By J K Bagorogoza, A.A.de Waal, H.J. van den Herik, B.A. Van de Walle

Abstract The case of Financial Institutions in Uganda

Purpose: The purpose of the study was to establish the levels of high performance in Financial Institutions in Uganda.
Design/Methodology/approach: The paper uses a sample comprising of 10 financial institutions. A convenient sampling scheme was used. The extent of high performance was evaluated using the high performance organization framework factors; management quality, workforce quality, long term orientation, continuous improvement, openness and action orientation.
Findings: The paper empirically shows that financial institutions fare better statistically on all characteristics of high performance. Although openness and action orientation had a low mean score compared to the other factors, this could be attributed to the cultural background of the employees. The scores for the other factors are just satisfactory and there is further scope for improvement.
Research limitations/implications: The study uses a sample of 10 financial institutions and the findings may lack generalization. Therefore it would be interesting to verify the findings using a larger sample size.
Practical Implications: The paper can serve as a basis for financial institutions in Uganda to adopt the high performance organization framework as such; this HPO framework could be the organizational model that organizations are looking to achieve economic, environmental and social sustainability. Managers can be offered a framework that adds focus to improvement.
The detailed scores on the HPO factors show the strong and improvement points of the organization and will set the action agenda for the transitions to HPO
Originality/Value: The paper tries to bring forth concern areas for high performance in the Ugandan finance sector. Past research that studied other types of HPOs may not be applicable to the unique nature of a developing country.
Keywords: High performance, high performance organization framework, financial institutions, Uganda.

Introduction

The importance of a high performing financial sector to a country’s economic growth and development is well established in the literature (Beck, Levine and Loayza, 2000; Beck, 2002; de Waal, Hai Duong and Vu Ton, 2009). Efficient financial systems help countries to grow, partly by widening access to external finance and channeling resources to the sectors that need them most (Mugume, 2007). Financial institutions are defined as institutions which collect funds from the public and invest these in financial assets such as deposits, loans and bonds, rather than tangible property. Financial markets and institutions are central to the process of economic development and growth. Careful comparative analysis of the growth rates of different countries has produced convincing evidence that having a deeper financial system contributes to growth and is not merely a reflection of prosperity (Beck, and Hesse, 2009; Kridan, and Goulding, 2006; Honohan and Beck, 2007). Countries with unrestricted financial systems also seem to have a lower incidence of poverty than others at the same level of national income. At the firm level, growth also responds to access to credit and to the conditions that favor such access. Effective financial systems tend to evolve around a banking sector seeking to achieve economies of scale in order to offset the costs of collecting and processing information considered to reduce uncertainty, thereby facilitating a more efficient allocation of financial resources (Mugume, 2007).
The financial sector is a vital aspect in any economy and has a significant impact on the efficiency and productivity of other sectors. It plays a significant role in providing essential financial services to the Ugandan public, such as loans, insurance, savings and so on. The sector is key to mobilizing domestic savings and essential for facilitating efficient investment. Banks are the predominant financial institutions in most developing countries, in Uganda they comprise over 80 percent of the financial system. (Beck, and Hesse, 2009; Mugume, 2008). Therefore, changes in the performance and structure of banks can have far-reaching implications for the whole economy. (Harker and Zenios, 2000; Yang Liu, 2008; Hafizim and Hayati, 2006). There is a concern that an inefficient and weak banking system is a hindrance to economic growth. However, a competitive and high performing banking system is required to ensure that banks are effective forces for financial intermediation channeling savings into investments fostering higher economic growth. (Johnson, 2004; Owen et al., 2001).
Due to competition in retail banking, the private sector is demanding diversified banking products from the sector beyond what is covered under the existing Law (Budget report, 2010/11). Although the Ugandan banking system has attained some degree of outreach and has recently invested heavily in physical infrastructure such as branches and ATMs, it remains small. The total number of deposit accounts held in financial institutions in 2004 was just over 1.7 million or about 35% of the total number of households. The Ugandan banking system is, therefore, relatively small even by African standards, and it is underdeveloped and characterized by a large share of foreign ownership. Liquid liabilities, bank deposits and private credit to GDP are below the overall average for Sub-Saharan Africa. The banking system also intermediates a smaller share of deposits into credit to the private sector (Mugume, 2007).
Since 2006, the financial sector in Uganda has experienced rapid changes and growth notably; an increase in the number of commercial banks; from 15 in 2006 to 22 in 2010 as a result of mergers and buy-offs which have seen some micro deposit or finance institutions being bought by commercial banks. Innovation of financial products and services and increase in number of braches being operated by commercial banks; the number of branches increased from 301 (2008) to 363 (2009). The upgrading of micro deposit Institutions( MDI’s) to commercial Banks, Increased implementation of the Village Savings and Loan Associations(VSLA) and Savings and Credit Cooperation (SACCO) programmes by both Non-governmental Organizations(NGOs) and the central government (under the Prosperity for all program) and the introduction of mobile money services by the telecommunication industry.

