HRD Orientation of Potential appraisal...
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Transcript of HRD Orientation of Potential appraisal...
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HRD Orientation of Potential appraisal and Development Practices in Government Organizations
of Nepal
Dr. NakrishnaBhattarai1
Abstract One of the mechanisms of HRD is potential appraisal and development which attempts to assess the potentialities of employees for occupying higher level positions from a variety of sources, and helps the top management to make decisions about the suitable persons for a given job. The objective of this study is to identify the potential appraisal and development situation and its HRD orientation in the government organizations of Nepal on the basis of opinions collected from 150 gazetted level employees through a package of five point Likert scaled thirty statements/questions regarding potential appraisal and development. The study has found out that the majority of potential appraisal and development practices are not carried out in the government organizations of Nepal. It further concludes that the linkages of potential appraisal and development with other HRD mechanisms have been experiencing poor in government organizations of Nepal
Key Words: HRD, Potential appraisal, Potentialities, development, linkages
I. Introduction
It is assumed normally that when a person is promoted to a higher level position, he is required to handle higher level responsibilities and different tasks. If so, there should be some way of ensuring that only those who have capabilities to handle the new responsibilities are promoted. Potential appraisal is meant for doing this. It is because of the inadequacies of the systems of promotions based on seniority and performance appraisals that a new system of developing employees for occupying higher positions has been thought of. This new system may be called potential appraisal (Pareek et al., 1999). The objective of potential appraisal is to identify the potentials of a given employee to occupy higher positions in the organizational hierarchy and undertake higher responsibilities. A good potential appraisal system attempts to generate data about employees and their potential for occupying higher positions from a variety of sources, and helps the top management to make decisions about the suitable persons for a given job. However, since the organization also has the responsibility for developing the managerial talent, a good potential system also helps the management in identifying employees whose capabilities can be developed through job rotation, training, etc. Thus, potential appraisal is linked with career development.
AGood Potential Appraisal System should have some of the requirements and steps to be followed when introducing a potential appraisal system. They are role descriptions, qualities required to perform the job, indicators of qualities, organizing the system, and feedback on potential appraisal for career development (Rao, 1999).
Regarding the purposes of performance appraisal, research carried out by the UK Institute of Personnel Management (now the Chartered Institute of Personnel and Development) identified a number of key purposes commonly used by organizations. One of them, according to Long (1986), was to assess future potential of the employees.
Potential appraisal has been one of the mechanisms or instruments of human resource development (HRD) system (Rao, 1999: Pareek and Rao, 1999). Therefore, in Nepal it is also needed to be searched what is the state of potential appraisal in the government organizations of Nepal in terms of potential appraisal system? Whether it is HRD- oriented having linked with other HRD mechanisms such as training and development, career planning and development, performance feedback and counseling and performance appraisal? This study is concerned with identifying these issues.
II. Theoretical Framework
1 Dr. Bhattarai is Associate Professor at LumbiniBanijya Campus, Tribhuvan University, Butwal. He can
be reached at [email protected]
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Potential appraisal is one of the mechanisms of HRD. In Nepalese organizations some of its aspects are included in performance appraisal system. Researchers in Nepal have not yet taken PAD as a HRD mechanism and till now research over it is not yet sufficiently found. So, in this research, it is studied the state of potential appraisal and development in the government organizations of Nepal from the viewpoints of gazetted level employees in the government organizations of Nepal, meanwhile it is also searched how much those opinions differ on the basis of designation level, gender, year of service and age.
III. Research Methodology
This research is basically exploratory cum descriptive in nature which was undertaken by following the exploratory cum descriptive survey research design. Available literatures were reviewed to identify the potential appraisal and development practices and their linkages for integrated HRD system. Survey method was adopted to collect data from the multiple level gazetted employees of government organizations of Nepal as respondents by using a questionnaire having two main parts.
Structured questionnaires were self-administered to the different level gazetted employees of four ministries and two other government entities. Each set of questionnaire contains two parts- a first part contains personal information and second part contains potential appraisal and development practices. The respondents were asked to give their frank opinion about the prevailing situation of PAD activities under two subsections. Statements/questions were structured with five- point Likert scale to know the opinion on extent of PAD activities under two sub-sections of PAD- potential appraisal and development system, and links of PAD with other mechanisms of HRD. For identification of the current state of PAD system and practices informal discussion and observations were carried out with the concerned heads of the organization/department. Secondary data were also collected from the annual reports, journals and websites.
According to data given by department of Civil personnel records on 2063/8/4 (2008/11/19) there are total 78,774 civil servants. Out of it 9054 employees are in gazetted level 45,159 in non-gazetted level and 2453 in no class level.
The researcher has adopted two staged sampling method. In the first stage, selection of organization was done using judgemental sampling. In the second stage proportional stratified random sampling has been adopted in the selection of respondents. In first stage using judgemental sampling four leading ministries of government of Nepal, directly related to the HRD in government organization- NPC, MoGA, MoF, and MoE, one constitutional body-PSC, which is also related to personnel matters and one leading training institution of government of Nepal-NASC, however NASC has been running under special provision different from government rules and regulation. A total 248 respondents were selected on the basis of proportionate random sampling considering rationality of minimum numbers, the level, and gender from gazetted class employees. In the real practice of proportional stratified sampling, rationality has been considered. Gazetted special class, gazetted first class and female employees who are less in number in the organizations are considered more than proportion. As the same way in the selection of respondents from each organization the rationality ground of minimum number is also considered to make the sample more representative. The organization which has less than 50 gazetted level employee, minimum 25 respondents were selected randomly by considering the level and gender. The organization which has more than 50 and less than 300 gazetted employees, total 30 respondents were chosen by considering the level and gender. The organization which have more than 300 gazetted employees, 10 percent of them were randomly chosen to distribute the questionnaire by considering the level and gender. Thus, this study has been based on the cross section analysis of 150 (248, sets of questionnaire were distributed only returned 150) observations for analyzing the status of potential appraisal and development.
This research is basically based on primary sources of data collected through the opinion survey carried out to the multiple gazetted level employees of the selected/sample government organizations of Nepal upon the PAD practices within their organizations. The primary data were collected by self-administered methods of collection. The questionnaire distributed to government employees mainly consists of two parts. First part is concerned with respondents‟ demographic features like designation level, year of service, gender and age. The second part is divided into two parts on the basis of different PAD practices. There are 30 questions/statements respectively to collect information related to PAD in government organizations of Nepal. Most of the questions used in this set of questionnaire are adopted by the different researchers in Indian context, culture and organization settings, specifically the questions developed by Rao (1991, 1999) in the research study carried out there in India. The social context, cultural context and organizational settings of Nepal and India seem similar, and therefore, in this study, the pre-testing of questionnaire was not felt necessary and therefore not carried out. Response on each question is
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collected through the 5-point Likert scale, 1 denotes not at all true and 5 denotes excellent/always true. Informal interviews with the head of organization/department were also carried out to collect needed data and information.
The other data need for description and analysis were extracted from the secondary sources too. Some required data were obtained from these sources, viz., library collection and websites.
This current study more or less has followed methodology used by Rao (1990 and 1999) in analysis the data collected for different HRD mechanisms. To evaluate and test the responses, mean value of PAD and mean value of each variable of PAD are computed and tested with the standard deviation for variation test and the Cronbach‟s alpha for testing reliability. F-test and t-test have been used to determine the goodness of fit and whether significant differences exist between the means of the variables respectively. All the required analyses were done by using the SPSS version 13 software.
One of the mechanisms of HRD is taken as potential appraisal and development. The aim of developing this questionnaire is to measure the potential appraisal and development practices and to assess the extent to which the potential appraisal and development system in government organizations of Nepal(GoN) HRD-oriented. To study the potential appraisal and development, the researcher has divided potential appraisal and development questionnaire into two sub-groups viz. Potential Appraisal and Development System (PADS) and links of PAD with other HRD mechanisms, and are studied separately too. The potential appraisal and development questionnaires have been analyzed on the basis of Rao (1990, 1991 and 1999).This set of questionnaire is composed of 30 statements. It has adopted 5 point Likert scale ranges from 1 to 5. 5 indicates always true, 4 indicates mostly true, 3 indicates sometimes true, 2 indicates rarely true and 1 indicates not at all true. This part of questionnaire has been developed and analyzed on the basis of Rao (1990, 1991 and 1999).The scores may be ranged from 30 to 150. Scores around 30 indicates no system of potential appraisal and development at all in the organization. Scores around 60 indicates that potential appraisal and development system have been seldom (rarely) adopted and implemented in the organization, scores around 90 indicates that potential appraisal and development have been sometimes adopted and implemented in the organization. Scores around 120 indicates that potential appraisal and development systems and practices have been mostly carried out and implemented at required. The scores close to 150 indicate that potential appraisal and development system and practices have been excellently carried out and implemented in the organization. The scores of all the respondents are also analyzed item-wise and needing improvements have been also identified. To evaluate the relative importance of each component of HRD mechanisms as suggested by Pareek and Rao (1981), the summated score of the responses on questionnaire survey has been used.
Nature of respondents can be discussed with various demographic variables like institutional categories, designation level, gender, years of service (tenure) and age. The majority of respondents were from the MoE and NPC followed by PSC and MoF, and then NASC and MoGA respectively. Respondents are also categorized on the basis of designation level. Since the highest population is gazetted III class officers, almost 51 percent of the respondents are from this category. Of the total respondents 88% were male. A highest percent (27.3) of the respondents were having working experience between 10-14 years. According to age group category the highest percent (22.00) of respondents were aged between 45-49 years old.
In order to analyze the study the various statistical tools were used. Meanpercentage and frequencies were computed for the sample population data. Binomial tests are the major non-parametric statistical tools used to analyze the parameters of this study. This makes sense institutively-if the inter- item correlations are high, then there is evidence that the items are measuring the same underlying construct. This is really what is meant when someone says they have high or good reliability. They are referring to how will their item measure a single uni-dimensional latent constant. T-test and F-test are applied to test the significance level of gender responses on the basis of male and female and to measure the significance level of responses of remaining three other category of respondents respectively.
There are seen some methodological limitations in this study. That can be stated as: The primary data were collected through Likert type scale from 1 to 5 which may not necessary capture the ratio characteristics of data might be considered as one of the major limitation of the activities; from the theoretical and general perspective of the study, the researcher was limited on the available literature and observations; the researcher faced some errors in data collection such as central tendency of the respondents and social desirability while making their response; and, although the number of employees in the government organization is very high only small number of respondents from the selected organization could be included.
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IV. Results and Conclusion
The mean scores of potential appraisal and development is 79.s91 which is below the model mean score 90, indicates that potential appraisal and development practices have been carried out and adopted at less than sometimes (average), having many weaknesses and lacking, and, therefore, seeks the considerable scopes for improvement in these matters.
Except the mean score of GI&SC and 55+, all the remaining groups‟ mean scores are below the model mean(90), indicate that PAD practices have been carried out at less than average and expect the ample considerable scope for improvements in these matters in the GoN and 55+ age groups mean scores are slightly higher than the model mean score 90 but closer to model mean scores indicate that potential appraisal and development practices have been carried out at sometimes (average) level and therefore seeks some improvement in these matters. The GIII and GII level mean scores are lesser than GI&SC level and below the model mean score denote that potential appraisal and development practices have been carried out and adopted less than average with many weaknesses, and, therefore, demand the ample considerable scope for improvement in these matters. These above score, further, indicate that the mean scores of GI&SC and GII are respectively the highest and the lowest mean scores of this part. The employees of GI&SC have rated most positively as compared to others because they might have to do these aspects in the organization but might have performed sometimes only and might have rated moderately only. The employees of GII have rated most negatively because they might not have got opportunities and system of potential appraisal and development in the government organizations of Nepal. The mean score of the employees of GIII is higher than the GII level employees because they might be new to organization and might have thought positively towards these matters.
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Table 1
Descriptive statistics of potential appraisal and development in the government organization of Nepal on the basis on designation /gender/years of service/age
Aggregate mean
Designation Gender Years of service Age
GIII
Class
GII
Class
GI & special
class
Male Female
<=9 10-14 15-19 20-24 25+ <=34 35-39 40-44 45-49 50-54 55+
Number 150 76 51 23 132 18 19 41 23 37 30 17 27 29 33 28 16
St. mean 79.91 78.92 76.31 91.17
80.46 75.89 79.68 78.76 77.87 78.78 84.60 79.65 81.67 79.03 74.52 78.43 92.56
St. error of mean
1.941 2.775 2.936 5.392
2.145 3.772 4.287 4.029 4.445 3.598 5.168 5.217 4.335 4.313 3.834 5.495 5.203
Median 23.777 24.194 20.964
25.857
24.643
16.003
18.688 25.800
21.316 21.879
28.308 21.509 22.523 23.228 22.027 29.075 20.813
Min 30 30 30 30 30 47 45 30 30 30 30 40 30 30 30 30 59
Max 148 118 105 148 184 101 117 118 118 116 148 117 118 118 116 1.48 131
Skewness
-0.37 -0.461 -0.896 -0.049
-0.41 -0.26 0.212 -0.507 -0.612 -0.718 -0.260 0.019 -0.541 -0.843 -0.548 -0.126 -0.005
Kurtosis 0.007 -0.572 0.110 0.712
-0.06 -0.86 0.059 -0.888 0.661 0.060 0.428 -0.404 -0.144 0.071 -0.144 0.056 -0.362
t-value
F-value
F-value
3.331
t-value
-0.764
t-value
0.373
F-value
1.319
Sig. 0.038 0.446 0.828 0.259
cronbach's alpha 0.962
Sources: Questionnaire Survey, 2008/20
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However, the mean score of male is higher than the female, but both are below the model mean scores 90, indicate that potential appraisal and development systems and practices have been carried out and adopted at less than sometimes (average) level having many weaknesses. The male employees have shown more positive attitudes towards the statements of potential appraisal and development as compared to female employees. The mean scores of all years of service groups are below the model mean score 90, indicate that potential appraisal and development systems and practices have been carried out at less than sometimes (average) level with many weaknesses and shortcomings. The mean score of 25+ and 15-19 are respectively the highest and the lowest measure of this part. The employees of 25+ years of service group have rated most positively because they might have reached the highest position in organization and have felt the responsibility to do things. The employees of 15-19 years of service group have most negatively rated because they have not felt such potential appraisal system and mechanisms adopted in the organization. The remaining groups have rated in between these extremes. The mean score of youngest group (<=9) is higher than the years of service groups 10-14, 15-19, and 20-24 because they are new to the organization mostly and they might have positive attitudes towards these aspects and the future.
Except the mean score of 55+ age group, the remaining age groups mean scores are below the model mean score 90, denote that potential appraisal and development system and practices have been carried out and adopted at less than sometimes (average) having many weaknesses and shortcomings. The mean score of 55+ age group is slightly higher than the model mean score but mostly closer to the model mean score denote that potential appraisal and development practices have been carried out moderately. The mean scores of 55+ and 45-49 age groups are respectively the highest and lowest mean scores of this segment. The employees of 55+ age groups have rated most positively on these aspects as compared to others because they might have reached at the highest position in the government jobs and therefore might have felt the responsibility to do these matters. The employees of 45-49 age group might have high position and experience but might have felt the lacking of potential appraisal and development system formally in the government organization. The remaining groups have rated in between these two extremes. The mean score of youngest employees (<=34) have rated higher than the 40-44, 45-49 and 5054 age groups because they might have potentialities, high expectations and positive attitudes towards the future.
The Table 1 depicts that the respondents‟ opinions of gender, years of service and age are not significantly different, and therefore, are not recognized as moderating variables in this context, while, the respondents‟ opinions of designation are significantly different, and therefore, regarded as moderating variable in this context. The Cronbach's Alpha is 0.962, which indicates high internal consistency in this construct.
Item-wise Analysis of Potential Appraisal and Development
Table 2
1. There is a formal potential appraisal system in your organization. 150 1 5 3.05 1.363
2. The objectives of potential appraisal are clear to all employees. 150 1 5 2.77 1.308
3. Being good potential – appraisal system attempts to generate data about employees and their potential for occupying higher position from a variety of sources, it helps the top management to make decisions about the suitable persons for a given job.
150 1 5 2.91 1.192
4. A good potential appraisal system helps the management in identifying employees whose capabilities can be developed through job rotation training, etc.
150 1 5 3.37 1.256
5 Potential appraisal data are linked with career development/promotion. 150 1 5 3.07 1.267
6. The potential appraisal system encourages open communication between assessor-assessee pair through counseling sessions.
150 1 5 2.97 1.226
7. The potential appraisal system helps interested assessees to gain more insights into their strengths, weaknesses and to discover their potential.
150 1 5 3.17 1.250
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8. To prepare a good potential appraisal system the HRD/HRM department in your organization prepares extensive job descriptions for each job to have the clarity of roles and functions associated with jobs in the organization
150 1 5 2.68 1.160
9. Your HRD/HRM department also prepares a detailed list of qualities, such as technical knowledge and skills, managerial capabilities and qualities, and behavioural qualities – e.g. initiative, drive, creativity, aptitude, etc., required to perform the role
150 1 5 2.64 1.222
10. Your organization adopts job rotation practices and their performance records at the early stage of employees can be good indicators to discover the aptitudes and technical knowledge and skills of the employees.
150 1 5 2.67 .994
11. The organization offers psychological testing services to measure managerial and behavioural dimensions as well as to assess the capabilities, potentialities and behavioural orientation of employees.
150 1 5 2.22 1.169
12. Simulation games and exercises are used in your organization to assess the managerial and behavioural skills and provide a good opportunity for assessing the potential.
150 1 5 2.01 1.059
13. Your organization adopts "Assessment center approach" where simulation exercises are developed help the employees discover themselves and make efforts to improve.
150 1 5 2.08 1.138
14. Your organization believes in performance appraisal ratings as sufficient indicators of the future potential of an employee
150 1 5 2.54 1.053
15. The organization is clear about the philosophy of potential appraisal and the relative weightage it wants to give for merit (potential) and seniority.
150 1 5 2.49 1.085
16. The organization believes in promotions only by using potential, so it promotes every person who tops the list of the indicators of potential.
150 1 5 2.57 1.155
17. Potential appraisal data are used to identify the appropriate people in your organization.
150 1 5 2.51 1.098
18. Your organization believes that the qualities-technical, managerial and behavioural depend upon the tasks to be performed in the organization
150 1 5 3.09 1.129
19. As one goes up in the organizational hierarchy, your organization gives more emphasis to managerial and behavioural qualities than technical skills.
150 1 5 3.07 1.056
20. The mechanisms of potential appraisal used by your organization are (Tick on those which are used):
150 1 5 3.09 1.279
21. The potential appraisal system adopted by your organization provide feedback to employees that every employee gets opportunity to know the results of assessment and gets help to understand the qualities actually required for performing the role for which
150 1 5 2.35 1.100
22. Your organization tries to identify as far as possible the capable people within the organization and create opportunities for them to develop.
150 1 5 2.62 1.072
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Factors of Potential Appraisal and Development and their mean value
Sources: Questionnaire Survey,2008/2009
Among the thirty factors of potential appraisal and development, the mean scores of the twenty three statements/factors (see in table 2) developed to measure the extent of potential appraisal and development system in the organization are below the average level (3.00) and above the rarely true level (2.00) indicate that there following practices relating to potential appraisal and development have been adopted and implemented at less than satisfactory level. Therefore these figures seek ample considerable scope for improvements in the matters.
