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CHAPTER3 The EMPIRICAL LITERATURE REVIEW
Introduction
This chapter presented the discourse on the empirical studies of the research and the consequent formulation of the hypothesis. It covered empirical studies based on financial measures of profitability and the multiple approaches of performance. Further the factors involving internal service marketing, employee job satisfaction, customer service quality, customer satisfaction, customer loyalty, and profitability were discussed in the construction of the hypothesis.
General Overview
Performance measurement is important to assess the soundness of the banking sector and build confidence of the public in the financial system of a country. A sound performance of the sector depends on the soundness of individual bank (the contagious effect). Therefore, when evaluating the performance of the banks, due consideration has to be given to both their profitability and the environmental factors affecting profitability, so as to avoid misleading conclusions.
Based on the contingency theory the business environment is dynamic and the literature demonstrates that the banks have to adapt their performance measurement system and strategies to fit with the ongoing changes of their business environment. Changes in the business environment have an impact on the survival and stability of organisations (Siti-Nabiha & Scapens, 2005). Then, changes in circumstances (contingencies) require an adjustment to the structure so as to improve the fit condition and lead to higher performance. As discussed in chapter two and according to Drucker (2000), management must be change leader, look at change as an opportunity and not a challenge, understand how to make change effective both inside and outside the organization, inspire the workforce to see change as an opportunity, and be able to develop new products or services to address the market needs for change. Therefore, in response to the dynamics of the internal and external environment, it‟s necessary to make continuous and timely scanning of the environment and respond appropriately by modifying their performance measurement systems and strategies that suit the change.
Therefore, given the different approaches used to evaluate the performance of the commercial banks, this study focuses on the relevant literature on measures of profitability and the non-financial factors affecting profitability.
Empirical Studies on Measures of Profitability
Financial measures have traditionally been used to evaluate the efficiency and effectiveness of a firm and its management in maximizing the wealth of shareholders. Besides, financial measures have been used as a source of information to the stakeholders of organisations for their respective decisions through multiple interim and annual financial reports. The balance sheets and income statements have been used as a source of data to measure the overall effectiveness and efficiency of a bank by various stakeholders. Profitability measures have also served as the bottom line of financial reports.
The literature on measures of profitability validates internal and external environmental factors as determinants for studying bank profitability (Bourke, 1989). Internal factors originate from bank balance sheets and income statement accounts which are bank specific determinants of profitability. Accounting provides different types of traditional financial measures of profitability such as return on assets (ROA), return on capital employed (ROCE), sales growth, capital structure (equity/assets), credit risk (loan loss provisions/total loan), operating expenses capability (operating expenses/total assets), and ownership structure (Atkinson, 2006) as internal determinants of profitability. These measures are profit measures used to evaluate the historical performance of a firm (soumadi & Aldaibat, 2012).
Empirical studies on profitability analysis cover either of cross-country or individual countries‟ banking systems or on developed or emerging market economies. Studies that focused mainly on cross-country analysis include that of Grigorian and Manole (2002) who estimate indicators of commercial bank efficiency by applying a version of the Data Envelopment Analysis (DEA) to bank-level data from a wide range of developed countries. Their analyses include a variety of macroeconomic, prudential, institutional, and bank-specific variables. Similar studies were also performed by Manandhar & Tang (2002); Bonin, Hasan, & Wachtel (2005); and Zhang & Daly (2013). .
Molyneux & Thornton (1992), Williams (2003), Athanasoglou, et al., 2008), Heffernan & Fu (2008), and Trujillo-Ponce (2013) apply a General Methods of Moments (GMM) technique in their studies of a single country‟s panel data. These authors examine the effect of bank-specific, industry-specific, and macroeconomic determinants of bank profitability.
The findings of the studies conducted on individual emerging country‟s bank by Tarawneh (2006), Sufian & Chong (2008), Idris, Asari, Mustaffa, & Jusoff (2011), Khan, Rehman, Rehman, Safwan, & Ahmad (2011), Gul, Irshad, & Zaman (2011) Ali, Akhtar, & Ahmed et al. (2011), Naceur & Omran, (2011), Almazari (2011) and Belanesh (2011) indicate that bank-specific determinant variables and external determinant factors have in combination an impact on the profitability of banks.
