Social Science Letters, ISSN: 2163-4130

Volume 2, Number 1, June, 2012

Evaluation of Factors that hinder Sustainable Banking of Commercial Banks
in Uganda, Case of Stanbic Bank Limited Uganda (SBLU) and Centenary
Bank Uganda
Bright Donat
a,b
, Asa Romeo Asa
c

School of Management, Wuhan University of Technology, Wuhan, P.R.China, 430070
Nationality: Uganda
Email:
a
donsbre@gmail.com,
b
brightdonat@yahoo.com,
c
romeoassa@gmail.com
doi.10.5729/ssl.vol2.issue1.7
Keywords: Sustainable banking, Commercial banks, Uganda.
Abstract. Sustainable banking is a great deal to Ugandas development, but limited research has
been conducted to address factors that hinder commercial banks in achieving sustainable banking.
Therefore this study aims at evaluating two banks to find out the factors that hinder sustainable
banking in Uganda. The study criticizes a single bottom line vision of banking institutions in which
profit maximization is taken as a sole objective in meeting shareholders expectations than overall
bank Stakeholders needs in business environment. 30 structured questionnaires were designed and
administered on Skype to 30 respondents of the two banks. Respondents were selected from
departments of risk management; corporate governance, public relations, corporate social
responsibility, 4 directors and 2 officials at Uganda Institute of Bankers were interviewed. Annual
bank reports, strategic plans, journals, and conference papers were reviewed. Sustainability
programs are among commitments of the two banks depicted in compliance of legislations,
financing environmental friendly projects, progression in shareholders wealth, social investments,
employee empowerment and embracing diversity participation. Present value at 1 (PV01), value at
risk (VaR) were the techniques to identify market risks in Stanbic Bank. Centenary Bank approach
to risk is top down and bottom top thinking to dilute its market risk. 75% of the respondents said
credit risk is the most common market problem, 25 % said risks is manageable, efforts should be on
innovation of bank products and services. Weak government policies, divergent ideologies, political
influence, capital in-adequacy, were identified as hindering factors to sustainable banking in
Uganda. The study recommended measures for fostering sustainable banking. However, the study
identified guided educational programs as a significant factor that mans ambitions of sustainability
not only to the banking sector but, also to the economies at large.
1. Introduction
Banking theorist address a question of why banks are special? The two widely accepted answers are
that banks reduce default and liquidity risks. Empirical studies of banks and stock return documents
justify statistical significance of the two factor model. One factor is the rate of return on the market
portfolios and the other factor is the return on a debt instrument. Banking sector plays a significant
role in the development of an economy, in this particular case of Uganda, commercial banks are
paramount in easing households to run various business activities and enabling the country to
expands its potential in raising Gross Domestic Product (GDP).
A brief Overview on Commercial Banks Industry in Uganda. Uganda has a number of
commercial banks; more than 20 of them are licensed by Central Bank of Uganda (BOU). Ugandas
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banking sector about 80 percent of the banking business is owned by foreign companies from South
Africa, United Kingdom, Nigeria and Kenya, which pose a potential risk to the economy. Why?
This is because the government of Uganda has no independent decisions on bank administration.
Despite liberalization, banking in Uganda slipped into a crisis in the early to mid 1990s. Period of
1994-98, half of the sector of faced insolvency problems [6], reflecting at the closure of
International Commercial Bank (ICB) in 1998, the closure of Greenland Bank in 1999, the
acquisition of Uganda Commercial Bank Limited by Stanbic Bank of South Africa in 2001. All
these events manifested a period of upheavals in banking sector in Uganda. Due to the economic
crisis of 2008, the International Monitory Fund revised its growth forecasts downwards (IMF
Report 2009). The study selected a sample of Stanbic Bank limited Uganda and Centenary Bank
Uganda as the yardstick to evaluate sustainable banking of commercial banks in Uganda, This is
because of their longtime experience in banking market, country wide branch coverage. The study
evaluates areas that are relevant to the subject of sustainable banking, for example: risk
management techniques, corporate governance, management attitude and expertise, corporate social
responsibility scale of compliance and comparison of financial performance.