The mean scores of the seven factors/statements developed to measure the extent of potential appraisal and development have fallen between the score 3 and 4 but most closer to 3, indicate that these seven factors related to potential appraisal and development have been carried out and implemented mostly at moderate level but much below the mostly carried out and implemented level (4). These scores, therefore, also seek some improvements in these matters.
The grand mean score of potential appraisal and development is 2.66. The grand mean score is lower than the model average (3) indicates that potential appraisal and development practices have been poorly carried out with many weakness areas and lacking, and, therefore demands considerable scope for improvements in these matters. Among the 30 factors of potential appraisal and development, a good potential appraisal system helps the management in identifying employees whose capabilities can developed through job rotation training, etc. scored 3.37, the highest and simulation games and exercises are used in organization to assess the managerial and behavioral skills and provide a good opportunity for assessing the potential scored 2.01, the lowest.
The mean score of potential appraisal and development (79.91) is below the model mean score (90). It indicates that potential appraisal development practices have been carried out with many weaknesses and shortcomings in the government organization (for detail item-wise analysis see in analysis). Among 30 factors only 6 factors viz. system of potential appraisal in the organization (3.05) system of identifying employees whose capabilities could be developed through job rotation, training, etc. (3.37), links of potential appraisal data with career development/promotion (3.07), potential appraisal system helps interested assesses to gain more insights into their strengths, weaknesses and to discover their potential (3.17), your organization believes that the qualities – technical, managerial and behavioral
23. A potential appraisal system adapted by your organization has been providing opportunities continuously for the employee to know his/her strengths and weaknesses through periodic counseling and guidance sessions by either HRD/HRM department or the manage
150 1 5 2.32 1.025
24. Potential appraisal data are used by the HRD department for other development decisions like, training and development, career planning and development, self-development, etc
150 1 5 2.40 1.111
25. Organization attempts to generate a climate of openness because of its beliefs in the development and multiplication of human resources.
150 1 5 2.57 1.058
26. The development of potential of employees for higher level jobs is done on the basis of performance appraisal dimensions in your organization.
150 1 5 2.80 1.105
27. Potential appraisal data are used for feedback and performance counseling in your organization.
150 1 5 2.31 .969
28. Potential appraisal and development data helps to identify potential employees to provide them training and development to develop required candidates for the organization.
150 1 5 2.63 1.156
29. Potential appraisal and development are based on career plans of employees and career plans are prepared using the potential appraisal and development data.
150 1 5 2.50 1.140
30. Potential appraisal and development data are used to decide about personnel matters through the appropriate HRI system in your organization.
150 1 5 2.46 1.121
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depend upon the tasks to be performed in the organization (3.09), as one goes up in the organizational hierarchy, your organization gives more emphasis to managerial and behavioral qualities than technical skills (3.07), and, the mechanisms potential appraisal used by your organization are superior ratings, peer ratings, simulation exercises, psychological tests, formal interview by board (3.09) have scored higher than average, denote that in these matters there is more than average practices carried out in the organization, but all the scores are closer to 3, further indicate they are almost at average level. Besides these 6 factors, all the 24 factors of this construct are poorly carried out in the government organizations of Nepal, and therefore seek for ample scope for improvements in these matters.
Except GI&SC and 55+ age group, all the remaining groups have rated below the average score, and therefore logically indicate that potential appraisal and development practices have been carried out below the average level with some lacking in the GoN. The GI&SC and 55+ age-group have rated PAD at more than model average score. It indicates that potential appraisal and development practices have been carried out at more than average level for them.
However there is significant difference in the respondents‟ opinions of designation, variable, but the respondents‟ opinions of gender, years of service, and age variables are not significantly different in PAD.
The mean scores of fourteen respondents‟ groups denote that the potential appraisal and development practices of government organization of Nepal related to potential appraisal system and links of PAD with other HRD mechanisms are below the model mean score and therefore at below the desirable level near to fifty percent. It denotes that PAD practices have been carried out with some weaknesses and lacking in GoN, and expects considerable scope for improvements in these matters because except 55+ age group and GI&SC designation level employees, all remaining groups have rated the subsection of PAD, the potential appraisal system at less than model average. But in remaining subsection of PAD, the links of PAD with other HRD mechanisms, all the groups of moderating variable have rated below the desirable level. It can be concluded that the mean scores of seven factors (see in appendix) denote satisfactory level, while all the remaining twenty three factors (see in analysis and appendix) related with the subsection of PAD are poorly carried out at below the desirable level with some weaknesses and lacking. It can be concluded that the employees who are in higher designation level, male, and higher in years of service and age, have experienced the PAD factors more positively than the employees who are lower in designation level, female and lower in years of service and age in government organizations of Nepal respectively.
It is concluded that the average score of PAD is below the model mean score and below sixty percent. It denotes that PAD activities are not sufficiently carried out in GoN. It further concludes that linkages of PAD with other HRD mechanisms seems very much poor in GoN.
The item wise facts revealed in this study of potential appraisal and development practices of government organizations of Nepal supports the finding of Pradhan (1992), Shrestha (2000), and Ojha (1996) regarding the performance appraisal, although, these researchers have included only a few PAD aspects within their studies of performance appraisal. Because potential appraisal and development system was not made developmental oriented to adopt feedback system for career development, performance improvement and identify training needs. Khatri‟s (1995) study of performance appraisal methods in Nepalese civil service has also included a few aspects of PAD indicates the closed system of performance evaluation which do not contribute to HRD, is also the finding of this study.
The findings have revealed that the PAD practices mentioned in twenty three factors are not established and implemented in the government organizations of Nepal as mentioned in the writings of Rao(1999) and Pareek et al.(1999).
To make the performance appraisal development oriented the twenty three factors mentioned in analysis part should be implemented and adopted as well as established in the government organization of Nepal.
It might be the basis for further research in HRD orientation of PAD in business, banking, manufacturing, trading, government and non-governmental sectors. This study has selected the institutions which are direct related to HRD in the government of Nepal. It would be more representative if it could have covered the respondents of all the ministries of Nepal. This study provides some insights for senior executives of Nepalese government organization in adopting, implementing and moderating PAD oriented to HRD system in the organization. This study could provide the managers/researcher/government organization/policy makers/executives to understand about different aspects of PAD, PAD system, their linkage with other mechanisms of HRD and its use in promotions, performance improvement career planning and development, and identifying training and development needs.
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Exploring Predictors of Job Stress: Compliance, Fairness Perception and Supervisory Relationship
(Evidence from Nepalese Commercial Banks)
Santosh Gyawali2
Abstract
Sample of 430 bank employeesfrom 23 commercial banks were surveyed with self- administered questionnaire basis to identify variability of predictors (compliance, fairness perception and supervisory relationship)over job stress. Regression analysis revealed fairness perception of employees; compliance and supervisory relationship were poor predictors of job stress similarly found positive relationship between compliance and job stress however negative with other two.
Key Words: Compliance, Fairness Perception, Supervisory Relationship, Job Stress
I. Introduction
The business professional have the understanding that one of the key components for competitive advantageis the human capital assets and the intellectual value they engage to the organization. Leading employers continually seek new and creative ways to maximizetheir employees‟ productivity and provide the most effective work environment (Marilyn,2001). Companies have come to realize the importance of comfort in the workplaceenvironment in order to retain quality personnel, increase productivity and maintain acompetitive edge (Luparello, 2004).Employees are suffering from the increasing complexity of the workplace, the rapidly changing work environments, the increased information and responsibility load, the increases in intrusions on employee privacy, and the pressure to be productive, which is especially stressful considering the global competition that reduces job security. Consequently, employers are faced with increased absenteeism and productivity losses (Aldred, 2001). With the increased focus on employee productivity, there is a corresponding increment in employee stress. It is found that when an individual feels stressed in his/her home life, this stress spills-over into the work arena and can affect various behaviors in the workplace and if organization do not take steps to reduce levels of work-family conflict, the resulting levels of stress may influence efficiency, profitability, and retention in their organizations. The pressure to make employee productive is proven as a major source of risk for many businesses.Considerable influence of job stress on both individuals and organizations, researches on the topic of stress have become a mounting concern in business and management arena.
People with a higher occupational stress may not be satisfied with their job consequently they may feel unhappy to work in the organization. They may feel frustrated or burned out when they are having problems with supervisors, organizational justice, and their obligatory attachment with organization or other stressors which may leave a negative impact to the organization. So, the study to realize the stress and the stressor that cause all the negative effects is considered very important for employer and employees.Beehr and Newman (1978) has defined stress as a situation which will force a person to deviate from normal functioning due to the change (i.e. disrupt or enhance) in his/her psychological and/or physiological condition, such that the person is forced to deviate from normal functioning. Hence, it is truly important for an individual to recognize the stresses that are facing by them in their career.
The National Safety Council found that on an average workday, one million employees will be absent from work due to job stress. The estimated annual cost to the employers is $200 billion a year, which includes medical costs, worker‟s compensation, and productivity losses (Caudron, 1998).The nature of today‟s work increases stress and strain for many employees. The current workforce economy is defined by increasingly service-based work, competitive and fast paced environments, a shift towards a 24-7 economy, and is increasingly focused on lean production (Tetrick& Quick, 2003). People are increasingly working odd hours, with more than 14% of full time workers and 36% of part time workers working non-standard schedules. These facets of American work life have increased employee responsibilities, the cognitive demands placed on employees, and the interdependence among employees, resulting in increased stress that can lead to negative health effects and detrimental organizational
2 Mr. Gyawali is Lecturer at LumbiniBanijya Campus, Tribhuvan University, Butwal, he can be reached at [email protected]
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outcomes (Tetrick& Quick, 2003; Wall & Jackson, 2005). U.S. industries lose nearly $300 billion a year–or $7,500 per worker–in employee absenteeism, diminished productivity, employee turnover, and direct medical, legal, and insurance fees related to workplace stress, according to the American Institute of Stress (Stambor, 2006). Job stress is a growing problem that results in substantial costs to individual employees and work organizations around the globe (Hart & Cooper, 2001). The overall cost of stress at work has been estimated to be in the range of 20 billion Euros in the European Union and more than 150 billion dollars in US, mainly for health care and treatment costs, absenteeism and turnover (Daniels, 2004). Whether similar type of statistics have not yet discovered or explored in Nepalese business scenario, the cost could be estimated quite higher. Study of job stress in different contexts will contribute to deeper understanding of the phenomenon and contribute how to minimize its negative effects on workers‟ productivity, satisfaction and commitment to stay in their jobs.
The business world is looking forward to high performance organizations, which would provide high job satisfaction to their employees with minimal stress and would also cherish excellence and effectiveness. The problems related to effective functioning of an organization such as dissatisfaction, turnover, absenteeism, disloyalty, lack of commitment, distrust have appeared in surface and more or less these are concerned to job stress. The study of job stress helps to understand its antecedents with consequences and so help toreduce discrepancies and lubricate the effective functioning for the organization. Numbers of studies have been carried out considering the topic Job Stress as nutshell in Nepalese research domain however; it is merely associated with continuance commitment refers employee‟s awareness that costs are associated with leaving the organization, probably the novel exploration on given field.
II. Theoretical Framework
Job Stress
Job stress refers to the extent to which job duties are difficult to fulfill.Gilboa, Shirom, Fried, and Cooper‟s (2008) meta-analysis found that work-related stressors, such as role overload, had a stronger negative correlation with performance in managers than in non-managers. Glazer and Beehr have built an organizational stress framework to examine relationships between role stressors (ambiguity, overload, and conflict), anxiety, commitment (affective and continuance), and turnover intention. The result indicated that three role stressors were expected to predict anxiety, continuance commitment and indirectly predict intention to leave (Glazer &Beehr 2005).Lee (2007), Lambert and Hogan (2009), Omolara (2008), Boyas and Wind (2009) announced a negative relationship between job stress and organizational commitment while Wells et al. (2009) study showed a positive relationship between job stress and organizational commitment and a negative relationship between job stress and career commitment (Wells et. al., 2009). Also Somers (2009) showed a noteworthy relationship between job stress and affective commitment and normative commitment but no significant relationship between job stress and continuance commitment. Yaghoubiet al., (2008) also announced that there is not a significant relationship between organizational commitment and job stress.
Khatibiet. al., (2009) conducted research study to explore the relationship between job stress and organizational commitment in National Olympic and Paralympic Academy (NOPA) employees. Statistical population of the research included all employees (full time) of NOPA. The results indicated a negative significant relationship between job stress and organizational commitment, affective commitment and normative commitment, but no significant relationship between job stress and continuance commitment.
Continuance Commitment
Organizational commitment is the relative strength of an individual's identification with and involvement in an organization. Organizational commitment is the psychological attachment felt by the person for the organization that reflects the degree to which the individual internalizes or adopts characteristics or perspectives of the organization (O‟Reilly & Chatman, 1986).According to Meyer and Allen‟s (1997), there exists three-component model of organizational commitment; i.e. affective, continuance and normative commitment. Affective commitment is based on emotional attachment to the organization. Employees choose to remain with the organization because they want to stay. Normative commitment refers to an employee‟s feelings of obligation to remain with the organization. Thus, employees with strong normative commitment will remain with an organization by virtue of their belief that it is the "right and moral" thing to do. Continuance commitment refers employee‟s awareness that costs are associated with leaving the organization. Continuance commitment can develop as a result of any action or event that increases the costs of leaving the organization, provided the employee recognizes that these costs have been incurred‟. Continuance commitment is based on perceived cost associated with leaving the organization.
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Weisner (2003) found that continuance commitment is not the commitment desirable for an organization, and stresses that while employees who perceive the cost of leaving the organization as heavy prefer to stay, their contribution to the organization is not as positive. Meyer and Allen (1997) found a strong relation between leaving and performance and affective commitment, but a weak relation with regard to normative commitment, and practically no relation in the case of continuance commitment. Meyer et al.‟s (2002) meta-analysis of 155 studies using one of these three commitment scales found strong correlations between each of the scales and job satisfaction and job involvement. All three were negatively correlated with job leaving. Michael (2009) found stress hinders the coordinators‟ sense of emotional commitment. As the stress level rises, the coordinators‟ sense of belonging decreases. Another finding was that the stress in the coordinators‟ job does not influence their overall continuance commitment. Strong continuance commitment was found in two categories: role expectations that were not compatible with the role requirements, and the second, unwillingness to leave the job in the middle of the year. In addition, the research indicated that job stress is not related to the PMP (Perach Mentoring Project) coordinators‟ normative commitment. They felt loyalty to the organization based on the faith that this work is the right thing to do.
Leadership Support
Leadership support is degree of support and consideration a person perceives from his or her immediate supervisor. Netemeyer et al., (1997) describes leadership support the degree to which a person receives support and consideration from his or her supervisor. A supportive leader assists employees when problems arise and encourages the flow of two-way communication.Podsakoff et al. (1993) examine the relations among leadership behaviors, job satisfaction. They report a correlation of .53 between supportive leader behaviors and job satisfaction. Brown and Peterson (1993) report a strong correlation between leadership consideration and job satisfaction.
In a study of 422 employees and their supervisors at two banks, Smith et al. (1983) established that supervisor support would improve job satisfaction.Schaubroeck and Fink (1998) investigated 214 employees in a large insurance company on the East Coast of the United States, and found that supervisor support was positively related to employees‟ job satisfaction (.41). In a meta-analysis by Podsakoff et al. (1996) demonstrated a medium high correlation (.57) between supervisor support and employees‟ job satisfaction.When supervisor support is effective, it is associated with lower levels of burnout, work stress, and mental health problems. In other words, social workers who perceive their supervisor as supportive have less potential for burnout (Lloyd et al., 2002).
Research specifies that supervisors can be a cause of stress and also help in preventing stress (Collings& Murray, 1996; Collins, 2008; Dillenburger, 2004; Himle et al., 1991; Lloyd et al., 2002; Mor Barak et al., 2009; Rauktis&Koeske, 1994). Storey and Billingham (2001) stated “the higher the level of support received, the lower the level of stress. This pattern also emerges for levels of support from seniors/supervisors and level of stress. Support from seniors/supervisors was more effective in dropping stress levels”.The term abusive supervisionrefers to “subordinates‟ perceptions of the extent towhich their supervisors engage in the sustained display of hostileverbal and nonverbal behaviors, excluding physical contact” (Tepper,2000). Behavioral descriptors consistent with thisdefinition include “using derogatory names, engaging in explosiveoutbursts (e.g., yelling or screaming at someone for disagreeing),intimidating by use of threats of job loss, withholding neededinformation, aggressive eye contact, the silent treatment, and humiliatingor ridiculing someone in front of others” (Keashly, 1998) that may result job stress.
Fairness Perception (Justice)
Fairness or justice perceptions refer to whether or not employees perceive that they are fairly rewarded given their level of training, tenure, responsibility or workload. It involves the ways employees decide if they are being treated fairly at their jobs, and the way this decision affects their work behavior (Moorman, 1991). There are two commonly researched forms of organizational justice: distributive justice and procedural justice. Procedural justice is defined as the fairness of the procedures themselves. Distributive justice is defined as the fairness of the outcomes received from organizational procedures (Greenberg, 1990). Distributive justice involves the receiver‟s views on how their outcome compares to a referent‟s outcome, the outcome of another employees. Procedural justice deals with the procedures that the organization uses to come to a decision. Organ (1988) suggests that distributive justice is more important to the study of employment relationships than is procedural justice. Tansky (1993) reports correlation of .45 between perception of fairness and job satisfaction.Organizational injustice has been conceptualized as a stressor in its own right, which may incrementally increase stress. This notion is supported by findings that organizational injustice tends to be associated with similar outcomes to occupational stress, such as turnover, lower job satisfaction (McFarlin& Sweeney, 1992), wellbeing (Kivimaki et al., 2003) mental distress (Elovainio et al., 2002), decreased quality of patient care (Pekkarinen et al., 2008).
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III. Methodology
Research design
The following study pursued the quantitative research design based on survey to identify variability of job stress predictors over job stress and its level considering Nepalese Banking industry. Self-administered questionnaire survey was designed to obtain response from employees. All 23 private commercial banks registered on Nepal Rastra Bank (Central Bank of Nepal) till the date of June 2009 were taken in account for conducting research. Respondents were selected from corporate offices as well as from their city branches. Total number of corporate offices and branches of those commercial banks were taken as the population and among those four corporate offices and thirty three branches were selected judgmentallyas sample.The survey questionnaires were purposively distributed to the respondents of each organization. Altogether 430 employees were chosen as a sample from those organizations though 220 (55.16%) responses were found valid.
Regression analysis was used in order to compare and analyze the relationship of the variables. Significance of the results was tested using F-test and R² values. Variables used for the survey were compliance (continuance) commitment, fairness perception (justice), leadership support (relationship with supervisor) as independent variables and as dependent variable the stress. Data were generated in six point Likert type scale anchored by “Strongly Disagree“=„1‟ to “Strongly Agree”=„6‟ and no space had left for neutral response.
Organizational Commitment
Items related to Organizational Commitment were taken from O‟Reilly and Chatman‟s (1986) measure of organizational commitment. It used 12 items to describe three dimensions of organizational commitments: Internalization, Identification and Compliance. Coefficient alpha values ranged from .86 to .91 (Martin &Bennete, 1996; Sutton & Harrison, 1993; Harris et al., 1993). Compliance correlated positively with turnover intention, correlated negatively with job level, job involvement, and development through management exposure (Harris et al., 1993).
