banks internal control systems. It is advisable to increase the bank size and capability in order to have more market share which helps in generating more profit.