2. Literature review
Sustainability implies meeting the needs of the present without compromising the ability of future
generation to meet their own needs (World Commission on Environment and Development, UN,
1987).Commercial banks are financial institutions that provides transactional, savings, and money
market accounts and accept time deposits. Putting in account the relevant theories, a dynamic theory
of banking is taken to be very relevant to issues that influence banking operations. Dynamic theory
of banking firm has been taken to model to explain the banking firm. Dynamic theory approach
yields insights into the function of banks as brokers between the borrower and the lender, but still it
has proved incapable of capturing many essential elements of the banking firm. The role of capital
is understated however, there are inefficiencies found with the dynamic theory of banking firms for
example not addressing the importance that should be given to customers, and other relevant
stakeholders that contribute to financial sustainability of commercial banks. Another theory was put
forward as a dynamic theory of customer relationships in bank loan markets. The theory builds on
traditional views of bank lending behavior, first spelled out by [12] and later elaborated upon by
[11]. According to his view, an essential factor underlying a bank loan pricing policy is its impact
on the banks stock of loyal customers, as well as those ordinary customers and their deposits.
Rather than taking relationship as given, examining the implications of the views expressed, by [9].
He argued that the banks which actually lends to a firm learns more about that borrowers
characteristics than other banks, Therefore taking in account the evolution of the two theories. it
expresses a concern for commercial banks to be dynamic with demand of the markets, adjust to
customer needs in order to best fit in the cycle of competition and achieve sustainable development,
Commercial banks operate in the risk business in the process of providing financial services; Banks
assume various kinds of risks, these include: market risks, financial risks, liquidity risks and
climatic risks, and many others. Risk management is the process by which managers satisfy
stakeholders objectives by identifying key risks, obtaining consistent, understandable, operational
risk measures, choosing which risks to reduce and which to increase and by what means, and
establishing procedures to monitor the resulting risk positions. In portfolio theory, risks are
generally perceived as a body of models that describe how investors may balance risk and reward in
constructing investment portfolios. [13] He simply proposed the following rule: that investor
should consider expected returns a desirable thing and variance of returns as undesirable thing the
concert yield and risks appear frequently in financial writings. The major sources of value loss
are identified as various kinds of risks. Market risks: refers to changes in market value due to
changes in underlying market factors such as interest rates, exchange rates, and equity and
commodity prices. Credit risks are the change in net asset value due to change in perceived ability
of counter parties to meet their contractual obligations. Operational risks results from costs incurred
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through mistakes made in carrying out transactions such as settlement failures, failures to meet
regulatory requirements and untimely collections and performance risks encompasses losses
resulting from failure to properly monitor employees or to use appropriate methods [10].
2.1 Equator principles and standards of financial institutions
Equator principles are credit risk management framework standards for determining, assessing and
managing environmental and social risk in project finance transactions. Equator Principles Financial
Institutions (EPFIs) commit to not providing loans to projects where the borrowers will not or they
are unable to comply with their respective social, environmental policies and procedures that
implement the EPs. From the annual report of 2009 of Hongokongo and Shanghai Bank
Corporation (HSCB), environmental protection and education was among the banks strategic vision.
From this perspective banks in Uganda should imitate the same principles embedded in EPFIs
2.2 An over view of stakeholders theory and its implication to organizations
In publication of strategic management: stakeholder management analysis, which clearly puts
forward the theory of stakeholder management [7]. He believes that stakeholders are all
individuals and groups who are able to affect achievement of an organizations goals or affected by
realizing process of an organizations objectives domestic and foreign scholars have put forward
their own views on the definition of the stakeholders, the representatives ones are: [8] thought that
stakeholders are groups who invested physical capital, human capital or financial capital in the
business activities and bear some risks [4] believed that stakeholders are individuals and groups
who set specific investment in business and bear a certain risk their activities can affect the
realization of business objectives, or affected by the process of achieving goals. In general business
stakeholders include Shareholders, employees, consumers, competitors, government, and media and
so on, they affect the realization of business goals, and commercial banks should take maximum
initiative to balance and put in consideration stakeholders interests in aspect of social, cultural
political, environmental, economic and technological values of a given society.
Corporate Governance of Bank Institutions. To remain competitive in changing world, banking
supervisors should be responsibility to provide regulatory frame work and guidance in terms of
corporate governance of banks. Bank supervisors should also monitor individual banks, taking
necessary measures when the bank fails to meet minimum corporate governance standards
necessary for banking business. The Basel committee on banking supervision has revised its
guidance on enhancing corporate governance for banking organizations ( Basel CG Guidance)
other Basel Committee such Core Principles for Effective Banking Supervision, Internal audit in
banks, and other risk management techniques should be provided and implemented to enhance
corporate governance in banks.