Statement of the Problem

Uganda’s financial sector is undergoing unprecedented changes, caused by the deregulation of financial services, strengthening of regulatory and supervision frameworks, and developments in information technology (Mugume, 2007). Many of these changes could have had vast implications for competition and performance in the financial sectors. The combinations of improvements and unfulfilled potential call for a new look at Ugandan banking sector. One of the consequences has been mergers and buyouts which has increased performance levels since they brought with them the experience from the different countries where they belong.
In spite of these changes, previous studies (Bwire, and Musiime, 2008) suggest that they have not been accessible to most Ugandans, with approximately 3.million (30%) of the 30 million population having accounts or utilizing the financial institutions. There is need for the formal financial institutions to work towards serving more people and this does not necessarily mean putting up more branches or outlets but creating systems/ products that are going to help people get better access to credit, increase on their portfolio, better protect themselves against risks etc. as lack of access to suitable financial services is one of the biggest obstacles to development (The Fin Scope survey, 2009).
When looking at ways to increase the quality of Uganda’s financial institutions, we turn to the high performance organizations research. A high performing organization is a business that achieves financial and non-financial results that are better than those of peer group over a period of time of at least five to ten years (de Waal, 2010) .Most of the studies into high performance conducted previously are clustered in USA, Europe and Asia and limited themselves to one or a few countries and one or a limited number of industries, there has hardly been done any research in the African context (de Waal, 2010). There is thus need for further research focusing on validating the HPO factors in African countries and industries.

Purpose

The purpose of the study is to identify whether the HPO Framework (de Waal, 2010) can be used to evaluate and improve the performance level of Uganda’s financial institutions. Our aim is to present an outline of the research, and provide a range of ideas and strategies that an organization can adopt to improve their performance, in both financial and non-financial measures. Based on the analysis that will take place within the framework of this research, consultants, professionals and students of human resource management can in future devise a model that will actively provide clear-cut interventions and facilitate the process of attaining and sustaining financial HPOs in Uganda.

Research Question

The following research questions are been formulated: How do we define high performance in Uganda? Do high performance organizations exist in Uganda?
The remainder of the paper is structured as follows; in the next section Literature on HPOs, the HPO framework, and financial institutions is discussed and these topics are related to each other. The theoretical background of the research is described. Then, the research questions are reviewed. This is followed by a description of the research approach. Following this, the results of the descriptive literature review and then of the practical research are described and discussed. The paper ends with the limitations of the research and suggestions for further research.

Literature review

High performance entails overall firm performance which is higher than the performance of the peer group (competitors, comparable organisations), and is measured by productivity, efficiency, customer satisfaction, profitability, market value, competitive advantage, etc. (Melville, et al., 2004). High performance is relative, and the term is used to refer to companies that outperform competition (Newbold-Coco, 2006). The process of measuring relative performance and determining the key drivers of performance is difficult (Kirby, 2005). Most studies define success differently and it is therefore challenging to decide which companies to study more closely. For instance, are excellent companies those with the highest market capitalisation or those with the highest growth rate in sales? For the purposes of this study, de Waal’s (2008) definition of HPO shall be used.High performance(HP) is of great concern to organizations due to the fact that low performance results into low international competitiveness on the basis of price, quality, flexibility, delivery times and after sales support ( Kasarda & Rondnelli, 1998), and eventually could lead to total collapse of the organization.

High performance Organizations

The concept of the HPO has evolved from research into the link between human resource management and organizational performance. HPOs are often described in terms of what they have achieved or consist of: strong financial results, satisfied customers and employees, high level of individual initiative, productivity and innovation, aligned performance measurement and reward systems and strong leadership (Annunzio, 2004; Bruch and Ghoshal, 2004; Brown and Eisenhard, 1998; Collins and 1997; Geus, 1997;Hodgetts, 1998; Mische, 2001; Weick and Sutcliffe, 2001; Zook and Allen, 2001).There are many forms of high performance organisations. Even as these studies are referring to the same general phenomena, the use of different ‘labels’ has certainly added to the uncertainty. The most recent concept dominating today’s debate, which is related to these practices, is HPO which is most commonly used both in academic and practitioner circles and it is therefore adopted for the study. According to de Waal (2007), it pays to be an HPO because they achieve better financial results, much higher customer satisfaction, customer loyalty, employee loyalty, and quality of products and services than non-HPOs. HPOs produce extraordinary results that extend beyond customer service and share holder value on a sustainable basis. HPOs can be regarded as one of those theories whose validity needs to be tested in an emerging country’s context, as this context can be more dynamic and completely different from a developed country’s context (de Waal,2007).