Leadership Support (Relationship with supervisor)
The items related to leadership support with five items were taken from measures of leadership support and consideration, House and Dessler (1974). Those items assessed the degree to which employees perceived their immediate supervisor as providing guidance, support, and considering inputs in planning processes. Its reliability was found as alpha value .87 (Netemeyer et al., 1997).
Leadership Support
(Relationship with
Supervisor)
Fairness Perception (Justice)
Compliance (Commitment)
Job Stress
Dependent Variables
Independent Variables
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Fairness Perception (Justice)
It consists of two domains, Interactional (procedural) Justice and Distributive Justice. Three items that shows employee perceptions of procedural fairness were used from Moorman‟s (1991) measure of organizational justice. The four items that shows employees perception of distributive justice was developed by Price and Muller (1986). It was focused on assessment of the degree to which rewards received by employees are perceived to be related to performance inputs. Its coefficient alpha values ranged from 0.75 to 0.94 (Moorman, 1991). Distributive justice correlated positively with job satisfaction and procedural justice (Moorman, 1991).
Job Stress and Stress outside the Workplace:Items that measure stress were adapted from Motowidlo et al. (1986).
IV. Results and Conclusion
The given tableillustrates the significant numbers of employees have exposed slightly agreement with fairness perception and continuance commitment and moderate agreement over leadership support. The standard deviation is almost similar in fairness perception and in leadership support and negligible deviation in case of stress.
Table 1
Mean, Standard Deviation and Reliability
The Cronbach‟s alpha value for
interactional justice is 0.832 where as it is 0.944 for
distributive justice and the aggregate alpha value for overall
fairness perception is 0.873 and it is consistent with coefficient alpha value of Moorman (1991) which was ranged from 0.75 to 0.94. The aggregate mean of all fairness perception items is 3.99 and the standard deviation is 1.193. The grand mean of fairness perception has indicated that employees are slightly agree with the fairness what they perceived by their superiors.
In this study, the Cronbach‟s alpha value for leadership support is found 0.878. According to Netemeyer et al. (1997), its reliability was found as alpha value 0.87, which is almost similar to the recent one. The aggregate mean value of leadership support 4.58 indicates most of the employees get supported from their leaders.
Table 2
Correlation Matrix
Fairness Perception Compliance Stress Relationship with Supervisor
Fairness Perception 1
Compliance .012 1
Stress -.078 .185** 1
Relationship with Supervisor .524** -.124 -.086 1
**Correlation is significant at 0.01level (2- tailed)
Correlation of stress with fairness perception, compliance (continuance commitment) and relationship with supervisor(leadership support) is found as -.078, .185 and -.086 respectively. Table exhibits negative correlation of stress with fairness perception and supervisory behavior but positive correlation with compliance, however weak
S.N. Description Mean Std.dv. Alpha
1 Fairness Perception (Justice) 3.990 1.193 0.87
2 Continuance Commitments 4.131 1.068 0.71
3 Leadership Support (Supervisory Relationship) 4.581 1.232 0.87
4 Stress 3.359 0.629 0.76
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relationship in each of case. If the significance level is relatively large, then the correlation is not significant and the two variables are not linearly related.According to Bryman and Cramer (2001), the Pearson‟s „r‟ between each pair of independent variables should not be exceed 0.80 or in excess of 0.80 may be suspected of exhibiting multicolinearity so problem of multicolinearity is almost null.
Test of Normality: Large significance values (>.05) indicate that the observed distribution corresponds to the theoretical distribution. Smaller the significance value of .05 indicates the non-normal distribution.
Table 3
Test of Normality
Fairness Perception
Compliance Supervisory Support Stress
Kolmogorov-Smirnov Z
1.454 1.257 1.853 .880
Asymp. Sig. (2-tailed)
.229 .185 .422 .092
DW 1.856 1.796 1.859
VIF 1.00 1.00 1.00
Tolerance 1.00 1.00 1.00
The table has exhibited, all the determinants of stress; fairness perception, compliance and supervisory support found their significance value greater than .05, the distributions resemble a normal distribution. The Kolmogorov-Smirnov statistics tests the hypothesis that the data are normally distributed and the sig. value less than .05 indicates the distribution of the data differs significantly from normal distribution. The DW test informs about whether there exist uncorrelated (independent) residual terms or lack of auto-correlation and consider the value closer to 2 (between 1 and 3) is better. All DW statistics in above table are close to 2 so negligible chances of auto-correlation. The VIF (Variance Inflation Factor) indicates whether a predictor has a strong linear relationship with other predictors.In our current model, VIF values are well below of 10 and tolerance statistics is above of .2 so could be concluded no collinearity with in the data.
Regression Analysis
Considering,Job Stressas dependent variable (Y) and Fairness Perception, Compliance and Fairness Perception as independent variables (X), the linear regression equation has been estimated as:
Table 4
Regression Results
Y= Job Stress, X= Fairness Perception
Ŷ = 3.523 - .041X
t = (23.740) (-1.153)
p= (0.000) (0.04)
R² = 0.06 F=1.329 (sig .04) df = 218
Y= Job Stress, X= Compliance
Ŷ = 2.908 + .109X
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t = (17.374) (2.783)
p= (0.000) (0.006)
R² = 0.034 F=7.746 (sig .006) df = 218
Y= Job Stress, X= Relationship with Supervisor
Ŷ = 3.56 - .044X
t = (21.762) (-1.275)
p= (0.000) (0.04)
R² = 0.07 F=1.627 (sig .04) df = 218
The Regression coefficient of fairness perception is -.041, compliance is .109 and supervisory relationship is -.044. It shows unit change in fairness perception (justice) causes .041 unitsnegative changes in job stress i.e. better the fairness perception lower the job stress, unit change in compliance causes .109 changes in job stress i.e. higher the feeling of compliance higher of job stress and unit change in supervisory relationship causes .044 units negative changes in job stress. In above model, 6% variability in job stress is explained by the fairness perception of employee, just 3.4% by compliance and 7% by supervisory relationship. It results the fairness perception of employees, compliance and supervisory relationship are predictors of job stress but have less significant impact.
Considering the t-value below of -2 and above of +2 reveals good predictors and it is found consistent in above model. If sig. value of F is less of .05 then independent variable do a good job explaining the variation over dependent variable.The p-value of ANOVA table is less than .05 means the model is statistically significant at 5% level of significance. So, calculation shows that there is relationship between fairness perception, compliance and relationship with supervisor to job stress. Here p value is less than the alpha value so the alternative hypothesis should not be rejected, i.e. better the fairness perception lesser the job stress, better relationship with supervisor lesser the job stress and positive relationship between compliance with job stress.
Most of respondents responded that they merely felt stress with their job and found almost similar stress level in male as well as female, however stress level found higher with higher education of employees. Job stress is found higher in age of 50 or more but lower for age group 20 to 30 years. Most of respondents agree with the statement that they would stay on organization because they would have to bear great cost when abandoning organization but similar result was not found in reference to female. Most of respondents agreed the good relationship with their supervisor. It is revealed higher the age factor better the fairness perception, higher feeling of continuance commitment with organization. Similarly, lower of age better of relationship with supervisor, higher the education level lower of fairness perception and no better relationship with supervisor, longer the tenure less significant the fairness perception and relationship with supervisors.
The research has concluded that compliance (continuance commitment)is predictor of job stress but less amount of variability has been defined by these predictors over the job stress. The given result is found consistent with the research conducted by Somers (2009), he advocated there exist significant relationship between job stress and affective commitment and normative commitment but no significant relationship between job stress and continuance commitment. It is also similar to the research findings of Khatibiet. al. (2009) as no significant relationship between job stress and continuance commitment similarly Yaghoubiet al., (2008) has also announced there is no significant relationship between organizational commitment and job stress.The research has also finished the result thatfairness perception of employees and supervisory relationship arepredictors of job stress and it is similar to the research findings of (Collings& Murray, 1996; Collins, 2008; Dillenburger, 2004; Himle et al., 1991; Lloyd et al., 2002; Mor Barak et al., 2009; Rauktis&Koeske, 1994), they advocatedsupervisors can be a cause of stress and also help in preventing stress.This notion is supported by findings that organisational injustice tends to be associated with similar outcomes to occupational stress, such as turnover, lower job satisfaction (McFarlin& Sweeney, 1992), wellbeing (Kivimaki et al., 2003) mental distress (Elovainio et al., 2002).It has also discovered better the fairness perception lesser the job stress, better relationship with supervisor lesser the job stress and higher the feelings of compliances in organization higher of job stress.
Further researcher could perform the similar research on job stress considering the different predictors such as physical working environment, task significance, task identity, work family balance, role of spouses, job description
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because what predictors were taken in attention for the given research were found poor predictors and insignificant amount of variability over job stress.
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Determinants of Working Capital: Evidence from Nepal
Dr. Ramji Gautam3
Abstract
This paper attempts to investigate the various factors determining the working capital level of Nepalese listed enterprises. In order to investigate the determinants of working capital fifteen enterprises listed in NEPSE have been taken as sample covering the period of time 2060/61–2069/70 B.S. Multiple linear regression models have been employed for the analysis of data. It is evident from the findings that the level of working capital is strongly affected by size, property, plant and equipment to total assets ratio, sales growth and opportunity cost.
Key words: working capital, working capital management, determinant factors
I. Introduction
The working capital meets the short-term financial requirements of a business enterprise. It is a trading capital, not retained in the business in a particular form for longer than a year. The money invested in it changes form and substance during the normal course of business operations. The need for maintaining an adequate working capital can hardly be questioned. Just as circulation of blood is very necessary in the human body to maintain life, the flow of funds is very necessary to maintain business. If it becomes weak, the business can hardly prosper and survive. Working capital is must for a business enterprise, though its amount varies from firm to firm.
The corporate finance literature has traditionally focused on the study of long-term financial decisions, particularly investments, capital structure, dividends or company valuation decisions. However, short-term assets and liabilities are important components of total assets and need to be carefully analyzed. Management of these short-term assets and liabilities warrants a careful investigation, since the working capital management plays an important role in a firm‟s profitability and risk as well as its value (Smith, 1980). Efficient management of working capital is very essential in the overall corporate strategy in creating shareholder value. Firms try to maintain an optimum level of working capital that maximizes that value (Deloof, 2003; Howorth & Westhead, 2003; and Afza & Nazir, 2007). In a broader spectrum, from the perspective of a Chief Financial Officer (CFO), working capital management is a simple and straightforward concept of ensuring the ability of the organization to fund the difference between short-term assets and short-term liabilities (Harris, 2005). However, a „total approach‟ should be followed which covers all the activities of the company relating to vendors, customers and products (Hall, 2002). In practice, working capital management has become one of the most important issues in organizations, where many financial managers are finding it difficult to identify the important drivers of working capital and the optimum level of working capital (Lamberson, 1995). Consequently, companies can minimize risk and improve their overall performance if they can understand the role and determinants of working capital. A firm may adopt an aggressive working capital management policy with a low level of current assets as percentage of total assets, or it may also be used for the financing decisions of the firm in the form of high level of current liabilities as percentage of total liabilities. Excessive levels of current assets may have a negative effect on a firm‟s profitability, whereas a low level of current assets may lead to lower levels of liquidity and stock outs, resulting in difficulties in maintaining smooth operations (VanHorne & Wachowicz, 2004).
The main objective of working capital management is to maintain an optimal balance among each of the working capital components. Business success heavily depends on the ability of the financial managers to effectively manage receivables, inventory, and payables (Filbeck & Krueger, 2005). Firms can reduce their financing costs and/or increase the funds available for expansion projects by minimizing the amount of investment tied up in current assets. Most of the financial managers‟ time and efforts are consumed in identifying the non-optimal levels of current assets and liabilities and bringing them to optimal levels (Lamberson, 1995). An optimal level of working capital is the one in which a balance is achieved between risk and efficiency. It requires continuous monitoring to maintain the optimum level of various components of working capital, such as cash receivables, inventory and payables. In general, current assets are considered as one of the important components of total assets of a firm. A firm may be able to reduce its investment in fixed assets by renting or leasing plant and machinery, whereas the same policy cannot be followed for
3 Ramji Gautam (Ph.D.) is an Associate Professor at Central Department of Management, Tribhuvan University, Kathmandu. He can be
reached at [email protected]
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the components of working capital. The high level of current assets may reduce the risk of liquidity associated with the opportunity cost of funds that may have been invested in long-term assets.
Most of the previous studies, on determinants of working capital of firms, have been focused on the developed countries. However, there is a need to study the variables that influence the investment in working capital in Nepalese enterprises. This study, therefore, attempts to identify such factors.
II. Theoretical Framework
Working capital is an important ingredient in the smooth running of business enterprises. It has not attracted much attention of scholars. Different authors have conducted research work to analyze working capital management in different ways. VanHorne (1969) examined separately the level of a firm's liquid assets and the maturity composition of its debt in order to illustrate the respective tradeoff between risk and return. He emphasized, lower the level of liquid assets the greater the risk of unable to meet current obligation. In his study, the risk is defined as the probability of technical solvency. The risk of running out of cash can be reduced or even eliminated by maintaining a high proportion of liquid assets. However, cost is involved on the one hand and on the other, it reduces the return on investment. He proposed that the calculation of different forecasted liquid assets requirement along with their subjective probabilities under different possible assumptions of sales, receivables, payables and other related receipts and disbursements. Generally, the longer the maturity schedule of debt, the less risky would be the debt financing of the firm. He further suggested preparing a schedule showing each alternative of debt maturity, probability distribution of debt running out of cash, opportunity cost. Thus, this study presents a risk return trade off in working capital management in entirely new perspective.
Agrawal (1983) studied on working capital management by taking sample of thirty four large manufacturing and trading public limited companies in ten different industries in private sector. An attempt was made to examine the industry practice in working capital management and to evaluate the management performance in this regard. By applying the ratio analysis as financial tools, responses to questionnaire and interview, it has been found that a wide variation prevails in the size of working capital in relation to sales in different industries.
Pradhan (1986) studied on management of working capital of selected Nepalese Public Enterprises covering ten years period starting from 1973 to 1982. By using the econometric models, he found that the level of working capital and its components depend not only on sales but also on holding cost. However, the inclusion of capacity utilization in the models does not seem to have contributed much to the demand function of working capital and its various components. It was revealed that most of the selected enterprises have been achieving a tradeoff between risk and return.
Vijaykumar and Venkatchalam (1996) studied the demand for working capital in private sector industries of Tamil Nadu by selecting sample of seven companies. The objective of the study was to determine empirically whether transaction working capital balances including cash and inventories vary proportionately or less than in proportion to change in the volume of sales and capital cost. For the purpose, they estimated the demand function of working capital and its components i.e. cash, receivables, inventories, gross working capital and net working capital. When only sales were taken as independent variable, coefficient of sales was more than unity in all the equations of working capital and its components. So far as capital costs were concerned, these had negative signs in all the equations but significant only in inventories, gross working capital and net working capital showing negative impact of interest rates on investment in working capital and its component. Thus, the regression results strongly suggested that the sales and capital cost affect the demand for working capital and its component determined.
Kim, Mauer and Sherman (1998) worked on the determinants of corporate liquidity. The purpose of the paper was to provide a theoretical and empirical investigation of the firm's decision to invest in liquid assets. Nine hundred fifteen industrial firms as sample, during the period of twenty years starting from 1975 to 1994 were taken. In the paper, they developed a model of optimal corporate investment in liquid assets based on a cost benefit tradeoff between the holding cost of liquid assets and the benefit of minimizing the need to fund profitable future investment opportunities with costly external financing. They found that the firms with larger market to book ratio had significantly larger position in liquid assets. In add, the size of the firm tends to be negatively related to liquidity. They also found that firms with more volatile earnings and lower returns on physical assets relative to those on liquid assets tend to have significantly larger positions in liquid assets. Finally, it has been concluded that a positive and significant relationship between liquidity and measures of future economic conditions that supports the models prediction that firms build liquidity in anticipation of promising future investment opportunities.
Hyderabad (1999) in his paper, an attempt has been made to evaluate the working capital investment and financing policies by taking 756 non-government and non-financial large public limited companies as sample for three years period from 1994/95 to 1996/97. By using different ratios, he found that a large majority of Indian public limited
25
companies had adopted a conservative policy towards the current assets investment. Similarly, he revealed that the large companies in India had followed a relatively aggressive approach in financing their working capital requirements. Further, he suggested employing more long-term funds to improve their overall working capital policy.
Howorth and Westhead (2003) examined the working capital management routines of a large random sample of small companies in the UK. Principal components analysis and cluster analysis confirm the identification of four distinct types of companies with regard to pattern of working capital management. Multinomial logistic regression analysis suggests that the selected independent variables successfully discriminated between the four types of companies. The results suggest that small companies focus only on areas of working capital management where they expect to improve marginal returns.
Filbeck and Krueger (2005) studied on an analysis of working capital management results across industries over a period of five years starting from 1996 to 2000 by taking nearly 1000 firms as sample in the survey. In their study, classical analysis of variance was used to address the issue of industry rank differences with in years. Similarly, assessment of working capital management performance across year was conducted using the Kendall's coefficient of concordance. After analyzing the data, they found significant difference existed between industries across time with respect to measures of working capital. The result of the study suggested that there were significant differences in the industry working capital management rankings and working capital varied across time.
Teruel and Solano (2006) studied on effects of working capital management on small and medium sized enterprises' profitability of Spanish firms. For the purpose of study, data were collected from eight thousand eight hundred seventy two small and medium sized enterprises covering the period 1996 to 2002. Use of the multiple regression analysis showed a significant negative relation of profitability with number of day accounts receivables, and number of day inventory. Further, the study pointed out that reducing the cash conversion cycle to a minimum as far as that was reasonable could increase the value of the firm. The result of the study was consistent with previous studies of Shin and Soenen, (1998) and Deloof, (2003)
Nazir and Afza (2009) have analyzed the factors determining the working capital requirements of manufacturing firms. They have used panel data for the phase of 2004–2007 and run ordinary least square (OLS) model on the determinants of working capital. They found that the operating cycle and stock market value positively related to working capital requirements but found leverage negatively related to the working capital requirements.
The empirical researches reveal that the firm specific factors affecting the level of working capital have differing relationship across different countries and firm sizes. Moreover, the behavior of these variables has been changing over time. The literature does not provide considerable research on determinants of working capital in developing countries like Nepal. The current research tries to fill these gaps.
III. Research Methodology A sample of 15 listed enterprises has been taken for the purpose of the study. Financial firms have been excluded from the sample for the obvious reason that the factors determining their working capital requirements are altogether different from the non-financial firms. In order to analyze the data, these enterprises have been classified scale wise such small, medium and large scale enterprises. In this study, secondary data have been used. All required secondary data for this study have been taken from different sources such as SEBON, NEPSE and annual reports of concerned enterprise. The data cover a ten-year period starting from 2060/61–2069/70 B.S. Multiple linear regression models have been employed for the analysis of data. The following models have been used for determining the working capital. According to the models, working capital is a function of size, property, plant and equipment to total assets ratio, sales growth and opportunity cost The following equations are the working capital models:
WC = α + β1SIZE + β2PTA + β3 SG + β4INTEREST + €t
NWC = α + β1SIZE + β2PTA + β3 SG + β4INTEREST + €t
where, WC measures gross working capital; NWC, net working capital; SIZE, total Assets; PTA, property, plant and equipment to total assets; SG, sales growth; INTEREST, opportunity cost and €t, error term.