Bank-specific determinant variables include, among others bank size, capitalisation, asset utilization ratio, operating efficiency ratio, credit risk, management of expenses, non-interest income, profit to asset ratio, loan growth, overhead expenses, insider lending, non-performing loans, and efficiency of asset management. External determinant factors consist of inflation, taxation, economic growth, bank regulation, and macroeconomic determinants. However, in spite of the prevalence of some common elements for classification, the empirical results vary due to the differences of both internal and external determinants‟ datasets and environments of the specific banks in the study.
On the other hand, ownership structure has also become a popular variable employed by researchers in China and in this regard Lin & Zhang (2009), Berger, Hasan, & Zhou (2009) suggest that ownership is associated significantly with improved efficiency.
Besides, globalization has developed recently as a measure to investigate bank performance. For instance, García-Herrero & Santabárbara (2008) find empirical evidence to suggest that the Chinese banking sector benefits from the globalization process through higher profitability and increase of the efficiency of the banking system.
Nevertheless, in spite of its effect on the free flow of services, capital, technology, and labour, globalization is also likely to aggravate the gap between developed and developing countries by creating a lobal financial crisis, causing political and cultural problems, and leading to environmental degradation. With respect to this, Lensink, Meesters, & Naaborg (2008) find that globalization negatively affects bank performance. But, the researcher believes that a country will not be immune in one way or the other from the impact of globalization. Although not a resolution for the financial development of the country, the banking business in Ethiopia is not yet open to foreign entry in view of the challenges the regulator would face and the capacity of the domestic banks to withstand the possible global competitive environment.
In sum, the above studies have measured performance based on accounting methods of evaluating profitability. Yet, the traditional financial measure has been criticized for many of its limitations. Critics such as Johnson & Kaplan (1987), and Hayes & Abernathy (1980) suggest that financial measures are not consistent with today‟s business environment. The most pronounced limitations are that financial measures are: backward looking, lack predictive power, not relevant to many levels of the organization, prone to reward short-term or incorrect behaviour, deficient on the provision of sufficient information on solutions to problems, not strategically focused, and not bold enough in creating sufficient linkage into the long-term performance (Smith, 2006; Zhang & Pan, 2009; and Al Sawalqa, et al., 2011).
CHAPTER 1 OVERVIEW OF THE RESEARCH
1.1. Introduction
1.2. Background of the Study
1.3. Statement of the Problem
1.4. Research Questions
1.5. Objectives of the Study.
1.6. The Research Hypothesis:
1.7. Significance of the Study:
1.8. Scope of the Study
1.9. The Structure of the Study
1.10. Summary of the Chapter
CHAPTER 2 THE THEORETICAL BASIS OF THE STUDY
2.1. Introduction
2.2. Liberalization and the Contemporary Banking Business Environment in Ethiopia
2.3. The Rational for Performance Measurement
2.4. The Definition and Design of Performance Measurement
2.5. Theoretical Foundation of the Research
2.6. The Performance Measurement Frameworks/Models:
2.7. Summary of the Chapte
CHAPTER 3 The EMPIRICAL LITERATURE REVIEW
3.1. Introduction
3.2. General Overview
3.3. Empirical Studies on Measures of Profitability.
3.4. Empirical Studies on the Non-Financial Measures of Performance
3.5. Hypotheses Development
3.6. Summary of the Chapter
CHAPTER 4 METHODOLOGY
4.1. Introduction
4.2. Research hypotheses
4.3 The Research Design
4.4 The Population and the Unit of Analysis
4.5 Sample Size Determination
4.6 Data Source and methods of data collection
4.7. Methods of data analysis.
4.8. Chapter summary
CHAPTER 5 DATA ANALYSIS
5.1. Introduction
5.2 Demographic Characteristics of Employees of the Sampled Commercial Banks:
5.3. Demographic Characteristics of Customers of the Sampled Commercial Banks
5.4. Descriptive Statistics of the Dimensions
5.5. Customer Service Quality Expectations and Perceptions – The GAP Score Analysis:
5.6. Testing Validity and Reliability
5.7. Factor Analysis and Validity of Measures
5.8. Reliability Analysis – Cronbach Alpha Test Results
5.9 Correlation and Multiple Regression Analysis
5.10. Testing the Hypotheses of the Study
5.11 Comparative Tests Using Multiple Regression Analysis of Public and Private Banks:
5.12 Summary and Key Findings
CHPTER 6.CONCLUSIONS, IMPLICATIONS, AND AREAS OF FUTURE RESEARCH
6.1. Conclusions
Appendices
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A COMPREHENSIVE MEASURE OF BUSINESS PERFORMANCE: A STUDY OF THE COMMERCIAL BANKING INDUSTRY IN ETHIOPIA