The High Performance Organisational Framework

The HPO framework was developed by de Waal (2006, 2008, 2010); the developed framework contains characteristics that potentially are applicable in various settings and contexts. These are characteristics that can be influenced by managers so they are able to take targeted actions to start achieving superior results (de Waal, 2007). Literature contends that the high performance organisation (HPO) tend to share similar characteristics. Previous researches and frameworks on high performance have been suggested, however, none of these researches had been empirically tested yet, but after a five year study by de Waal, (2007), the characteristics were defined which are part of all excellent organisations worldwide and can be influenced by managers so they are able to take targeted actions to start achieving superior results. The research involved examination of 290 publications on studies performed in the last 30 years in the area of high performance. The common themes that were tested in a worldwide survey executed at over 1400 profit, non-profit and governmental organisations. The research yielded 35 characteristics in five factors which have the most impact on high performance, and thus together can be designated as a HPO framework. As such, this HPO framework could be the organisational model organisations are looking to achieve economic, environmental and social sustainability (Freeman and Zollo,2009) since it has been established that there is direct relationship between HPO factors and competitive performance(de Waal, 2010; Vickers,et al., 2008).
The HPO framework consist of five factors :(1) management quality, (2) workforce quality, (3) long term orientation, (4) continuous improvement, (5) openness and action orientation. (Waal, 2006). First, The high quality management factor is characterised by managers who have an effective, confident and strong management style and are trusted by all organizational members. Secondly, a high quality workforce that has a diverse and complementary management team and workforce, which are flexible and resilient. Thirdly, HPO’s require long term orientation and commitment to be far more important than short-term gain, and extends this long-term commitment to all stakeholders of the organization. Fourthly, there is need for openness and action orientation enhansing an open culture that focuses on using this openness to take dedicated action to achieve results. Lastly, HPO’s need a continuous improvement and renewal strategy that sets the organization apart from its peer group, and structures its processes, products and services in such a way that this unique strategy is achieved in an innovative way.