For the purpose of this study, working capital is taken as dependent variable. Working capital is measured by total current assets in the first model and net working capital in the second, which is defined as total current assets minus current liabilities. For the model, it is assumed that the following factors have significant influence on the firms' working capital investment. Size
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The firm size may influence the investment in firms' working capital. Larger firms may require larger investment in working capital because of their larger sales volume. Alternatively, larger firms may be able to use their size to forge relationships with suppliers that are necessary for reductions in investments in working capital. Thus, firms' size is likely to influence their working capital investment, though the direction of the affect is an open question. The firms' total assets measure the size. Property, Plant and Equipment to Total Assets
The proportion of a firm's assets accounted for by fixed assets might exercise and influence on working capital investment. It is calculated dividing property, plant and equipment by total assets. A negative relationship exists. Sales Growth
It is expected that sales growth influence the firms' working capital investment. A firm might build up inventories in anticipation of future sales growth, and as a result, may increase its use of trade credit. For such growth, the firm's percentage sales growth is calculated as current sales - base sales / base sales. Opportunity Cost
Finally, the opportunity cost of the capital invested in working capital has been measured as short-term interest rate of commercial bank. It is expected, this variable should be negatively related to working capital
IV. Results and Conclusion
Regression Results of Different Scale Enterprises In Model 1, a significant positive relationship between working capital and size is found in small, medium and large-scale enterprises, which is consistent. Moreover, the coefficient of property, plant and equipment to total assets ratio is negative in small, medium and large-scale enterprises. The results are significant and consistent.
Table 1
Regression Result of Different Scale Enterprises
Model 1 SSEs MSEs LSEs
Beta coefficient Beta Coefficients Beta Coefficients
WC (Constant) 75.090**
(3.111)
791.149*
(9.148)
575.915
(1.257)
SIZE 0.639*
(23.363)
0.285*
(6.415)
0.443*
(4.927)
PTA -186.229*
(-13.956)
-504.077*
(-9.869)
-811.160*
(-6.345)
SG 0.0009744
(0.084)
0.490
(1.155)
-0.809
(-0.807)
INT -1.240
(-0.670)
-34.899*
(-5.772)
-19.683
(-0.675)
F-value 161.876* 47.653* 25.344*
R Square 0.901 0.796 0.743
Adjusted R Square 0.896 0.779 0.714
Note: Figures in parenthesis denote‘t’ values; *significant at 1percent, **significant at 5 percent,
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The sign of the coefficient of sales growth is neither as expected nor significant in large-scale enterprise while it is as expected in small and medium scale enterprise. The coefficient of opportunity cost is neither as expected nor statistically significant in small-scale enterprise. A negative relationship between opportunity cost and working capital is found that is statistically insignificant in small and medium scale enterprises. However, it is consistent with previous study.
Table 2
Regression Result of Different Scale Enterprises
Model 2 SSEs MSEs LSEs
Beta Coefficients Beta Coefficients Beta Coefficients
NWC (Constant) -64.235
(-0.888)
332.510**
(2.217)
660.413
(1.372)
SIZE -0.09826
(-1.198)
0.06013
(0.782)
0.008828
(0.094)
PTA 7.070
(0.177)
-472.867*
(-5.337)
-842.272*
(-6.273)
SG 0.02025
(0.582)
0.396
(0.538)
-0.345
(-0.328)
INT 5.579
(1.005)
-8.155
(-0.777)
-8.240
-0.269
F-value 0.773 8.163* 11.177*
R Square 0.42 0.400 0.561
Adjusted R Square -0.012 0.351 0.511
Figures in parenthesis denote ’t’ values; *significant at 1 percent, **significant at 5 percent
In Model 1, R-square explains 90.1 percent of the variation in working capital under ordinary least square in small-scale enterprises, 79.6 percent in medium and 74.3 percent in large scale enterprises. In Model 2, it has been observed that the relationship between working capital and size of the firm is positive in medium and large-scale enterprises, which is statistically insignificant. The coefficient of size is neither significant nor consistent in small-scale enterprises. The coefficient of property, plant and equipment to total assets ratio is positive in small-scale enterprises, which is neither significant nor consistent. In medium and large-scale enterprises, the coefficient of property, plant and equipment to total assets ratio is a negative that is statistically significant and consistent with previous study. In small-scale enterprises, a positive relationship between working capital and property, plant and equipment to total assets ratio is found which is neither significant nor consistent. The relationship between sales growth and working capital is positive and as expected in small and medium scale enterprises. In large-scale enterprise, a negative relationship between sales growth and working capital is found which is insignificant and inconsistent. The coefficient of opportunity cost is negative and as expected in medium and large-scale enterprises while it is positive in small-scale enterprises, which is insignificant. In Model 2, R-square explains 56.1 percent of the variation in working capital under ordinary least square in large-scale enterprises, 42 percent in small and 40 percent in medium scale enterprises. It is evident from the Table 3, 4 and 5 the regression equation does not suffer from any multicollinearity among independent variables.
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Source: Computed from annual reports of concerned enterprise
Table 4
Correlations Matrix of Large Scale Enterprises
Variables WC NWC SIZE PTA SG
WC 1.000
NWC .783 1.000
SIZE .649 .209 1.000
PTA -.710 -.734 -.236 1.000
SG -.034 -.017 .034 -.022 1.000
INTEREST -.140 .072 -.405 -.180 -.089
Source: Computed from annual reports of concerned enterprise
Table 5
Correlations Matrix of Medium Scale Enterprises
Variables WCMS NWC SIZE PTA SG
WC 1.000
NWC 0.582 1.000
SIZE 0.366 -0.003 1.000
PTA -0.659 -0.638 0.195 1.000
SG 0.143 0.094 0.104 -0.042 1.000
INTEREST -0.416 -0.072 -0.164 0.048 0.016
Table 3
Correlations Matrix of Small Scale Enterprises
Variables WC NWC SIZE PTA SG
WC 1.000
NWC -0.218 1.000
SIZE 0.805 -0.137 1.000
PTA -0.436 -0.021 0.056 1.000
SG 0.030 0.076 -0.008 -0.068 1.000
INTEREST -0.042 0.135 -0.074 -0.041 0.074
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Source: Computed from annual reports of concerned enterprise
Regression Results of Pooled Data
The Table 6 gives the results of regression equations, which show a positive relationship between working capital and size of the firm, as expected in both the models. This result is consistent with the view of larger firms may require larger investment in working capital because of their larger sales levels. This result shows that the size is a strong determinant of working capital. The coefficient of property, plant and equipment to total assets ratio is negative which is significant and consistent as well in entire model. The relationship between sales growth and working capital is negative which is neither significant nor consistent. A negative relationship between opportunity cost and working capital has been observed. It is significant in Model 1 and consistent in the both. In the above regression result, the adjusted R-squared explain 41.8 percent of the variation in working capital under ordinary least square in Model 1 and 27.6 percent in Model 2. It is evident from the Table 7 the regression equation does not suffer from any multicollinearity among independent variables.
Table 6
Regression Results of Pooled Data
Variables
Model 1 Model 2
Beta Coefficients Beta Coefficients
WC(Constant) 610.693*
(4.444)
NWC(Constant) 158.651
(1.474)
SIZE 0.304*
9.596
0.135*
(5.445)
PTA -457.592*
(-6.726)
-373.119*
(-7.001)
SG -0.062
(-0.623)
-0.018
(-0.233)
INTEREST -2732.958*
(-2.563)
-264.268
(-0.316)
R Square 0.432 0.293
Adjusted R Square 0.418 0.276
Figures in parenthesis denote ’t’ values
*Significant at 1percent
30
Table 7
Correlations Matrix of Pooled Data
Variables WC NWC SIZE PTA SG
WC 1.000
NWC 0.748 1.000
SIZE 0.442 0.197 1.000
PTA -0.312 -0.438 0.278 1.000
SG -0.056 -0.050 0.008 0.084 1.000
INTEREST -0.112 0.026 -0.043 -0.082 -0.069
Source: Computed from annual reports of concerned enterprise
Working capital management is highly important in firms as it is used to generate higher returns for the stakeholders; however, it has not elicited much attention from researchers and practitioners. When the working capital requirements are not properly managed and are allocated more than required, it renders the management inefficient and reduces the benefits of short-term investments. On the other hand, if the working capital is too low, the company may miss a lot of profitable investment opportunities or suffer short-term liquidity crisis, leading to the degradation of company credit, as it cannot respond effectively to temporary capital requirements. There may be various external and internal factors that may induce the firms to strike a balance between meeting unforeseen capital requirements and avoiding inefficient management of capital. The present study uses some different factors to explore the determinants of working capital level of a firm. In Model 1, a positive relationship is found between working capital and size of the firm. The signs of coefficients of property, plant and equipment to total assets ratio and opportunity cost are negative. All variables that are used to explain the level of working capital are statistically significant except sales growth and their signs are as expected. In Model 2, the sign of coefficient of size is positive and statistically significant. The sign of coefficient of property, plant and equipment to total assets ratio and opportunity cost are negative and these are statistically significant. The sign of the coefficient of sales growth is negative and it is statistically insignificant.
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Determinants of Cash Holdings Evidence from Nepalese Manufacturing Companies
Yuga Raj Bhattarai4
Abstract
The study examines the determinants of corporate cash holdings of Nepalese manufacturing companies using a sample of five manufacturing companies listed on the Nepal Stock Exchange for the period 2007- 2014. Data were sourced from the annual reports of the sampled companies and have been analyzed using regression model. The result shows significant positive association between cash holdings and leverage and dividend. The major conclusion of the study is that leverage and dividend are the most influencing factors in determining cash holdings in Nepalese manufacturing companies.
Keywords: Cash holdings, determinants, manufacturing companies.
I. Introduction
One of the most important financial decisions the firm makes is how much cash to hold as a buffer against future uncertainty. Corporate holdings of cash reserves have received increasing academic interest starting from the seminal work by Baumol (1952), Miller and Orr (1966) and Jensen (1986). Firms hold a significant portion of their assets in the form of cash because cash is blood of a firm‟s life. Companies demand for cash to cover immediate expense related to their current activity, dividend policy, or even investment projects since the transaction costs are higher when they use more profitable and less liquid assets as a means of payment. Companies, particularly those that have more difficulty getting external finance also demand for cash for precautionary reasons, i.e. to reduce the risk of failing to raise the necessary funds to finance profitable investment projects. One of the motives for holding cash, advanced in the finance literature, is a precautionary one of avoiding the risk and costs of shortage of liquidity.
In addition to the precautionary motive of holding cash, Jensen (1986) argues that entrenched managers would rather retain cash than increase payouts to shareholders when their firms have poor investment opportunities. Firms hold cash to provide a buffer to meet unexpected contingencies. Keynes (1934) and Baum et al. (2005) also argued that firms‟ liquid asset holdings increase with increases in its operational and macroeconomic uncertainty.
The objective of this study is to examine the factors that affect cash holdings in Nepalese listed manufacturing companies. Cash and cash equivalent is important policy matter in the field of modern corporate finance that is why this study is intended to provide solution to the corporate managers regarding accessing cash and cash equivalent requirement especially Nepalese context.
The remainder of this paper is organized as follows. The section II includes the theoretical framework and literature review. Section III describes research methodology. The section IV presents the results of the multivariate analysis and finally, section V incorporates the conclusion.
II. Theoretical Framework
The academic literature on reserves of cash and cash equivalents was first developed in the early work of Keynes (1936). The author discusses the preference for liquidity, indicating three reasons for holding currency: (i) transactions motives, (ii) precautionary motives and (iii) speculative motives. The optimal levels of cash holding by firms, based on monetary theory has been studied by several researchers, for example, by Baumol (1952), Miller & Orr (1966) and Meltzer (1963). There are three theoretical models related to cash holding of a firm, namely: the trade-off model, the pecking-order theory (Myers & Majluf 1984), and the free cash flow theory (Jensen, 1986). When cash holding is explained by the trade-off model means that there is an optimal level of holding cash by balancing the marginal costs and marginal benefits of cash holding (Myers, 1977). In pecking order theory cash is seen as a buffer between retained earnings and investment needs (Myers & Majluf, 1984). In the free cash flow theory managers holds cash in order to increase their power and control over the investment decision of the firm (Jensen, 1986).
For a value-maximizing manager, the level of liquid assets to hold solely may depends on the marginal costs and benefits of each additional rupee on hand. There may be an optimal level of liquid-asset holding that reflects the trade-off between these costs and benefits. Early models such as ones presented by Keynes (1934) and Baumol
4 Mr. Bhattarai is an Associate Professor at Patan Multiple Campus, Tribhuvan University. He can be reached at
33
(1952) adopt this view and take an inventory approach to the problem. In these models, liquid assets are held because they provide two main benefits; the first use of liquid assets is transactional. Liquid assets are cheaper to use than fixed assets to finance daily operation. The second use of liquid assets is precautionary; firms hold cash as a buffer against undesired states of nature. On the other hand, holding liquid assets entails an opportunity cost because of the liquidity premium. A third reason, not explicitly included in the previous models, for firms to hold cash is for speculative uses. Firms can easily deploy liquid assets to take advantage of opportunities. According to Myers and Majluf (1984) the firm will hold cash as a financial slack so that it can be used to finance investments when equity or debt financing is too expensive.
The major related studies on firm level determinants of cash holdings have been reviewed as follows:
Opler et al. (1999) developed a model by using 1084 US publically traded firms from 1971 to 1994 focusing on firm cash-holdings, provided evidence that supports both the static trade-off and the agency theory models. They found that firms with strong growth opportunities, in general, hold more cash. Firms that invest more (high capital expenditure) and research more tend to hold more liquid assets. Alternatively, firms with greater access to capital markets such as large firms (with less asymmetric information problems) hold lower levels of cash. Elkinaway and Stater (2007) studied non-financial firms of Argentina, Brazil, and Mexico to analyze Brazilian crisis effect on cash holding of these firms after 1999. The study represents different cash holding pattern by Mexican post-crisis period and Brazilian post-crisis period. Tobin Q used as cash determinants. They found from industry analysis is that the effects of a crisis differ from country and industry to industry.
Alvarez et al. (2010) studied large panel data of firms at Chili. Their focus was on liquidity crisis inside of the country and its impact on cash holding by corporations. Their findings evidenced that leverage; bank debt, liquid assets, and size reduce cash holdings of Chilean firms. Precautionary motives was still the reason behind holding cash at hand like any other firms however additionally it as found that, time-varying industry sale volatility increases amount of cash holdings. Islam (2012) studied on the manufacturing firms‟ cash holding determinants using data set of five years (2006-2010) data of firm specific variables. The least squared model analysis showed that current assets, operating income, cash flow, size, short-term debt, total debt, intangible asset, leverage ratio, net cash and tangibility ratio have significant relationship with cash hold by the manufacturing firms. Gao et al. (2013) studied with large sample comparisons of cash policies in public and private US firms. They found that private firms hold, on average, about half as much cash as public firms do. They provided the mixed evidence on the effects of agency problems on cash policies. Specifically, agency problems affect not only the target level of cash, but also how managers react to cash in excess of the target.
Morais and Silva (2013) analyzed the determinants of cash holdings for the accommodation industry in South European countries (Spain, Greece, Italy and Portugal) using a sample of 5,964 firms during the period 2003-2011. A fixed-effects panel data model revealed that larger companies, higher leveraged, where most debt is short-term and that maintain better relationships with financial institutions exhibit lower cash to assets ratios. Liquid assets substitutes, capital expenditures and asset tangibility also have a negative effect on cash levels. Cash holdings are positively influenced by cash-flow and cash-flow volatility. In view of theory and major empirical evidences, a conceptual framework has been outlined. The most of the related empirical studies reported that firm size, leverage, debt structure and dividend are major determinants of cash holdings. To test these cash holdings determinants in Nepalese Listed manufacturing firm‟s context, this study develops the following conceptual framework.
Figure -1 Conceptual Framework
Dependent variable Independent variables
Firm size
Leverage
Cash ratio
Debt structure
Dividend
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III. Research Methodology
The sample
Manufacturing companies listed on the Nepal Stock Exchange Limited were the population of the study. A sample of five listed manufacturing companies is chosen for the study. The main data source is the annual reports of the sample companies. Required data are also collected from the Securities Board Nepal and Nepal Stock Exchange Limited for the period 2007- 2014. The all sample companies have financial information for at least six consecutive years to estimate the determinants of cash holdings.
The Model
The choice of model is impressed by Opler et al. (1999), Morais and Silva (2013) to examine the determinants of corporate cash holdings. In this study, the models to be estimated are:
CASH-1it = β0 + β1SIZEit + β2LEVit + β3DSTRit + β4DPSit +eit (1) CASH-2it = β0 + β1SIZEit + β2 LEVit + β3DSTRit + β4DPSit +eit (2)
Where: β0 is the intercept term i.e. autonomous cash holding, β1,, .., β4 are coefficients of the independent variables, CASH-1it is the cash holdings of firm i, in year t which is calculated as cash to total assets ratio. CASH-2it is the cash holdings of firm i, in year t which is calculated as cash to net assets ratio. Size (SIZE) is taken as a proxy for the firm size (SIZE) of firms. It is calculated as the natural logarithm of total assets. LEV is the ratio of total debt to total assets. It is assumed that eit is independently distributed across firms with zero means but there are no restrictions on heteroskedasticity across firms and time.
Variables and Hypotheses
Cash ratio: In this study the cash ratio has been calculated as the cash to total assets ratio (CASH1), the most common approach in the literature, and the next, cash to net assets ratio (CASH2) first used by Opler et al. (1999) and also used by Morais and Silva (2013) has been adopted in the study to represent cash holdings.
Firm size: Firm size is an important determinants of cash holdings, but the expected relationship is ambiguous (e.g., Drobetz & Gruninger, 2007; Niskanen & Niskanen, 2007). The existence of less information asymmetries facilitating the access to financing and the greater diversification of activities of larger companies (Rajan & Zingales, 1995) suggest a negative relationship between cash reserves and size. According to the theory and the empirical evidence, it is hypothesized that a negative relation between the cash ratio and size. In this study natural logarithm of total assets has been used to represent firm size (SIZE).
H1: Cash holdings are negatively related to firm size.
Leverage: The leverage ratio can affect a firm‟s cash holdings. The leverage is measured as the ratio between total
debt and total assets. The association between leverage and cash ratios is ambiguous, as well. Growing firms may have different investment opportunities, firms have different marginal trade-offs with respect to cash and leverage.
The pecking order theory assumes that when investment exceeds retained earnings, debt increases and cash is reduced. Thus, financial hierarchy theory suggests a negative relationship between leverage and cash holdings. Likely the empirical evidence such as Kim et al. (1998), Opler et al. (1999), Ferreira and Vilela (2004), Ozkan and Ozkan (2004) demonstrates a reduction in cash levels when firms increase their financial leverage.
Leveraged firms are more likely to hoard cash due to the higher probability of financial distress (Baskin, 1987). Likely, if companies try to avoid bankruptcy and agency costs associated with high leverage it could be possible to find a positive relation between leverage and cash. In this study the hypothesis is that a positive relation exists between cash holdings and leverage.
H2: Cash holdings are positively related to leverage.
Debt structure: Precautionary motives should also lead companies with predominance of short-term debt to retain
higher cash levels as a measure to reduce refinancing risks. Then, a positive relation is expected between the cash ratio and debt structure measured as the ratio between short term debt and total debt (STDEBT).
H3: Cash holdings are positively related to debt structure.
