Internal controls and financial performance of commercial banks in Uganda

Abstract

The study was set to investigate the relationship between internal controls and financial performance of Diamond Trust Bank Limited in Uganda. The objectives included assessing the relationship between control environment, risk analysis and control activities on financial performance of Diamond Trust Bank. The study adopted a case study design in which data was collected using questionnaires from 110 employees who constituted top administrators and other employees working in Diamond Trust Bank Limited. Interviews were also used to collect qualitative data from the top management. Both stratified and purposive sampling techniques were respectively adopted in the selection of the participants. The data was entered and analysed in SPSS version 21.0 in which both descriptive and inferential statistics were processed. The quantitative results that were in agreement with the qualitative findings showed a moderate positive significant relationship between control environment and financial performance(r = 0.561, sig = 0.00). Findings similarly showed a strong positive relationship between risk analysis and financial performance (r= 0.764, sig = 0.00). In addition there was a strong but significant positive relationship between control activities and financial performance of Diamond Trust Bank Limited (r=0.710, sig=0.00). The qualitative results were also supportive of these. The study based on the objectives and results concluded that control environment, risk analysis and the implementation of control activities are influential predictors of financial performance of Diamond Trust Bank. This relationship was such that the better the implementation of the aspects related to control environment, risk analysis and control activities, the higher the financial performance and the poorer the implementation of such practices the lower the financial performance of Diamond Trust Bank. The study therefore recommended among others that the management of banks should design and operationalize mechanisms that promote diverse input by the internal audit of the bank particularly in as far as governance practices concerned. It also recommended that bank administration in conjunction with the concerned internal audit department personnel should harmonize the receipt and review of standard performance reports as to improve financial performance.