3. Data and methodology
A qualitative approach in data collection was employed, in which 30 structured questionnaires were
designed and administered on Skype to 30 respondents of Stanbic Bank Limited and Centenary
Bank Uganda. Questionnaires were further allocated to different responsibilities to balance the
findings, where 6 employees from risk management departments, 6 corporate managers in charge of
governance, 6 public relations officers and 6 in charges of corporate responsibility affairs, 4
directors and 2 research officers at Uganda Institute of Bankers were interviewed. J ournals, bank
survey reports were reviewed; some of these reports included: Asian Development Bank (ADB)
Report 2010 and 2009, and East African Development Bank (Report 2010), and other online
relevant resource.
4. Findings and discussion of findings
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4.1 Financial performance of Stanbic bank and centenary bank of the year 2009 to 2010
According to the annual report 2010 of Stanbic Bank limited Uganda, financial performance decline
in bank gains was registered, 2010 the bank accumulated profit after tax of UgShs72, 081,980,000
Billion Uganda shillings equivalent to $26,899,775.208 compared to financial year 2009, profit
after tax UgShs9,5298,351,000 Billion equivalents to $35,563,732.0. Return on equity was 31.3 %
in 2010 compared 45.1 in 2009, return on assets was 3.0 % compared to 5.1 percent in 2009, cost to
income ratio was 67.2% compared 48.2%, earning per share was 14.08% compared to 18.62% in
2009, dividends proposed per share was 7.03% compared 13.08 percent in 2009. The study found
out the bank financial performance was favorable despite the stiff competition caused by the new
international entrants in industry. However, Stanbic Bank Report indicated that a lot of investments
were made during the year 2010; interests were reduced in order to boost lending. Unfavorable
terms of trade dominated with high imports and low exports caused huge setback in bank wealth
progression. For the year ended 2009, the bank achieved a net profit of 71.2 billion Uganda
shillings with drop of 24.4 % drop over the prior year. Despite the slowdown in economic growth in
2010, Centenary Bank managed to post a 25.2% growth after tax profit of UgShs29.39bn. This is
different from UgShs23.48bn that the bank posted in 2009.The bank registered a significant growth
in customer deposits peaking at Shs630bn with percentage equivalent of 42.3% rise compared to
Shs443.4bn in 2009.


Figure 1. Graph above portrays incomes (Ushs) attributable to shareholders of Stanbic bank limited Uganda compared
to centenary bank Uganda and equity bank financial view in period of five years
The statistics in the graph fig 1 portrays financial expectation to Stanbic Bank Shareholders
improved steadily despite a lot of economic problems encountered by Ugandas economy during
the period, for example the financial crisis of 2008, Unfavorable balance of trade coupled with the
Inflation at 15-18.7 % (UgShs2680 to UgShs2700 per $1) in 2010-2011 and reduction in general
productivity that caused a drop of 24.4% in profit after tax over the prior year of 2009. On the hand
Centenary Bank and Equity Bank improved in yielding their Shareholders wealth.
4.2 Corporate governance
The best practices of stanbic bank and centenary bank are characterized by adherence of rules,
regulation and guidelines has given the banks an advantage in winning Shareholders trust.
Accountability, transparence and compliance to corporate governance practices has given the bank
an edge of sustainability despite intermittent changes that occur in markets, banks are in position to
detect them in advance and discuss necessary course of actions.