Dividend: The dividend per share is used as a proxy for dividend in this study. Opler et al. (1999) argue and show
that firms with low dividend payout will hold less cash due to lower transaction demand. However, dividends are a sign of maturity, stability and access to capital markets. High-dividend firms are less financing constrained and therefore experience a lower cost of selling assets/ raising finance when needed that they experience less cash flow uncertainty, so they hold less cash. Thus dividend variable is likely to be negatively correlated with cash holdings, since a firm can cut its dividend when cash in needed. This argument is also supported by Gao, et al. (2013) and they
35
reported that dividend variable have negative effect on cash reserves. Thus, in this study, a negative relation is expected between the cash ratio and dividend.
H4: Cash holdings are negatively related to dividend.
IV. Results and Conclusion
Descriptive Statistics
The descriptive statistics for the variables used in the analysis are presented in table1. It can be seen that for the period 2007-2014, on average, firms have a cash ratio (CASH-1) of 5.7%. The result indicates that sample manufacturing companies in Nepal hold 5.7% of total assets as cash balances. The average value of debt ratio (LEV) is 66.67%, which indicates that about 66.67% of total assets of sample firms are financed by debt, a fact that seems to highlight their capacity to access external financing. Around 95.60% of total debt is short-term debt and on average, sample Nepalese manufacturing companies distribute Rs. 13.314 per share as dividend to their shareholders.
Table 1
Descriptive Statistics of Variables
Variables Mean S.D. Skewness Kurtosis Minimum Maximum Percentile
25 50 75
CASH-1 0.057 0.067 2.212 6.522 0.002 0.322 0.011 0.031 0.099
CASH-2 0.254 0.360 2.450 6.466 0.005 1.629 0.047 0.095 0.337
SIZE 13.567 0.976 -0.180 -1.458 12.074 15.127 12.567 13.881 14.391
LEV 0.667 0.184 -0.179 -1.180 0.363 0.922 0.547 0.642 0.854
DSTR 0.956 0.121 -2.789 6.846 0.525 1.000 1.000 1.000 1.000
DPS 13.314 22.217 1.843 2.106 0.000 76.000 0.648 2.997 9.960
Source: Annual report of sample companies and results are drawn from SPSS-16.
Correlation Analysis
Table 2 presents the correlation matrix of the variables used in this study. The results indicate that there is significant positive relationship between cash holding (CASH-1) and dividend (DPS). Likely a significant negative relationship is found between cash holding (CASH-2) and leverage. All correlations among the independent variables were found to be less than 0.8; implying the absence of multicollinearity.
Table 2 Pearson’s Correlation Matrix of Variables
Variables CASH-1 CASH-2 SIZE LEV DSTR DPS
CASH-1 1
CASH-2 .530** 1
SIZE 0.125 -0.297 1
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LEV -0.306 .428* -.606** 1
DSTR 0.275 0.215 -.414* -0.142 1
DPS .511** -0.074 .454** -.729** 0.136 1
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
Regression Results
The table 3 presents the regression results for the determinants of cash holdings. The value of R2
and adjusted R2 are
0.321; 0.224 in model 1 respectively and R2
0.394; adjusted R2
0.308 in model 2 indicate the fair explanatory power of independent variables. The p value for F statistics in both model represent that the models are fairly fitted well statistically. To exclude the hypothesis of the presence of multicollinearity, the variance inflation factors (VIF) are calculated. The VIF (variance inflation factor) in both model are less than 4, which indicates that there is no evidence of multicollinearity.
Table 3
Regression Results of Determinants of Cash Holdings CASH-1it= -0.268 +0.007SIZEit + 0.084LEVit +0.151DSTRit +0.002DPSit +eit (1) CASH-2it=-3.416+0.088SIZEit + 1.911LEVit +1.152DSTRit +0.008DPSit +eit (2)
Predictors Model -1 Dependent Variable: CASH-1
Model-2 Dependent Variable: CASH-2
Coefficient Std. Error p-value VIF Coefficient Std. Error p-value VIF
Constant -0.268 0.361 0.464 -3.416 1.832 0.073
SIZE 0.007 0.017 0.672 2.667 0.088 0.089 0.330 2.667
LEV 0.084 0.102 0.416 3.218 1.911 0.518 0.001 3.218
DSTR 0.151 0.113 0.194 1.725 1.152 0.574 0.055 1.725
DPS 0.002 0.001 0.015 2.149 0.008 0.003 0.036 2.149
R2 = 0.321; Adj.R2 = 0.224, F-value =3.304
F(sig) = 0.024; D.W.= 1.945
R2 = 0.394; Adj.R2 = 0.308, F-value = 4.554
F(sig) = 0.006; D.W.= 2.304
Source: Annual report of sample companies and results are drawn from SPSS-16.
The coefficient estimate on leverage (LEV) is significantly positive at 1% level, in model 2. However it has insignificant coefficient in model-1. The positively significant coefficient is in line with the priori hypothesis but contradicts to the findings of Gao et al. (2013) where they found negative association with cash holdings and leverage. However, the findings of this study support the prediction about the relation between leverage and cash holdings, based on agency cost theory of debt, that firm with a high leverage will increase its cash holdings to decrease the likelihood of financial distress.
The results support the notion that firms with higher leverage hold more cash, which is inconsistent with pecking order and free cash flow theories. As per the pecking order theory, when firm‟s investments are in excess of retained earnings, high levels of debt and little cash holdings occur simultaneously.
Table 4
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Relation between expected sign and actual sign with significant level
Independent Variables Expected Sign Actual Sign Significance Level
Model-1 Model-2
SIZE - + NS NS
LEV + + NS **
DSTR + + NS NS
DPS - + * *
**. Significant at the 0.01 level (2-tailed).
*. Significant at the 0.05 level (2-tailed).
NS indicates not significant
The coefficient of dividend payment shows a positive relationship with cash holding. The result is in line with Ozkan and Ozkan (2004). It suggests that a Nepalese manufacturing firm that pays out dividend to their investors tend to hold more cash than those who do not pay dividend. However, this finding is contrary to findings of Gao et al. (2013) where they found negative association cash holding and dividend.
In this study, company size is found statistical insignificant, meaning that company size doesn‟t significantly affect cash holdings in Nepalese context. Likely, debt structure is also found statistically insignificant. It indicates that debt structure does not significantly affect cash holding of Nepalese manufacturing companies.
This study analyzed the determinants of cash holdings for the manufacturing firms listed in the Nepal Stock Exchange using a sample of 5 firms during the period 2007 to 2014. The objective of this study was to examine the determinants of the cash holdings in listed manufacturing companies of Nepal. The OLS regression model was used and the results showed that the cash holding is positively associated to the leverage and dividend payment. The study concludes that leverage and dividend payment are the major determinants of cash holdings of Nepalese Manufacturing companies. It should be noted that this study is limited to a sample of five manufacturing companies and the companies‟ specific variable. If sample size increases and industry characteristics and macro-economic variables are included in the model, the result may differ.
References
Alvarez, R., Sagner, A., & Valdivia, C. (2010). Liquidity crisis and corporate cash holdings in Chile. Central Bank of Chile, Working Papers, 564.
Baskin, J. (1987). Corporate liquidity in games of monopoly power. Review of Economics and Statistics, 69, 312-319.
Baum, C., Mulstefa C., & Andreas S. (2005). Uncertainty determinants of corporate liquidity. Boston College Working Paper.
Baumol, W. J. (1952). The transactions demand for cash: An inventory theoretic approach. Quarterly Journal of Economics, 66(4), 545-556.
Drobetz, W., & Gruninger, M. C. (2007). Corporate cash holdings: Evidence from Switzerland. Financial Markets Portfolio Management, 21, 293-324.
Elkinaway, S., & Stater, M. (2007). Cash holdings and firm value during Latin American financial crisis. Paper presented at 2007 FMA Annual Meeting Program.
Ferreira, M..A., & Vilela, A.S. (2004). Why do firms hold cash? Evidence from EMU countries. European Financial Management, 10(2), 395-319.
Gao, H., Harford J., & Li, K. (2013). Determinants of corporate cash policy: Insights from private firms. Journal of Financial Economies, 109, 623-639.
Islam S. (2012). Manufacturing firms’ cash holding determinants: Evidence from Bangladesh. International Journal of Business and Management, 7(6), 172-184.
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Jensen, M.C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323-329.
Keynes, J. M. (1934). The general theory of employment, interest and money. Harcourt Brace, London.
Kim, C., Mauer, D., & Sherman, A. (1998). The determinants of corporate liquidity: Theory and evidence. Journal of Financial and Quantitative Analysis, 33(3), 335-359.
Meltzer, A. (1963). The demand for money: A cross-section study of business firms. Quarterly Journal of Economics, 405-422.
Miller, M., & Orr, D.(1966). A model of the demand for money by firms. Quarterly Journal of Economics, 413-435.
Morais F., & Silva P. (2013). Determinants of cash holdings in the accommodation industry. Tourism and Hospitality International Journal, 1, 95-136.
Myers, S., & Majluf N. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 5, 147-175.
Niskanen, M., & Niskanen, J. (2007). Cash holdings in SMEs evidence on Finnish data. Working Paper.
Opler, T., Pinkowitz, L. Stulz, R.M., & Williamson, R. (1999).The determinants and implications of corporate holdings of liquid assets. Journal of Financial Economics, 52(1), 3-46.
Ozkan, A., & Ozkan, N. (2004). Corporate cash holdings: An empirical investigation of UK companies. Journal of Banking and Finance, 2, 2103-2134.
Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. Journal of Finance, 50 (5), 1421:-1460.
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Firm-Specific Factors Affecting Cost Of Capital: Nepalese Evidence
Pitambar Lamichhane5
Abstract
This paper attempts to analyze the relationship between firm-specific factors and cost of capital of Nepalese non-financial firms for the period 2004/05-2012/13 applying descriptive and causal comparative research design. Cost of capital (K0) is dependent variable and firm-specific variables are considered as explanatory variables. The result of this paper shows that Nepalese firms are highly levered. The results of regression analysis of this study reveals that the cost of capital is positively related with growth rate ( GR), dividend payout ratio (DPR), tangibility assets ratio (TAR) but only DPR has significant impact on determination of cost of capital. Similarly, cost of capital (K0) is inversely related with leverage ratio (LR), size (SIZE), earning variability ratio (EVR) and liquidity ratio (LR) but LEV, EVR and LR have strong explanatory power. It is concludes that leverage ratio, dividend payout ratio, earning variability, and liquidity ratio are the major predictors of cost of capital in Nepalese enterprises.
Key Words: Cost of capital, leverage ratio, size, growth rate, dividend payout ratio, earning variability, liquidity ratio, and
tangibility assets ratio.
I. Introduction
The fundamental decision for every business firm is to assess where to invest its funds and re-evaluate the quality of its existing investment. The cost of capital is the key measure to evaluate such decisions. Not only the hurdle rate for investment project but also the composition of the firm's capital structure is also key factors which affect for investment and financing decisions. Therefore, every business firm while making financing decision should pay appropriate attention to lower the cost of capital. The financial resources of the firms can be raised from different sources such as undistributed profit (retained earnings), equity shares, preference shares, debentures etc. These financial instruments have been evolved in response to a wide spectrum of investor preferences relating to security of principal, and growth in capital value and earning arising from the investment. Equity shares are the most venturesome financial instruments whereas debenture and loans are of least preference. The degree of risk for a preference shareholder lies in between the two ends of the scale represented by equity and debt securities. These funds belong to equity shareholders in the company. Their retention by the business has to be justified by holding out an assurance that these would be reinvested to give a return at least equal to what these sums could fetch in the hand of investors if fully distributed as dividends.
The goal of the business firm is to maximize the value of equity share. So, the firm should select s uch a capital structure
that maximizes the value of equity shares and minimizes the overall cost of capital. Though a lot of financial literature is
available on the relationship between cost of capital and leverage, the question regarding the effect of ca pital structure on
the cost of capital stills remain unanswered. This question is one of the divergence areas in the field of finance. Financial
experts have diversified opinion on the subject. In the one hand, with some exceptional assumptions, Modigliani and
Miller (M-M) hypothesis holds the view that the cost of capital to a firm remains invariant to the capital structure change
(Modigliani & Miller, 1958). On the other hand, the traditionalist view is that the cost of capital is a function of capital
structure. Several studies were made to test M-M hypothesis but there is no unanimous agreement on the relationship
between capital structure and cost of capital. Therefore, two controversial viewpoints are found about the relationship
between capital structure and cost of capital.
Prior studies show that both views have been found to be analytically sound and logical and have been supported by
empirical observations. As the issues have not been settled yet, there is a need of empirical studies for concludin g the
results. In Nepalese context, this study attempts to examine the relationship between firm-specific factors and cost of
capital of the business firms.
II. Theoretical Framework
Previous studies have found mixed evidences on relationship between firm-specific factors and cost of capital. There are two ways to define leverage i.e. ratio of debt to equity and ratio of total debt to total capital. Although debt to equity ratio is preferred and widely used to measure the leverage, here debt to total capital ratio is used to measure leverage; it is because some companies have negative equity which gives negative debt equity ratio
5 Pitamber Lamichhane is Lecturer at Padmakanya M. Campus, Tribhuvan University, Kathmandu. He Can be reached at
40
that has no meaning. Both these measure of leverage show the borrowing position of the company and rank firms in the same manner at a point of time (Pandey, 1981). While calculating debt ratio in equation, only long-term debt is included although M-M included preference capital in debt, but non-payment of preference dividend does not present risk of bankruptcy as in the case with debt (Barges, 1963). Short-term liabilities also provide leverage benefit to the shareholder and involve cost and risk like the long-term debt (Pandey, 1981; Razan & Zingales, 1995).
While measuring relationship between cost of capital and firm-specific factors, Weston (1963) included size as an explanatory
variable. Therefore, size has been included as a control variable. It is generally accepted that larger size firms have highe r
market value and investors are attracted to invest in the securities of such firms because these firms provide wide
marketability of their share, they are better known in the capital market, being more diversified, they are less risky, and l arger
firm have a capacity to use more modernized and efficient technique of production and it tends to have less cost of
production. Thus, larger firms are likely to have higher debt capacity and have expected to borrow more to maximize the tax
benefit (Rajan & Zingales, 1995). The information cost and monitoring cost being small in higher firms. Thus, larger firms,
due to lower information asymmetry, are likely to have easier access to debt market and be able to borrow at lower cost
(Fama, 1985). Hence, larger size firm has been expected to have a negative impact on the cost of capital. This finding is
empirically supported by Ferri and Jones (1979), and Kim and Soreson (1986).
Weston (1963) suggests that omission of growth variable would bias the coefficient of leverage variable. The empirical work
of Weston has showed that growth variable being correlated to the leverage would tend to influence the relationship between
the cost of capital and leverage. Theoretically, it is suggested that growth opportunities are negatively related with levera ge.
The agency cost theory accepts that the firm with high growth prospect should use less debt in order to mitigate agency
problem, this increases the cost of capital.
Dividend payout ratio indicates the extent of the net profit distributed to the shareholders. Generally, it is widely believe d
that shareholder prefer current earning (dividend) than retain them (Graham, 2000). The payout effect is consistent with
the notion that companies attempt to minimize transaction cost in their joint financing and dividend policy. And the high
payout increases the level of debt (Martin & Scott, 1974). Thus, the value of share is affected by dividend payout ratio .
Earning variability measures the degree of business risk. If the sample firms are not homogeneous with respect to risk
arising from other than financing decision, the measurement of capital effect may contain serious biases. M-M (1958),
Barges (1963) and Weston (1963) in their empirical work, holds basic business uncertainty constant among the firms by
confining samples to single industries. But Wippern (1966) argued that industry group do not provide for an adequate
biases on which to insure homogeneity of basis business uncertainty. Firms with high earning volatility carry a risk of
earning below the level of their debt charges which result acquiring funds at high cost to face the risk of bankruptcy. The
bankruptcy cost theory contends that the more volatile earning of the company the greater is chances of business failure
and thus greater will be the bankruptcy cost. As the probability bankruptcy increases, the agency problem related to debt
become more annoy. Thus, there exists positive relationship between cost of capital and earning volatility (Booth et.al.
2001; Titman & Wessels1988; Masuli, 1983).
There are two contradictory views about the impact of liquidity on the capital structure of the firm. Pecking Order Theory
argues that the manager prefers internal sources of fund rather than external. Therefore, firms would like to create liquid
reserve from retained earnings to finance future investment. Firms with sufficient liquid assets do not need to raise capital
from debt. Hence, it is expected to have negative relationship between leverage and liquidity which indicates positive
relationship between liquidity and cost of capital. Ozkan (2001) also revealed the same result. On the other hand, a firm with
higher liquidity ratio raises capital through debt due to having higher debt servicing capacity and it affects on cost of cap ital.
This would imply a positive relationship between leverage and liquidity.
Generally, assets tangibility has been accepted that the structure of assets owned by enterprises affects its capital structure
and agreed that the companies tend to match the maturity of these assets and liabilities. Further, the presence of tangible
assets is expected to be more important in external borrowing at lower cost as it is easy to collateralize them. Titman and
Wessels (1988), Rajan and Zingales (1995), Fama and French (2002), Harris and Raviv (1990) argue the tangibility of
assets is positively related with leverage as it increases the collateral value, thus increases borrowing capacity, thus
reduced cost of capital. Further, Jensen and Meckling (1976) pointed out that the agency cost of debt exists and if a firm
has higher tangible assets then that can be used as collateral diminishing the lender’s risk of suffering such agency cost of
debt.
III. Research Methodology
3.1 Research Design
This paper has adopted the descriptive research design to explain the firm-specific factors and cost of capital as well as to show the relationship between cost of capital and other various variables (capital structure, size, dividend payout, growth rate etc.) of Nepalese non-financial business firms. Similarly correlation, regression
41
models are used to determine and evaluate the cost of capital and explanatory power of its various independents variables.
3.2 Sample Selection
Out of the 32 listed firms excluding banks, finance and insurance companies, 13 firms are used as the sample in judgment basis. This exclusion of banks, finance and insurance companies is due to the fact that the nature and characteristics of such firms differs significantly with non-financial companies and the debt of these companies like liabilities are not strictly comparable to the debt issued by non-financial firm (Rajan & Zingales, 1995). Hence, such firms do not provide good platform for the study of capital structure. Thus, the sample of the study contains manufacturing, trading, hotels and service firms.
3.3 Sources of Data and Period of Study
This study is carried based on secondary sources of data. For the secondary data set, the necessary data is collected from the publications, annual report of the individual firm, corporation coordination council MOF, and SEBON report. The study covers a period of 9 years from fiscal year 2004/05 to fiscal year 2012/13.The total number of 115 observations are used from the 13 sample firms.
3.4 Dependent Variable
The cost of capital is the dependent variable for the test of M-M first proposition that there is no any relationship between
costs of capital and capital structure. Although there are several approaches of expressing cost of capital, but due to the
problem of data sufficiency in Nepalese capital market, in this study, average cost of capital (K 0) is calculated by dividing the
expected earnings by the book value of share capital and debt capital. The equity share is taken as a net book value after
adjusting undistributed profit/loss. The debts are taken at their book value, as there is no significant yearly fluctuation in the
price of these sources of capital. In this study, no sampled companies are issuing preference share to raise capital. Therefo re,
average cost of capital of equity share and debt is used as dependent variable.