The finance sector in Uganda

Financial institutions have existed for the last 50 years in Uganda. Banking has existed since 1906 with the establishment of the National Bank of India, which later became the Grindlays bank and is now known as the Stanbic bank. The East African Board was responsible for issuing currency until 1966 when the Bank of Uganda was establishment by the 1966 Parliament Act. Standard bank was opened in 1912. Bank of Netherlands 1954 which later merged with Grindlays bank and Baroda was established in 1965. At independence in 1962, there were four commercial banks, all international banks, namely, Standard Chartered, Barclays, Grindlays and Bank of Baroda. The government subsequently established two public banks (Uganda Commercial Bank and Cooperative Bank) which later acquired monopoly of banking virtually everywhere outside Kampala. The banking industry in Uganda is currently composed of commercial banks and other financial institutions e.g. Housing Finance, Post Bank and the Central Bank.
The 1965 Parliament Act established the Uganda Credit and Savings bank which later became Uganda Commercial Bank. For a long time the government owned banks or financial institutions dominated the banking industry. These included Uganda Development Bank which received all foreign loans and channeled them to the local companies for development; UCB, which handled the majority of the customers (and still does) with the biggest number of branches (about 67 in numbers) and the East African Development Bank which handled the East African Community business. By 1970, Uganda had more than 290 commercial banks branches which reduced to 84 in the period between 1970 and 1980’s. The UCB owned a total of 50 branches out of the 84 branches. In the recent years, a number of new developments have come up aimed at the strengthening of the banking industry such as cheque clearing, the electronic clearing system (ECS), automated teller machines system (ATM),electronic banking (EB). The non-bank financial Institutions (NBFI), the Institute of Bankers, general liberalization and the Financial Institution Bill, which can be considered as positive steps towards sustained competitiveness and high performance.
Financial liberalization which started in 1987 brought an influx of new foreigh and domestic banks, but also brought a deep banking crisis with it. Uganda experienced a systemic banking crisis from 1994 to 2003 due to lack of bank capital in the system (Caprio et al., 2005). 1998 and 1999 saw the closure of several small banks and in 1998 UCB was recapitalized and privatized to a Malaysian investor. Subsequent insider transactions and imprudent lending, however, caused deterioration of the bank’s loan portfolio and in 1999 BoU intervened and renationalized UCB, 2002 the South African Stanbic acquired 80% of UCB’s shares, with the remaining 20% held by the government for UCB employees. As part of the sales agreement, Stanbic has maintained almost completely the branch network, even in more rural areas and has recently expanded lending after a credit crunch ( Clarke et al., 2006).
Following the crisis in the 1990’s, the Ugandan authorities have significantly strenghthened bank regulation and supervision, and tightened loan classification and provisioning standards. The closure of Cooperative Bank, ICB, Greenland Bank and Trust Bank in 1998 and 99, the UCB privatization, the introduction of a risk-based approach in the banking supervision as well as reforms in the regulatory environment have made the Ugandan banking sector less fragile, resulting in falling loan loss provisions ( BoU report, 2008).
While Uganda’s banking system is small, it has always had a relatively large number of banks, even before financial liberalisation. As of 2004, there were 15 banks, 12 of them foreign-owned and the remainder owned by domestic private shareholders. During the sample period of our empirical analysis, the Uganda banking system had undergone vivid changes in its market structure. While the deposit market has become more concetrated mostly due to the UCB privatization, there has been no significant change in concentration in the lending market over the past 6 years. Market concetration in Uganda is higher than in the Kenya and Tanzanian banking sector as measured by the Herfindahl index1 in deposits and loans ( Cihak and Podpiera, 2005). Further the banking market has experienced a significant increase in foreign ownership over the past years.(Beck, and Hesse, 2009).
Ugandan banks operate in a challenging contractual and informational framework, with high contract enforcement costs. While recent reforms, such as the introduction of a Commercial Court have provided positive signals, deficiencies in asset and company registries and the absence of a credit information registry until recently have increased lending costs for both borrowers and lenders (Beck, and Hesse, 2009).
The central bank’s reports indicate the strength and soundness of the sector has continued to improve, as evidenced by the improvement in the quality of the bank’s assets. BoU’s report from 2010 suggests that Uganda’s financial sector has remained sound and resilient because the liquidity ratio and quality of assets and core capitals of all the banks are very strong. People have gained confidence in the banking sector and they are saving more with the banks compared to 10 years ago. Figures show that in September 2008, the deposit levels were Shs. 4 trillion while in June 2009, deposits stood at shs. 5 trillion representing an increase of 1 trillion which translates to 29 % increase. The Annual Report of the Bank of Uganda for the Year 2009/2010 reveals that the banking sector continues to grow in terms of size, number of institutions and outreach during the year 2009/2010. The number of commercial banks in the country increased to 22 with a total network of 390 branches (including sub-branches and agencies) at the end of June 2009. The health of the banking sector also remained largely untainted with the ratio of non performing loans to total credit at 3.0 % at the end of June 2010 compared to 4.0 % at end of June 2009. The percentage of core capital to Risk Weighted Assets (RWA) was maintained at 19.3 % in June 2010. New Bank branches (21) were opened to expand access to the banking system. The industry has managed to combine rapid expansion with financial stability. The ratio of non-performing loans remains at around 3 percent, which is within international standards.

The Theoretical Model

Research into factors that cause or facilitate high performance is driven by developments in the resource-based view of the firm (Lockett et al., 2009) and the theory of dynamic capabilities (Peteraf and Barney, 2003; Easterby-Smith et al., 2009; Teece, 2009; de Waal, 2010). Literature on the resource-based view and dynamic capabilities identified many different factors as potentially important for high performance. The type of factors found seems to depend on the approach of research or the personal views and interests of the researchers. This makes it difficult to define a set of factors which describes the HPO in general. It is therefore necessary that a clear HPO framework is developed to allow generalization (Pearson et al., 2008; de Waal, 2010). The factors, which determine whether an organisation becomes or stays an HPO, derived from practical research are five (de Waal, 2010). These are; management quality, workforce quality, long term orientation, continuous improvement and, openness and action orientation. Two of these factors relate to people both in terms quality management and as workers whilst the remaining relate to their attitudes to work and goal–focus….
Read the complete paper ‘The applicability of the high performance framework in Africa: The case of financial institutions in Uganda’ presented at the International Conference on International Business in Greece.