Effects of boards on performance of local and foreign-owned banks in Tanzania

Neema Mori (University of Dar es Salaam Business School, University of Dar es Salaam, Dar es Salaam, Tanzania) (Norwegian Centre for Microfinance Research, University of Agder, Kristiansand, Norway)
Goodluck Towo (Bank of Tanzania, Dar es Salaam, Tanzania)

African Journal of Economic and Management Studies

ISSN: 2040-0705

Publication date: 12 June 2017

Abstract

Purpose

The purpose of this paper is to examine the effects of board composition on the profitability of banks in Tanzania. First, it examines the differences between local and foreign-owned banks in terms of their boards and profitability, and then the contribution of board composition to banks’ profitability.

Design/methodology/approach

The paper utilizes a secondary panel data set of information on the boards, their operations and financial statements of 35 banks. The data were collected between 2009 and 2013. The authors tested the stated hypotheses using descriptive and econometric analyses.

Findings

The results show a significant difference in board composition and profitability between local and foreign-owned banks. Local banks have a higher income and profits. With their contextual knowledge they are able to attract diverse board directors who contribute positively to their performance. The paper also found that large boards and those with women on them were associated with high profitability.

Research limitations/implications

The study focused on three aspects of boards, which are size, foreign directors and women’s representation. The paper is limited in the sense that other aspects of composition that also affect performance are not included in the study.

Practical implications

The paper suggests that in order to maximize profitability, banks should increase the number of directors. Many board members can share skills and knowledge, which can improve performance. Women are underrepresented on boards. With current changes in policy and education in emerging countries, there is a need to increase their representation.

Originality/value

This study contributes to the agency theory by showing that large boards are indeed efficient at monitoring and bringing in profits, especially in an emerging economy where there are multifaceted risks at country and company level. These risks require shareholders and investors to have a much better understanding of the banks and that is where a large board plays a key role.

Keywords

Citation

Mori, N. and Towo, G. (2017), "Effects of boards on performance of local and foreign-owned banks in Tanzania", African Journal of Economic and Management Studies, Vol. 8 No. 2, pp. 160-171. https://doi.org/10.1108/AJEMS-06-2016-0090

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Publisher

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Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited

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