3.5 Independent Variable
a. Leverage
There are two ways to define leverage i.e. ratio of long-term debt to equity and ratio of total debt to total assets. Although
debt to equity ratio is preferred and widely used to measure the leverage, here it is not used because some companies have
negative equity which gives negative debt equity ratio that has no meaning. Therefore, in this study, total debt to total
assets ratio is used to measure leverage.
b. Size
While measuring relationship between cost of capital and leverage, Weston (1963) included size as an explanatory variable.
Therefore, size has been included as a control variable. It is generally accepted that larger size firms have higher market v alue
and investors are attracted to invest in the securities of such firms. The larger firms are likely to have higher debt capacity
and have expected to borrow more to maximize the tax benefit. The information cost and monitoring cost being small in
higher firms. Thus larger firms, due to lower information asymmetry, are likely to have easier access to debt market and be
able to borrow at lower cost. Thus, larger size firm has been expected to have a negative impact on the cost of capital. In t his
study, size represents to the natural logarithm of annual net sales.
c. Growth
Weston (1963) suggests that omission of growth variable would bias the coefficient of leverage variable and further argued
that growth variable being correlated to the leverage would tend to influence the relationship between the cost of capital
and leverage. The agency cost theory accepts that the firm with high growth prospect should use less debt in order to
mitigate agency problem, this increases the cost of capital. To measure growth opportunities, the growth rate of assets has
been employed and in this study, growth rate is included as an explanatory variable in the regression model.
d. Dividend payout ratio
This ratio indicates the extent of the net profit distributed to the shareholders. It is widely believed that shareholder prefer current
earning (dividend) than retain them. The payout effect is consistent with the notion that companies attempt to minimize transaction
cost in their joint financing and dividend policy. The high payout increases the level of debt and value of share is affected by
dividend payout ratio. Hence, there exists negative relationship between dividend payout ratio and cost of capital. The proxy for the
measurement of dividend payout ratio as dividend payment per share divided by earning per share is used as an explanatory variable
in this study.
e. Earning variability
42
Earning variability measures the degree of business risk. Firms with high earning volatility carry a risk of earning for the
level of their debt charges, which result acquiring funds at high cost to face the risk of bankruptcy. The bankruptcy cost
theory contends that the more volatile earning of the company, the greater is chances of business failure and thus, greater
will be the bankruptcy cost. As the probability bankruptcy increases, the agency problem related to debt become more
annoy. Thus, there exists positive relationship between cost of capital and earning volatility. In this study, earning
variability is measured by coefficient of variation that is the standard deviation of the operating profit divided by mean of
operating profit.
f. Liquidity
To measure the short term risk of the firm the liquidity ratio has been included in the model. Generally, it is accepted that
firm with higher liquidity raises capital through debt at low cost which implies negative relationship between cost of
capital and leverage. On the other hand, Pecking Order Theory of capital structure argues that the managers prefer internal
capital rather than external and firms would like to create liquid reserve from retained earnings, and firm with more liquid
assets does not need to raise capital from debt. Thus, a positive relationship between cost of capital and liquidity has been
expected. In this study, to measure the liquidity, current ratio that is current assets divided by current l iabilities is used.
g. Assets tangibility
Generally, the structure of assets owned by business firms affects its capital structure and cost of capital. It is agreed th at
the companies tend to match the maturity of their assets and liabilities. Hence, it is expected to find long-term debt
associated with fixed assets and short-term debt with current assets. Further, the presence of tangible assets is expected to
be more important in external borrowing at lower cost as it is easy to collateralize them. Therefore, tangibility of assets is
positively related with leverage as it increases the collateral value and increases borrowing capacity which reduced cost of
capital. In this study, assets tangibility is used as tangibility assets ratio and it is defined as a ratio of fixed assets to total
assets and used as an explanatory variable.
3.6 The Model
The following regression model/equation has been used to measure the impact of various firm-specific factors on cost of capital:
K0 = β0 + β1 LEVR + β2 Log SIZE+ β3GR + β4 DPR + β5 EVR + β6 LR + β7 TAR+ µ
Where,
K0 = Average cost of capital, β1, β2…, β7 = Beta coefficients,
LEVR = Leverage ratio, SIZE = Natural logarithm of net sales,
GR = Growth rate, DPR = Dividend payout ratio,
EVR = Earning variability, LR = Liquidity ratio,
TAR= Tangible assets ratio and µ = Disturbance term or error term.
IV. Analysis and Findings
4.1 Descriptive Statistics
In general, descriptive statistics is used to measure the values and position of firms' different dependent and explanatory variables for the study period. In this study, minimum and maximum values, measures of central tendency (mean), dispersion (standard deviation) of both dependent and explanatory (independent) variables are used to analyze and the results are presented in the Table 1.
Table 1
Descriptive Statistics
In this table, selected statistics of the variables in the analysis are presented. K 0 represents average cost of capital, LEVR is the total leverage, SIZE indicates natural logarithm of total sales, GR refers growth rate, DPR is the dividend payout ratio, EVR represents earning variability ratio, LIQ indicates liquidity ratio and TAR is the tangibility assets ratio.
S.N. Variables Maximum Minimum Mean Standard Deviation
1 K0 0.235 0.084 0.167 0.017
43
2 LEVR 1.725 0.157 0.692 0.076
3 SIZE 11.937 2.085 7.918 0.148
4 GR 0.068 -0.056 .0417 0.052
5 DPR 1.125 0.000 0.418 0.095
6 EVR 0. 1051 -0.036 0.026 0.023
7 LR 8.542 0.0763 1.565 0.214
8 TAR .893 0.029 0.734 0.038
Source: www.mof.gov.np and www.sebon.gov.np
Table 1 shows the minimum and maximum average cost of capital are 8.4 percent and 23.5 percent respectively.
The average cost of capital of Nepalese firms is 16.7 percent. The table presents the leverage ratio minimum 15.7 percent
to maximum 172.5 percent and average leverage of Nepalese firms is 69.2 percent. Further, Table 1 indicates average size
in natural logarithm of net sales is 7.918 and average growth rate is 4.17 percent. Similarly, the Table 1 presents average
dividend payout ratio, earning variability ratio, liquidity ratio and tangibility assets ratio of 41.8 percent, 2.6 percent, 157
percent and 73.4 percent respectively. Finally, the table also indicates the least variation in cost of capital and highest
variation in liquidity ratio in Nepalese business firms.
4.2 Correlation Analysis
The correlation analysis attempts to explain the relationship among the cost of capital and its explanatory (firm-specific) variables using Pearson correlation coefficient for the study period to analyze the relationship among the variables. Table 2 presents the values of correlation coefficient between different pairs of firm-specific factors and cost of capital to analyze the direction and magnitude of relationship among different pairs of variables.
Table 2
Correlation Coefficient of Cost of Capital with Explanatory Variables
This table shows the correlation coefficient between different pairs of variables used in this study for the analyzing the firm-specific factors and cost of capital with 115 observations of 13 sample firms during the period of 2004/05 through 2012/13. K0 represents average cost of capital, LEVR is the total leverage, SIZE indicates natural logarithm of total sales, GR refers growth rate, DPR is the dividend payout ratio, EVR represents earning variability ratio, LIQ indicates liquidity ratio, and TAR is the tangibility assets ratio. The * indicates the correlation is significant at 10 percent, ** represents significant at five percent and *** indicates significant at 1 percent.
Variables K0 LEVR SIZE GR DPR EVR LR TAR
K0 1.000 - - - - - - -
LEVR -0.321* 1.000 - - - - - -
SIZE -0.121 0.221** 1.000 - - - - -
GR 0.161 0.283** 0.024 1.000 - - - -
DPR 0.375*** 0.102* 0.221 0.081 1.000 - - -
EVR -0.418*** 0.074 0.368** -0.092 -0.143* 1.000 - -
LR -0.392*** 0.215* 0.167 0.176* 0.056* -0.091 1.000 -
TAR 0.091 -0.165 -0.046 0.084 -0.147 -0.216 -0.283** 1.000
Source: www.mof.gov.np and www.sebon.gov.np
44
Table 2 shows the cost of capital of Nepalese firms are positively related with growth rate, dividend payout ratio,
and tangibility assets ratio but significantly correlated with dividend payout ratio. The cost of capital is inversely related
with leverage ratio, size of sales, earning variability ratio and liquidity ratio but significantly correlated with earning
variability ratio and liquidity ratio.
4.3 Regression Analysis
In this section, regression model is applied to explain the relationship between cost of capital (K 0) and explanatory variables (LEVR, SIZE, GR, DPR, EVR and TAR). The regression results are obtained based on
ordinary least square regression model using pooled data of sample firms with the help of SPSS software version 13. Table 3 presents regression results which show the predicting power of explanatory variables in determining the cost of capital in Nepalese business firms.
Table 3
Regression Relationship of Cost of Capital with Explanatory Variables
K0 = β0 + β1 LEVR + β2 Log SIZE+ β3GR + β4 DPR + β5 EVR + β6 LR + β7 TAR+ µ
This table shows regression results of cost of capital on seven explanatory variables with 115 observations of 13 sample firms during the period of 2004/05 through 2012/13. Dependent variable is cost of capital K0 ,and independent variables are leverage ratio LEVR, natural logarithm of total sales SIZE, growth rate GR, dividend payout ratio DPR, earning variability EVR, liquidity ratio LR and tangibility assets ratio TAR. The figures in the parentheses are t-statistics. The * indicates the t-statistic is significant at 10 percent, ** represents significant at five percent and *** indicates significant at 1 percent level of significance. Also reported are the F-statistics and R2.
Model Constant LEVR SIZE GR DPR EVR LR TAR R2 F
K0 0.372 (5.094**))
-0.099
(-1.70*)
-0.024
(-1.11)
0.081 (1.001)
0.086 (3.151***)
-0.048 (-2.773***)
-0.043
(-3.182***)
0.005 (0.124)
0.362 0.672 (6.310***)
Source: www.mof.gov.np and www.sebon.gov.np
The regression results presented in Table 3 shows that the impact of leverage ratio (measured by total debt to total assets)
on cost of capital is negative and significant at 10 percent level of significance. It indicates inverse relationship between
leverage and cost of capital i.e. higher the use of debt lower the average cost of capital in Nepalese business firms. Furthe r,
Table 3 presents size of net sales (SIZE), earning variability ratio (EVR) and liquidity ratio (LR) are negatively related
with cost of capital where EVR and LR have impact on cost of capital at 1 percent level of significance. Hence, this
regression results indicates that earning variability and liquidity position of Nepalese business firms have strong
explanatory power to predict the cost of capital.
The regression results of the Table 3 shows growth rate (GR), dividend payout ratio (DPR), and tangibility assets ratio (TAR) are positively related with cost of capital. Dividend payout ratio has the statistically significant impact on cost of capital at 1 percent level of significance but growth rate and tangibility assets ratio have no statistical significant impact. Hence, dividend payout ratio has strong explanatory power and it implies that dividend payout ratio is an important determinant of cost of capital in Nepalese firms. The F-value of overall regression model is significant at 1 percent level of significance. Hence, the model is statistically signific ant. The value of R
2 is 0.362 which indicates predicting power of the model is 36.2 percent.
V. Conclusions
The cost of capital has been a popular issue in corporate finance for a long time, yet insufficient attention has been paid to the factors that drive the cost of capital in Nepal. Here, an analysis was undertaken of the cost of capital in Nepal based on data of 13 sample firms. Regression model was applied to measure the relationship between firm-specific factors and cost of capital.
In this study, results indicate that average cost of capital of Nepalese firms is 16.7 percent and average debt ratio is 69.2 percent which shows that Nepalese firms are highly levered. The regression results of the study reveals that leverage is an important determinant of cost of capital. Further, the regression results of the study concerning the explanatory variables growth rate, dividend payout ratio and tangibility assets ratio are positively related with cost of capital whereas leverage ratio, size of sales, earning var iability and liquidity ratio are negatively related with cost of capital. Finally, the results of the study conclude that leverage, dividend payout, earning variability and liquidity position have statistically significant impact on cost of capital and the y are important determinants of the cost of capital in Nepalese firms.
In this paper, only total debt ratio as leverage to analyze the relationship between firm-specific factors and cost of capital in Nepalese business firms has been used. Such study needs to be incorporated long-term leverage
45
and short-term leverage separately to examine the relationship between capital structure and cost of capital . The future researchers can investigate the effect of capital structure on cost of capital using longer time periods data, and larger sample sizes. This study has applied few firm-specific determinants/variables to evaluate the cost of capital of firms. Inclusion some other variables such as profitability ratio, size of assets, tax rate, market interest rates, inflation rate, capital market condition, gross domestic product growth rate, foreign exchange rates etc. may be considered as explanatory variables (determinants) to analyze the their effects on cost of capital in Nepalese business firms.
References
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Booth, L., Aivazian, V., Demirguc-kunt, A., & Maksimovic, V. (2001). Capital structure in developing countries. The Journal of Finance, LVI, (1), 87-130.
Fama, E. F. (1985). What is difference about banks? Journal of Monetary Economics , 15, 29-37.
Fama, E., & French, K. (2002). Testing tradeoff and pecking order predictions about dividend and debt. Review of financial studies, 15, 1-33.
Ferri, M. G., & Jones, W. H. (1979). Determinants of financial structure : A new methodological approach. The Journal of Finance, 34 (3), 631-644.
Graham, J. R. (2000). How big are the tax advantages of debt? The Journal of Finance, LV (5), 1901-1939.
Harris, M., & Raviv, A. (1990). Capital structure and the informational role of debt. The Journal of Finance, 45 (2), 321-349.
Jensen, M. C., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency cost and ownership structure. Journal of Financial Economics, 43, 271-281.
Kim, W. S., & Soreson, E. H. (1986). Evidence on the impact of the agency cost of debt in corporate debt policy. Journal of Financial and Quantitative Analysis , 21,131-144.
Martin, J. D., & Scott, D. F. (1974). A discriminant analysis of the corporate debt -equity decision. Journals of Financial Management, 3, 71-79.
Masulis, R. W. (1983). The impact of capital structure changes on firm value : Some estimates. The Journal of Finance, 38 (1), 107-126.
Modigliani, F., & Miller, M. (1958). The cost of capital, corporation finance and the theory of investment. American economic review, 48, 261-275.
Ozkan, A. (2001). Determinants of capital structure and adjustment to long run target: Evidence from UK company panel data. Journal of Business, Finance and Accounting , 28, 175-198.
Pandey, I. M. (1981). Capital structure and the cost of capital . New Delhi: Vikas Publishing House Pvt. Ltd.
Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. The Journal of Finance, L (5), 1421-1460.
Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of Finance, XLIII (1), 1-17.
Weston, J. F. (1963). A test of cost of capital proposition. Southern Economic Journal , XXX, 105-112.
Wippern, R. (1966). Financial structure and the value of the firm. Journal of Finance, XXI, 615-633.
www.mof.gov.np
www.nepalstock.com
www.sebon.gov.np
46
Use of CAMELs Ratios in the Prediction of Financial Health of Banking and Financial Institutions: Nepalese Evidence
Rajendra Maharjan6
Abstract
This paper presents some empirical results of predicting bank and financial intuitions health by using 16 CAMELs ratios. It applied a multivariate technique to Nepalese companies to ascertain its ability to discriminate between financially strong and weak pooled data over 2004 to 2013 periods. This study develops a financial health prediction model for Nepalese banking and Financial Institutions. The results show good performance with a highly correct categorization factuality rate of 91.2 percent. Seven ratios were determined significant out of 16 CAMELs ratios utilized in this analysis to discriminate among financially strong and weak companies. The significant variables are Core capital to risk weighted assets is the most contributing variable in differentiation between groups which closely followed by non performing loan to total loan, net income to number of employees, size of firm, total loan to total deposit, net interest income to total assets, and least contributing variable is growth in loan. Surprisingly, none of earning ratios seem to be influencing in context of Nepal.
Keywords: BFIs, CAMELs ratios, Prediction Model, Discriminant Analysis,
I. Introduction
A sound banking industry comprises a paramount component of the financial services sector. A healthy banking system plays as the bedrock of economic, social and industrial growth of an economy. The role of financial system in economic growth and opined that there is a strong correlation between economic growth and financial system development (McKinnon & Shaw, 1973).
Banks serve as backbone to the financial sector, which facilitate the proper utilization of financial resources of a country. The banking sector is increasingly growing and it has witnessed a huge flow of investment. Bank failure is the result of mismatch between the current available liquid assets and current obligation (Sharma, 2004). Performance of the banking sector is an effective measure and indicator to check the performance of any economy to a large extent. Banking system has been allotted a crucial and noteworthy role in financing the planned economic growth (Mishra & Aspal, 2009). CAMEL is basically, a ratio based model for evaluating the banking performance. It is the model for rating the banks. In this regard, an attempt is made to analyze the performance of selected commercial and development bank in terms of its financial health. The main endeavor of CAMEL system is to detect problems before they manifest themselves. Banking sector‟s performance is seen as the reflection of the economy activities of the nation as a healthy banking system acts as the basis of social, economic and industrial growth of a nation (Sharma, 2014).
Discriminant analysis was a very popular method for model development in the early stages of bankruptcy prediction. However, advancements and technology have made other methods (including logit analysis, probit analysis, and neural networks) more prominent. The literature on bankruptcy prediction dates back to the 1930's beginning with the initial studies concerning the use of ratio analysis to predict future bankruptcy. Research up to the mid- 1960's focused on univariate (single factor/ratio) analysis. The most widely recognized univariate study is that of Beaver (1966). Altman (1968) published the first multivariate study, which remains very popular in the literature today. Sinkey's (1975) model was aimed at prediction of bank failure.
Banks that are making profit and doing good business in the market is termed as financially strong bank or non problem bank. Such banks are able to meet its current and long term liabilities when they mature. These kinds of
6 Mr. Maharjan is a Lecturer at Golden Gate International College Kathmandu, Nepal. He can be reached at
47
bank have a higher capital adequacy ratio, lower non performing loan fair rate of return and higher market price. On the other hand, bank that are not making profit and have negative retained earnings over a consecutive year are said to be financially weak bank or problems bank. Such banks are unable to meet its obligation when it matures. Those firms that have a higher non performing loan and lower Tier I and Tier II capital are also categories as a weak firm. Lack of timely identification and addressing of the problem lead to the failure of such banks. In context of Nepal there are few bank and financial intuitions‟ that are gone to liquidation.
The cause of corporate failure was a popular topic of research in the 1990s (McKee, Estrella et al. 2000). One of the techniques used to analyze possible corporate failure was CAMEL (Capital, Assets quality, Management, Earning and Liquidity) ratios. On 1 January 1997, a sixth component, 'S' (sensitivity to market risk), was included in the CAMEL rating system. Researchers have argued that the CAMEL(S) ratios can help evaluate the financial conditions of a bank, its management quality and its compliance with regulations. That is, the ratios can be used as an effective tool to identify a bank's problems.
As CAMEL(S) ratios are established milestone for predicting the bank failure, this study aims to provide an evidence of strong and weak performance in regard to Nepal. It is very interesting to see use of CAMELs ratios in contest of developing country like Nepal to identify problems banks. Thus an attempt will be made to develop statistic model of financial ratios in prediction of bank failure decision.
The remainder of the paper is organized as follows. The next section reviews existing literature and conceptual framework and discusses the motivation for the present study. Section III provides details of data and methodology utilized, and Section IV examines the regression results. Conclusions are offered in the final section.