4.3 Risk management controls
Stanbic Bank recognize risk as part of its portfolio challenges, Market risks, financial risks,
liquidity risks and many other forms that non preventive like climatic risks. The bank uses market
risk measurement technique to control market eventualities, its uses (VaR) Value at Risk and Pv01
(Present value at one). Management applies these methodologies to its trading and non trading
portfolios to estimate the market interest rate risk of positions held and maximum losses that could
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arise whereas (VaR) estimates the market risk of foreign exchange positions held and maximum
losses expected. VaR expresses the maximum amount the bank might lose, but only to a certain
level of confidence of (98%) therefore probability that actual loss of 2% could be greater than VaR
estimates. Asset Liability Committee sets limits on both value of risk and Pv01 that may be
acceptable (ALCO). Centenary Bank employs the effective model of emphasizing a combination of
top down and bottom top thinking and analysis tied together by logical argument. This is done to
identify the risk capacity and risk appetite the bank wants to absorb. However, due to the nature of
Ugandas economy that mainly relies on agriculture, that is a dependent on climate. It often results
in credit risk most especially from clients who are farmers. Bank ordinary employees look at
stakeholders from the point of view of direct shareholders, not considering other various parties in
the business environment. However, the study justifies that Stanbic Bank Limited is active in
implementing sustainability programs, (Stanbic Bank Annual report 2010). Stanbic Bank
commitments are reflected in its focus to preserve and protect the Environment, Employee
Relations and Ethics, Employee Wellness and HIV/AIDS, Compliance to Local Regulations and
Standard Bank regulations and Social Investments. Stanbic Bank reported an improvement in
wealth creation of stakeholders to the tune of Uganda shillings 189.4 billion in 2010 compared to
183.7 billion; Centenary Bank also prioritizes corporate social responsibility programs among their
commitments. 75% of the respondents suggested that since credit risk is rampant problem in our
bank operations. 25 percent said risk is part of business and its a manageable challenge that does
not require a lot of managerial efforts like other activities of concern noted as new product
development, creation of supporting services and public relations that complement growth and
survival in competition. 80 Percent of respondents said job vulnerability suffers proper
communication between subordinates and managers, 15% said sustainability of the banks is not a
single entitys effort but, the overall contribution of stakeholders, the same respondents further said
education is crucial in regard to the subject of sustainability, 5 percent were non responsive. 60% of
the respondents stressed that political party demonstrations in the urban centers reduce the investor
confidence and commercial banks operate in fear of investors pulling out their money in favor of
safer places of investment, 40 Percent said Investors need to support the ruling regimes in order to
operate smoothly.
The study found out that, commercial banks in Uganda are sustainable but, due to weak
government policies from external business environment, divergent ideologies between
shareholders and management, political influence, capital in-adequacy, poor educational policies
were among the hindering factors of sustainable banking in Uganda.
5. Recommended measures to foster sustainable banking in Uganda
I) Banking institutions must expand their mission from ones that prioritize profit maximization as
the only sole objective but, to equally commit their objectives on supportive strategy
2) Commercial banks must be transparent to stakeholders, not only through robust, regular and
standardized disclosure, but also by being responsive to stakeholders needs for specialized
information on financial institutions, policies, procedures and transactions. Commercial
confidentiality should not be used as excuses or deny stakeholder information.
3) Commercial banks should ensure that markets are more capable of fostering sustainability by
actively supporting public policy, regulatory or market mechanisms which facilitate
sustainability and financial institutions must be accountable to their stakeholders by embracing
transparent business practices.
4) The study stressed a need for commercial banks to embrace social, environmental, economical
and political values of the society in order to cater for stakeholders needs in the business
environment. Quality management circles to discuss weekly and monthly operational problems
should be strictly formed. This is done to identify weaknesses that may result in a bank and
affect stakeholders and their savings.
Figure Abbreviations:
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CSR: Corporate Social Responsibility of banks.
CG: Corporate Governance structures.
RC: Risk Control Mechanism.
4Cs: Customers, Competitors, Competence and Commodities.
T&I: Technology and Innovation.
VC: Vertical Communication.
SP: Deployment of Supervisors across departments.
The application of the model in figure fig. 2 guides commercial banks management to execute
managerial obligations through Plans, controlling the bank activities in line with guidelines,
procedures, policies and standards. Bank managers should be responsible to delegate supervisors
that meet Basel standards for effective bank supervision, Supervisors across departments are
required to observe the performance, check whether employees are working on standards, and
report findings to the immediate managers for the necessary course of action depending on the
nature. Managers should be responsible to formulate strategies that embed solutions, monitor them,
and act by giving directives to their subordinate managers to apply them responsibly considering
social environmental and economical needs of the business environment. Its important to note that;
implementation of practices, strategies should be at all levels: stakeholders should be given
information regarding the bank performance. Communication should be vertical and horizontal
across the bank firms; the guiding mechanism in fig 2 aims at diluting the risks to acceptable levels.

Figure 2. The Framework model that commercial banks should refer to achieve sustainable banking
6. Conclusion
The study has acknowledged social, environmental, and economical aspects of the banking business
as significant factors to commercial bank sustainability. The two banks in the case above were
found sustainable, this is reflected in their compliance to regulations and policies, investing in social
projects, financing environmental friendly projects and advocating for implementation of carbon
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emission reduction measures. However, the study identified educational programs on proper usage
of bank products and non intervention in the host country politics was considered additional factors
to strengthen endeavors of sustainable banking in Uganda. Profit maximization of a banking firm
should be an equal commitment besides others, by considering social, economic, political,
technological and environmental values of a given society.
References
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