II. Theoretical Framework
The purpose of this section is to present how the previous researchers had explained various financial ratios in order to make the prediction of bank failure decision. Weston et al. (1996) indicated that financial ratios have been used to determine firm‟s financial health and suggest the actions that enable the firm to take advantages of its strength and correct its weakness. As regards to the background of introducing CAMEL, it was originally adopted by the regulators of North American Commercial banks and it covers five areas of performance, namely, Capital Adequacy, Asset quality, Management quality, Earning ability and Liquidity. In the early 1970s; federal regulators of the US developed CAMEL rating system to appraise the performance of the Commercial banks (Siems & Barr, 1998).
Empirical evidence indicates that the study by Ramser and Foster (1931) was one of the oldest studied in the field of financial distress of firms. They analyzed eleven types of financial ratios for 173 firms. The study revealed that ratios of failed firm have been significantly lower than non failed firms. Beaver (1966) first attempt to predict based on univariate prediction model based on 79 failed & 79 non-failed firms, selected by the paired sample (by industry and asset size). He examined 30 different financial ratios & tried to predict industrial failure up to 5 years in advance. The study was. The most successful predictors were (1) cash flow to total debt ratio followed by (2) net income to total assets ratio, (3) current plus long-term liabilities to total assets (4) working capital to total assets & (5) current ratio.
Altman (1968) used discriminant analysis of financial ratios in the prediction of corp. bankruptcy. The study is based on a paired sample consisting of 33 failed & 33 non-failed manufacturing firms. Initially 22 financial ratios were considered as predictors of failure. Only 5 out of them were finally considered as predictors. Altman‟s model appeared as follows:
Z=0.012 X1+0.014 X 2 +0.033 X3+0.006 X4+0.999 X5
X1 = (CA-CL)/ TA
X2 = Retained Earnings/ Total Assets
X3 = EBIT / Total Assets
X4 = ME / Book Value of Total Debt (market value of equity includes both pref. & com. shares, and debt includes CL + LTL).
X5 = sales/total assets
The study concluded that all firms having of Z-score of 2.99 clearly fall into non bankrupt sector where as those firm having Z-score 1.81 are all bankrupt. The area between 1.81 and 2.99 has been defined as grey area because of the susceptibility to error classification.
Wirnkar and Tanko (2008) analyzed the adequacy of CAMEL in evaluating the performance of bank. This empirical research was implemented to find out the ampleness of CAMEL in examining the overall performance of bank, to find out the importance of each component in CAMEL and finally to look out for best ratios that bank regulators can adopt in assessing the efficiency of banks.
48
Baral (2005) studied the performance of joint ventures banks in Nepal by applying the CAMEL Model. His study was mainly based on secondary data drawn from the annual reports published by joint venture banks. His report analyzed the financial health of joint ventures banks in the CAMEL parameters. His findings of the study revealed that the financial health of joint ventures is more effective than that of commercial banks.
Joshi (2012) studied BFIs failure in Nepal. The study used 17 ratios all together and found that seven ratios were found significant. In capital adequacy ratio out of four ratios three ratios Capital/Total Assets, Capital find /RWA and Provision for loan loss/Net loans were found to be significant. In Assets quality Non performing loan/Total Loan, in management efficiency ratio out of three only one ratio interest income/Interest Expense was found to be significant. Similarly, in Earnings out of four ratios only one ratios only one ratio ROE is found to be significant. Similarly, in liquidity ratio also Net loan/Total Assets is found to be significant.
From the above studies it is clear that there is no uniformity in use of methodology so there is different result. This shows that there are different views, idea and opinion of authors, academician, practitioners, and academician regarding the concept of corporate failure. However, corporate failure, bankruptcy, financial distress and financial health are used interchangeably in context of Nepal.
Conceptual Framework of Financial Health Prediction Model: MDA
III. Research Methodology
The study has employed descriptive and causal comparative research design to deal with the fundamental issues of analysis of corporate failure with the help of various ratios in the context of Nepalese firms.
Nature and Sources of Data
This study is based on secondary data for the purpose of discriminating the firms into financially weak and strong BFIs. The secondary sources of data were collected from annual financial report of selected companies listed in NEPSE from 2004 to 2013. The secondary data were obtained through published annual reports of the sample firms from Nepal Rastra Bank (NRB), Security Board of Nepal (SEBON), Nepal stock exchange (NEPSE). Annual reports of the sample firm were collected from the head office share department. The Banking and financial institutions listed in NEPSE till 2013 which includes 30 commercial Bank and 94 Development Bank with the total population of the study is 182. The data ranges from maximum ten year to minimum three year observations with 102 year observations among selected seventeen commercial and development banks.
Selection of Enterprises
All the Banks and financial institutions that were listed in NEPSE by the end of 2013 were considered as the population of the study. Selection of sample is based on the financial performance of the firms. The firms that have poorly performed during the study period, firm that are liquidated and Prompt Corrective Action (PCA) taken by NRB as well as firms that have a net worth negative, negative retained earnings and zero profit and loss during the study period is considered as financially weak firm. Similarly, firm is regarded as a financially weak when it is unable to cover and service its liabilities with its liquid assets, and therefore, it is technically in a Bankrupt status. Some of the failed BFIs in Nepal were liquidated while a few of them were either acquired by other companies or merged with
Conclusion
Construct an efficient discriminant model of financial position of BFIS
Financial Ratios
Capital Adequacy
Asset Quality
Management Efficiency
Earnings
Liquidity
Sensitivity
Company Status
Financially Weak
Financially Strong
Test the predictive ability of ratios
Test the accuracy of predictions with MDA Model
49
others. Meanwhile, some of them were restricted by the central Bank of Nepal from accepting deposits, thereby indicating their failed status as a full-fledged and healthy Bank.
In contrast, the firm that is neither liquidated nor under the action of NRB also having positive net worth, retained earnings and making profit is considered as financially sound BFIs. The details of listed selected companies and periods of data used to meet the objectives of the study have been given in table 3.1.
Table 1
Selected Enterprises for the Study
S.N. Name of the firms Class Financially weak /Strong
Period Obs.
1 Nepal Bank Limited (NBL) A Financially weak 2004-2013 10
2 Rastriya Banijaya Bank (RBB) A Financially weak 2004-2013 10
3 Nabil Bank Limited (NABIL) A Financially strong 2005-2013 9
4 Standard Charted Bank Limited (SC)
A Financially strong 2005-2010 6
5 Nepal Bangladesh Bank Limited (NB Bank)
A Financially weak 2005-2008 4
6 Nepal Credit & Commerce Bank Limited (NCC)
A Financially weak 2005-2007 3
7 Citizen Bank Limited (CBL) A Financially strong 2008-2013 6
8 Gurkha Development Bank Limited (GDB)
B Financially weak 2005-2010 6
9 Vibor Bikas Bank Limited (VBBL) B Financially weak 2008-2013 6
10 Siddhartha Development Bank Limited (SDBL)
B Financially strong 2005-2012 8
11 Sanima Bank limited (SBL) A Financially strong 2011-2013 3
12 Jyoti Bikash Bank Limited
(JBBL)
B Financially weak 2009-2013 5
13 Lumbini Bank Limited
(LBL)
A Financially weak 2004-2008 5
14 State Bank of India Limited (SBI) A Financially Strong 2006-2010 5
15 International Development Bank Limited (IDBL)
B Financially weak 2009-2013 5
16 Tourism Development Bank Limited (TDBL)
B Financially strong 2010-2013 4
17 Laxmi Bank Limited (LBL) A Financially strong 2006-2012 7
Grand Total observation 102
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Source: SEBON, NEPSE, NRB & Annual Reports
The study period begins from 2004 to 2013 but the selected firm does not possess homogeneity in period. The minimum year of sample observation is three and maximum observation is ten. The study used pooled-cross section data of 17 firms for analyzing the relationship among variables, as mentioned in table 3.1.The study is based on 102 observations. The BFIs selected for the study can be considered representative of respective industry.
Methods of Data Analysis
In this section, various methods of analysis have been under secondary and primary data. The methods data consists of (i) descriptive statistics, (ii) Test of equality of group means between financial strong and weak BFIs (iii) Multivariate discriminant analysis.
Descriptive Statistics
Average ratios of financially weak and strong have been computed to observe whether there is significance difference between failure and non failure firms. Mean value of the ratios gives the result of the average of each ratio within the group that present s the deviation of each ratio within the group.
Test of Equality of Group Means
The F test is used to carry out the mean difference for each variable from one way analysis of variance between groups. To compute the values computer software Microsoft Excel and SPSS are used.
Multiple Discriminate Analysis (MDA)
MDA is a statistical technique is widely used to discriminate the firms. Altman (1968) study was considered as one of the pioneer study in discriminant analysis. After the Altman, MDA was followed by Deakins (1972), Blum (1974), Ohlson (1980). It refers to the simultaneous consideration of several independent variables as the indicators in the prediction process with categorical variable as dependent variables. To carry out the essential output from this study a Multiple Discriminant Analysis (MDA) is used as a technique in a linear equation referred to as discriminant function. Multiple Discriminant Analysis is a method for compressing a multivariate signal to yield a lower dimensional signal amenable to classification. MDA is not directly used to perform classification of failed and non failed firms. Including all variables first stepwise discriminant analysis is performed then final significant variables are used to discriminate the firms using the following equations. This function transforms the individual variable values to a single discriminate score or Z value, which is used to classify the financial health of BFIs. Zi = a0 + a1 X1 + a2 X2 + a3 X3 +……………………. + an Xn + ei
The details of sixteen variables that are under taken for the study are discussed in brief below.
Capital Adequacy Ratios
Capital is one of the bank specific factors that influence the level of bank profitability. It is the amount of own fund available to support the bank's business and act as a buffer in case of adverse situation (Athanasoglou et al. 2005). Banks capital creates liquidity for the bank due to the fact that deposits are most fragile and prone to bank runs. Moreover, greater bank capital reduces the chance of distress (Diamond, 2000). Capital adequacy ratio is directly proportional to the resilience of the bank to crisis situations. It has also a direct effect on the profitability of banks by determining its expansion to risky but profitable ventures or areas (Sangmi and Nazir, 2010).
Asset Management
The bank asset includes among others current asset, credit portfolio, fixed asset, and other investments (Athanasoglou et al., 2005). Loan is the major asset of commercial banks from which they generate income. The quality of loan portfolio has a direct bearing on bank profitability. The highest risk facing a bank is the losses derived from delinquent loans (Dang, 2011). Low nonperforming loans to total loans shows that the good health of the portfolio a bank. The lower the ratio the better the bank performing (Sangmi and Nazir, 2010).
Management Efficiency
Management Efficiency is one of the key internal factors that determine the capability of the management to deploy its resources efficiently, income maximization, reducing operating costs can be measured by financial ratios. One of this ratios used to measure management quality is operating profit to income ratio (Rahman et al. in Ilhomovich, 2009; Sangmi and Nazir, 2010). The higher the operating profits to total income (revenue) the more the efficient management is in terms of operational efficiency and income generation. The other important ratio is that proxy management quality is expense to asset ratio. Management quality in this regard, determines the level of operating expenses and in turn affects profitability (Athanasoglou et al. 2005).
Earnings
51
Profit is the ultimate goal of banking and financial institutions. All the strategies designed and activities performed thereof are meant to realize this grand objective. To measure the profitability of commercial banks there are variety of ratios used of which Return on Asset, Return on Equity and Net Interest Margin are the major ones (Murthy and Sree, 2003; Alexandru et al., 2008). Khrawish (2011) that ROE is the ratio of Net Income after Taxes divided by Total Equity Capital. It represents the rate of return earned on the funds invested in the bank by its stockholders. ROA is also another major ratio that indicates the profitability of a bank. It is a ratio of Income to its total asset (Khrawish, 2011). It measures the ability of the bank management to generate income by utilizing company assets at their disposal
Liquidity
Liquidity is another factor that determines the level of bank performance. It refers to the ability of the bank to fulfill its obligations, mainly of depositors. According to Dang (2011) adequate level of liquidity is positively related with bank profitability. The most common financial ratios that reflect the liquidity position of a bank according to the above author are customer deposit to total asset and total loan to customer deposits
Sensitivity to market risks and size
The concern is with the impact on banks from shifts and fluctuations in the financial market. Banks are vulnerable to market distortions if they rely heavily on market refinancing. Size of the firms also affects in the performance of bank (Bell, 1997).
Table 2
Variables description
Capital Adequacy
X1=Total capital to total Assets
X2=Core capital to risk weighted assets
X3= total capital to risk weighted assets
Assets Quality
X4=Non performing loan to total loan
X5= Loan to total assets
Management Efficiency
X6=net interest income to total assets
X7=Interest income to interest expenses
X8=net income to number of employees
Earnings
X9=net interest income to total operating income
X10=Return on equity
X11= Return on Assets
Liquidity
X12=Liquid asset to total assets
X13= Total loan to total deposit
X14= Growth in loan
Sensitivity to Market
X15= Market price per share to earning price per share
X16=Log of Total Assets
Z = Overall index or score of the equation, a0 is intercept term, a1 to a16 are the coefficient of each of the sixteen variables.
The categorical dependent variable of this study is financially weak and financially strong denoted by zero and one respectively and independent variables are capital adequacy ratios, asset quality ratios, management efficiency, earnings, liquidity and sensitivity to market. The discriminant score Z is used to classify the firms into financially weak and financially strong.
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IV. Results and Conclusion Descriptive Statistics
In this study, descriptive statistics basically summarizes the data as per the purpose of this study with the statistical package SPSS. The descriptive statistics used in this study consists of mean, standard deviation related with variables under consideration. Table 4.17 summarizes the descriptive statistics of financially strong firm specific explanatory variables used in this study during 2004 to 2013 associated with 48 firm‟s year observation. It further explains the descriptive statistics of financially strong and weak firms across the nature of business.
Table 3
Descriptive Statistics of Financially Strong BFIs
Ratios Mean Std. Deviation Minimum Maximum N
TC/TA 11.13 5.40 5.54 27.03 48
CC/RWA 11.70 5.61 0.40 36.17 48
TC/RWA 17.18 14.25 10.25 102.60 48
NPL/TL 1.71 2.63 0.00 12.37 48
Loan/TA 0.59 0.14 0.24 0.81 48
NII/TA 0.03 0.03 0.00 0.20 48
II/IE 2.06 0.87 0.80 4.40 48
NI/NOE 0.96 1.04 -0.13 7.41 48
NII/TOI 0.72 0.14 0.23 0.91 48
ROE 17.60 12.12 -10.83 42.25 48
ROA 1.71 1.05 -1.29 6.23 48
LA/TA 20.78 12.41 0.09 47.69 48
TL/TD 0.67 0.19 0.19 0.95 48
Growth in loan 38.06 36.76 -13.64 187.98 48
P/E 24.63 19.50 -8.58 96.58 48
Ln Size 9.59 0.97 7.05 10.94 48
This table shows the sixteen variables with forty eight firm‟s years the mean, standard deviation, minimum and maximum values of financially strong BFIs. Nine financially strong BFIs have been selected with 48 year observations. The ratio of total capital to total assets (TC/TA) is calculated dividing total capital to total assets where total capital is the sum of the paid up capital and reserve and surplus and total asset is the sum of current and fixed assets. (LA/TA) is the ratio of Liquid asset to total asset where liquid asset includes cash in vault, deposit with NRB and investment in treasury bills.
Among the three ratios under capital adequacy, TC/RWA has the highest mean (17.18) with standard deviation (14.25) and TC/TA has the least mean (11.13) with standard deviation (5.40). Under asset management ratio NPL/TL has the highest mean (1.71) with standard deviation of (2.63) and the least is of Loan/TA (0.59). Similarly, in management efficiency the highest mean (2.06) is of II/IE and the least is NII/TA has the least mean (0.03) with standard deviation (0.03). In earnings ROE has a highest mean (17.06). Similarly, in liquidity Growth in loan has highest mean (38.06) and in sensitivity P/E ratio has the highest mean (24.63).
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Table 4
Descriptive Statistics of Financially Weak BFIs
Ratios Mean Std. Deviation Minimum Maximum N
TC/TA -2.59 22.19 -55.54 29.35 54
CC/RWA -4.16 24.10 -56.25 36.11 54
TC/RWA -2.88 24.13 -55.54 36.79 54
NPL/TL 20.57 13.24 2.28 57.64 54
Loan/TA 0.50 0.18 0.00 0.75 54
NII/TA 0.05 0.06 -0.01 0.35 54
II/IE 2.05 0.67 0.45 3.40 54
NI/NOE -0.14 0.82 -3.22 1.11 54
NII/TOI 0.65 0.40 -1.80 0.93 54
ROE -1.26 32.23 -111.63 111.60 54
ROA -0.23 4.75 -18.92 6.35 54
LA/TA 21.35 14.88 0.02 65.69 54
TL/TD 0.45 0.22 0.00 0.83 54
Growth in loan 179.52 849.49 -32.52 5697.37 54
P/E 5.31 55.15 -293.71 153.00 54
Log of size 9.19 1.42 6.29 11.36 54
This table shows the sixteen variables with forty eight firm‟s years the mean, standard deviation, minimum and maximum values of financially strong BFIs. Nine financially strong BFIs have been selected with 48 year observations. The ratio of total capital to total assets (TC/TA) is calculated dividing total capital to total assets where total capital is the sum of the paid up capital and reserve and surplus and total asset is the sum of current and fixed assets. (LA/TA) is the ratio of Liquid asset to total asset where liquid asset includes cash in vault, deposit with NRB and investment in treasury bills.
Among the three ratios under capital adequacy, CC/RWA has the lowest mean (-4.16) with standard deviation (24.10). Under asset management ratio NPL/TL has the highest mean (20.57) with standard deviation of (13.24) and the least is of Loan/TA (0.50). Similarly, in management efficiency the lowest mean (-0.14) is of II/IE with standard deviation (0.82). In earnings ROE has a lowest mean (-1.26). Similarly, in liquidity TL/TD has lowest mean (0.45) and in sensitivity P/E ratio has the lowest mean (5.31).
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Table 5
Test of Equality of Group Means between Financially Strong and Weak BFIs
Ratios Basis Mean of Strong firm
Mean of weak firm
Mean Difference
Wilks' Lambda F- ratio Sig.
TC/TA Percent 11.126 -2.591 13.717 0.852 17.409*** 0.000*
CC/RWA Percent 11.699 -4.164 15.863 0.835 19.823*** 0.000*
TC/RWA, Percent 17.181 -2.879 20.061 0.798 25.307*** 0.000*
NPL/TL Percent 1.708 20.573 -18.865 0.515 94.069*** 0.000*
Loan/TA Times 0.585 0.503 0.082 0.939 6.483** 0.012*
NII/TA Times 0.033 0.050 -0.016 0.97 3.055 0.084
II/IE Times 2.060 2.054 0.006 1 0.002 0.969
NI/NOE Times 0.955 -0.143 1.098 0.738 35.413*** 0.000*
NII/TOI Times 0.719 0.653 0.066 0.989 1.15 0.286
ROE Percent 17.597 -1.259 18.857 0.873 14.585*** 0.000*
ROA Percent 1.710 -0.234 1.944 0.929 7.691*** 0.007*
LA/TA Percent 20.783 21.353 -0.570 1 0.043 0.835
TL/TD Times 0.671 0.455 0.217 0.784 27.558*** 0.000*
Growth in loan Percent 38.063 179.515 -141.452 0.987 1.327 0.252
P/E Times 24.630 5.310 19.319 0.95 5.296** 0.023*
ln_size Rupee 9.593 9.189 0.404 0.973 2.735 0.101
* At 10 % level of significance, ** At 5 % level of significance, *** At 1 % level of significance.
This table shows the sixteen variables with forty eight firm‟s years the mean, standard deviation, minimum and maximum values of financially strong BFIs. Nine financially strong BFIs have been selected with 48 year observations. The ratio of total capital to total assets (TC/TA) is calculated dividing total capital to total assets where total capital is the sum of the paid up capital and reserve and surplus and total asset is the sum of current and fixed assets. (LA/TA) is the ratio of Liquid asset to total asset where liquid asset includes cash in vault, deposit with NRB and investment in treasury bills.
The table 5 above reveals the basis of measurement of CAMELs ratios, mean difference, Whilks‟ lamda, F-ratios and significance. The value of wilk‟s lamda ranges from 0 to 1. Smaller the value of wilk‟s lamda greater the group differences and vice-versa. NPL/TL has the lowest (0.515 wikl‟s lamda and II/IE and LA/TA has the highest (1) wilk‟s lamda. The above table also shows all three ratios of capital adequacy ratios namely TC/TA, CC/RWA and TC/RWA
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are significantly difference between financially strong and weak BFIs at 1 per cent level. In case of asset quality also both the ratios NPL/TL and Loan/TA are significantly difference 1 per cent and 5 Per cent respectively.
Similarly, NI/NOE ratio only seems to be significantly difference at 1 Percent. Both ROE and ROA seems to be significantly different at 1Percent level. Similarly, in case of liquidity only TL/TD ratio is significant and in sensitivity P/E ratio of financially strong and weak BFIs are seems to be significant at 1 per cent level of significant.
Discriminant Analysis
Multivariate Discriminant Function and Application of financial position. The multivariate discriminant analysis able to predict with 91.2 per cent accurate. Sixteen financial ratios have been conducted under CAMELS ratios. Following equation has been developed based on multivariate discriminant Z- function for the prediction of financial position of BFIs.
Z = -4.491 + 0.038 * X2 – 0.048 * X4 – 5.937 * X6 + 0.603 * X8 + 1.958 *X13 + 0.00001 * X14 + 0.465 * X16
The above model is useful in prediction of financial health of the BFIs. If Z score is less than -0.071 the firm is falls financially weak group, between -0.071 to 0.112 lies in grey zone and more than 0.112 is falls in financially strong group.
Relative Contribution of Financial Ratios
The initial sample consists of 102 firm years from the annual reports of listed non financial firm in NEPSE data base from 2004 to 2013 of selected variables from stepwise discriminate analysis. The magnitude of sign has been ignored to rank the variables.
Table 6
Relative Contribution of Financial Ratios
Ratios Coefficient SD Adjusted Coefficient Rank
X2 0.038 19.563 0.743 1
X4 -0.048 13.592 -0.652 2
X6 -5.937 0.048 -0.283 6
X8 0.603 1.077 0.650 3
X13 1.958 0.234 0.458 5
X14 0.000 619.955 0.006 7
X16 0.465 1.241 0.577 4
This table shows the relative contribution of each significant variable selected from MDA. First column shows the significant variables, second column shows its coefficient, in third standard deviation, fourth column shows the adjusted coefficient and last column indicate the overall rank.The table 6 shows that current Core capital to risk weighted assets (X2) contribute most in differentiation between groups which closely followed by non performing loan to total loan (X4), net income to number of employees (X8), size of firm (X16), total loan to total deposit (X13), net interest income to total assets (X6), and growth in loan (X14). The results clearly indicate capital adequacy ratios is most influencing ratio and least influencing in discriminating financial performance is growth in loan. Interestingly none of liquidity ratios do not seem to be influencing in context of Nepal.
The Overall Accuracy of Discriminant Classification
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For the overall accuracy of discriminant classification initially, firms were classified into financially strong and financially weak BFIS based on performance of the firm during the study period. The dummy variable is created with 0 for financially weak and 1 for financially strong BFIs.
Table 7
The Overall Accuracy of Discriminant Classification
Predicted group membership
financially weak financially strong Total
Actual group
Membership financially weak 47 7 54
financially strong 2 46 48
Total 102
Type of error Numbers correct percent correct percent error Total
Type I 47 87.03 12.97 100
Type II 46 95.83 4.17 100
91.2 % of original grouped cases are correctly classified.
The table 7 shows the overall accuracy of discriminate classification. First part of the table reveals the number of actual and predicted group of financial weak and strong group and second part deals with the type I and Type II error.
The table depicts the overall discriminant accuracy of 102 sample observations of seventeen companies consisting of nine financially weak firms with 52 observations and eight financially strong firms with 48 observations. It also describes the type of error. Out of 54 financially weak firm predicted 47 were correctly classified with 87.03 percent leaving 12.97 per cent Type I error. Similarly, for financially weak firm out of 48 observations 46 were correctly classified with 95.83 percent leaving 4.17 percent as Type II error. The overall correct classification is 91.2 per cent which is satisfactory for MDA technique.
The major conclusion of this study is that mean ratios of financially weak BFIs is significantly different than that of financially strong BFIs. The study reveals that core capital to risk weighted assets is the most contributing variables among the sixteen CAMELs ratios which is followed by non performing loan to total loan, net income to number of employees, size of firm, total loan to total deposit, net interest income to total assets and least contributing variables is growth in loan that are found to be highly significant. One of the variable sizes is consistent with (Nazir, 2010). Surprisingly, none of earnings ratios do not seem to be influencing in context of Nepal. The multiple discriminant analysis suggests if Z score is less than -0.071 the firm is falls financially weak group, between -0.071 to 0.112 lies in grey zone and more than 0.112 is falls in financially strong group. The study further reveals that the 91.2 per cent accuracy in predicting financial health of Nepalese BFIs
Overall, the results of this study suggest that Nepalese Banking and Financial Institutions should strive to generate profit out of its assets employed in the business in order to be successful. The results of this study and the
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implications derived there from should, however, be taken against the backdrop of their limitations as the sample is small. Further research is required to make use of large numbers of sample when it is available so that the results could be generalized.
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58
Human Resources Development Climate:
Empirical Study of Nepalese Commercial Banks
SupuspaBhattarai7
Abstract
An optimal level of HRD Climate is essential for facilitating HRD. The study is aimed at assessing the extent of Developmental climate prevailing in Private and Public sector commercial banks operating in Nepal and also its comparative analysis. For the purpose of the study, primary data is collected from 135 employees of various Private and Public sector commercial banks through a structured questionnaire. The study revealed that the three variables: General Climate, HRD Mechanisms and OCTAPAC culture are good in Private sector commercial banks as compared to Public sector commercial banks. The findings indicate no significant difference in the developmental climate prevailing in Private and Public sector commercial banks.
Key words:HRD, HRD climate, HRD mechanism, OCTAPAC culture, commercial banks
I. Introduction
Human resource development in the organizational context is a process by which the employees of an organization are helped in a continuous, planned way to: (a) acquire or sharpen capabilities required to perform various functionsassociated with their present or expected future roles; (b) develop their general capabilities as individuals and discover and exploit their own inner potentials for their own and/or organizational development processes; and (c) develop an organizational culture in which supervisor-subordinate relationships, team work and collaboration among sub units are strong and contribute to the professional well-being, motivation and pride of employees (Rao, 1985). The positive HRD climate renders the existing systems more effective and makes the organizations more receptive to the introduction of relevant additional system (Athreya, 1988). Organizations differ in the extent to which they have these tendencies. Some organizations may have some of these tendencies, some others may have only a few of these and a few may have most of these. Recognizing the importance of HRD climate, Center for HRD, Xavier Labour Relations Institute (XLRI) developed 38-item HRD climate questionnaire to survey the extent to which development climate exists in organizations. These 38 items assess General climate, OCTAPAC (Openness, Confrontation, Trust, Autonomy, Pro-action, Authenticity and Collaboration) culture and implementation of HRD mechanisms(Sarawathi 2010).
A congenial HRD climate is extremely important for the ultimate achievement of the business goals. In Nepalese context, type of organization influences the culture prevalent in the organization. Since climate is an outcome of the culture, this study attempts to compare the HRD climate in Private and Public sector commercial banks in Nepal. The present study is an attempt to assess the extent of HRD climate prevailing in Private and Public sector commercial banks and to compare the HRD climate between two types of commercial banks. A 38-item HRD climate questionnaire has been grouped into three categories: 1) General climate; 2) OCTAPAC culture; and 3) HRD mechanisms. The general climate items deal with the importance given to the Human resources development in general by the top management and line managers. The OCTAPAC items deal with the extent to which openness, confrontation, trust, autonomy, pro-activity, authenticity and collaboration are valued and promoted in the organization. The items dealing with HRD mechanisms measure the extent to which HRD mechanisms are implemented seriously.
II. Theoretical Framework
According to Saraswathi (2010) on his article revealed that the three variables: General Climate, HRD Mechanisms and OCTAPAC culture are better in software organizations compared to manufacturing in India. The findings indicate significant difference in the developmental climate prevailing in software and manufacturing organizations. In
7Mr. Bhattarai is Lecturer at New Horizon College,Tribhuvan University, Butwal. He can be reached at [email protected]..
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comparison, it was observed that the units that engaged in software provide HRD climate with an overall percentage of 69% (mean score 3.77) and the manufacturing organizations (62 percentage score, mean score 3.46). This means that good HRD climate was prevalent in the units surveyed.
HRD climate can be grouped as General climate, OCTAPAC culture and HRD mechanisms. A review of literature indicates that HRD climate exists in various organizations. But a study of 52 organizations shows that the average extent of climate was about 54% in these organizations which is rather low (Rao& Abraham, 1986). An optimal level of development climate is essential for facilitating HRD activities. Various studies indicate the introduction and development of HRD programmes in Indian organizations including Larsen and Toubro Ltd. (Pereira, 1985), Crompton Greaves Ltd. (Varughese, 1986), Voltas Ltd.(Rao, 1985), Indian Oil Corporation (Kapoor, 1992) etc. found that HRD is practiced more in public sector than in private sector industries (Anandram, 1987). In an analysis of 14 large public and private sector organization it is found that only three of them did not have separate HRD department (Rao, 1992). An organization that has better HRD climate and processes is likely to be more effective than an organization that does not have them (Rao, 1992). The (Venkateswaran,1997) study found that, to a large extent, a favourable HRD climate was prevalent in a public sector undertaking in India. The study of (Srimannarayana, 2001) identified below average level of HRD climate in a software organisation in India. HRD climate was significantly more developmental in IT industry when compared to the automobile industry (Agrawal, 2002), good in a private sector undertaking in India (Mishra and Bhardwaj, 2002), highly satisfactory in engineering institutes in India (Rodrigues, 2004), moderate in Dubai organisations (Srimannarayana, 2007), and banks (Pillai, 2008), and moderate in the organisations in India (Srimannarayana, 2008). The revelation of (Moran &Volkwein, 1992)was a newer approach (Cultural approach) to organizational climate, which proposes that organization climate arises from inter-subjectivity of members as they interact within a context established by an organisation‟s culture. They state that climate operates at levels of attitudes and values, while culture operates at these levels as well as at the level of basic assumptions. The study of (Pattanayak, 1998) states that HRD Climate affects performance in three ways: a) by defining the stimuli that confronts the individual; b) placing constraints on the individual‟s freedom of choice; and c) providing source of reward and punishment.
The modern age of tough competition focusing on competitiveness is the most essential factor for sustainability and outperforming of the organization. Organizations are facing challenges of global competitions, more customer focus, speed and flexibility. These challenging issues could not be addressed without competent, capable, committed employees. Those could be fulfilled in the organization with HRM practices with HRD focus.
To develop HRD system for effective performance of the organization it is necessary to think about the system view of HRD. HRD system is composed of different instruments as subsystem. Regarding the instruments/mechanisms/activities/ practices of HRD, different researches have indicated and taken different instruments/mechanisms/practices for HRD.
III. Research Methodology
The study is basically descriptive in nature where employees belonging to the Private sector (NMB Bank and Nepal SBI Bank) and Public sector commercial banks (Nepal Bank and RastriyaBanijya Bank) constituted the respondents of the study. The Questionnaire was administered to 135 respondents from 4 different commercial banks by taking into consideration the availability of employees and their interest to give responses to the questionnaires. Since the questionnaire used a five-point scale (5- always true, 4-mostly true, 3-sometimes true, 2- rarely true, 1- not at all true), a average scores of 3 and around indicate a moderate tendency on the dimension existing in the organization, while scores around 4 indicates a fairly good degree of the dimension existing in the organization. In order to make interpretations easy the mean score were converted into percentage score using the formula Percentage score = (mean score-1) x 25. This assumes that a score of 1 represents 0 percent, of 2 represents 25 percent, of 3 represents 50 percent, of 4 represents 75 percent, and of 5 represents 100 percent. Thus, percentage score indicate the degree to which the particular dimension exists in the commercial banks out of the ideal 135.Similarly, the 38-items HRD climate survey developed byRaoand Abraham (1986) at the XLRI Centre for HRD is an instrument that is widely being used to survey the HRD climate. This study uses a five-point scale questionnaire to measure the level of HRD in commercial banks. In five-point scale 5 indicates always true, 4 indicates mostly true, 3 indicates sometimes true, 2 indicates rarely true and 1 indicate not at all true. Questionnaire was used to all officer and managerial level employees of the sampled banks. The scale may be ranged from 38 to 190 when the scores on all the 38 items are added to get a composite score. Scores close to 190 indicate an excellent climate (which is rare), scores above 152 indicates a good HRD climate. Scores below 114 indicate that there is a considerable score for improvement. Scores around 38 indicates no situation of HRD climate in the commercial banks of Nepal. The scores of all the respondents are analyzed item-wise and area needing improvement have been identified. In order to test the credibility of the work the relevant quantitative techniques such as analysis of average mean score, analysis of standard deviation, regression analysis, percentage and Mann-Whitney Test has been adopted.
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IV. Results and Conclusion
General HRD Climate
In order to assess general HRD climate prevailing in the organizations, 14 items from the questionnaire and the scores on the responses of the sampled employees in the commercials banks have been calculated. Means and percentage score of private and public sector commercial banks under the study have been presented in Table 1. It is found from the table that the overall mean scores for these 14 items put together is 3.56 (percentage score 64) in private commercial banks and 3.49 (percentage score 62) in public commercial banks on a 5-point scale. Thereby it can be stated that the general HRD climate prevailing in the private commercial banks and public commercial banks is good but general HRD climate in private is comparatively good than public sector commercial banks.
Table 1
General Climate
Factors Item No. Private Public
Mean % Std. Deviation Mean % Std. Deviation
The top management of this organization goes out of its way to make sure that the employees enjoy their work.
Item 1 2.76 44 1.008 3.06 52 1.099
The top management believes that human resources are extremely important resources for this organization.
Item 2 3.78 70 .839 4.16 79 .915
Development of the subordinates is seen as an important part of their job in this organization.
Item 3 3.61 65 .685 3.62 66 .943
The personnel policy in this organization facilitates employee development.
Item 4 3.37 59 .760 3.47 62 .989
The top management is willing to invest a considerable part of their time and other resources to ensure the development of employees.
Item 5 3.28 57 .738 3.23 56 .952
Senior officers/executives in this organization take active interest in their juniors to help them learn about their jobs.
Item 6 3.80 70 .855 3.33 58 .975
People lacking competences in doing their jobs are helped to acquire competence rather than being left unattended.
Item 7 3.57 64 .716 3.17 54 .803
Managers in this organization believe that employee behaviour can be changed for development at any stage of their life.
Item 8 3.43 61 .716 3.59 65 .946
People in this organization are helpful to each other.
Item 9 4.20 80 .683 3.91 73 .854
Employees in this organization are very informal and do not hesitate to discuss their personal problems with their supervisors.
Item 10 3.56 64 .839 3.54 64 1.037
The psychological climate in this Item 11 3.57 64 .662 3.44 61 .949
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Source: Questionnaire Survey, January, 2012.
The important factor contributing highly to general climate in private sector commercial banks seems to be that people in this organization are helpful to each other. The other dimensions contributing to general climate on which the organizations surveyed, scored better (percentage score more than 60) includes; the top management believes that human resources are extremely important resources for this organization; development of the subordinates is seen as an important part of their job in this organization;senior officers/executives in this organization take active interest in their juniors to help them learn about their jobs;people lacking competences in doing their jobs are helped to acquire competence rather than being left unattended;managers in this organization believe that employee behaviour can be changed for development at any stage of their life;employees in this organization are very informal and do not hesitate to discuss their personal problems with their supervisors;the psychological climate in this organization is very conducive to any employee interested in developing himself by acquiring new knowledge and skills;seniors guide their juniors to prepare them for future responsibilities/roles they are likely to take up;the top management of this organization makes efforts to identify and utilize the potential of the employees;people in this organization do not have any fixed mental impressions about each other.
The factors seemed to be at average level (percentage score 50-60) in private commercial banks includes; the personnel policy in this organization facilitates employee development;the top management is willing to invest a considerable part of their time and other resources to ensure the development of employees.
In private bank the factor seemed to be poor (percentage score 40-50 and mean score 2.76) includes; the top management of this organization goes out of its way to make sure that the employees enjoy their work.
While in public sector commercial banks, the top management believes that human resources are extremely important resources for this organization 9 (item 2) and people in this organization are helpful to each other (item 9) has scored excellent (with percentage 79 and 73 respectively). The other factors on which the public banks surveyed scored good (a percentage score 60-70) included: development of the subordinates is seen as an important part of their job in this organization;the personnel policy in this organization facilitates employee development;managers in this organization believe that employee behaviour can be changed for development at any stage of their life;employees in this organization are very informal and do not hesitate to discuss their personal problems with their supervisors;the psychological climate in this organization is very conducive to any employee interested in developing himself by acquiring new knowledge and skills;the top management of this organization makes efforts to identify and utilize the potential of the employees;seniors guide their juniors to prepare them for future responsibilities/roles they are likely to take up.
The dimensions like the top management of this organization goes out of its way to make sure that the employees enjoy their work; the top management is willing to invest a considerable part of their time and other resources to ensure the development of employees;senior officers/executives in this organization take active interest in their juniors to help them learn about their jobs;people lacking competences in doing their jobs are helped to acquire competence rather than being left unattended;people in this organization do not have any fixed mental impressions about each other, appeared to be at average level (percentage 50-60). There were no factors at poor level in public sector commercial banks.
organization is very conducive to any employee interested in developing himself by acquiring new knowledge and skills.
Seniors guide their juniors to prepare them for future responsibilities/roles they are likely to take up.
Item 12 3.72 68 .738 3.64 66 1.041
The top management of this organization makes efforts to identify and utilize the potential of the employees.
Item 13 3.57 64 .742 3.49 62 1.026
People in this organization do not have any fixed mental impressions about each other.
Item 18 3.61 65 .787 3.23 56 1.003
Average 3.56 64 0.77 3.49 62 0.97
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It is found from the study that the general climate in private commercial banks is better than the public sector commercial banks. Though there is one dimension scoring at poor level in private and no dimension found poor in public banks, most of the factors in private banks appeared to be better i.e. percentage score more than 60, while in public banks some dimensions scored better and other dimensions have scored at average level. Thus, it can be stated that the general climate prevailing in private banks seems to be better than the public banks. HRD Mechanisms
Implementation of HRD mechanisms such as training, performance appraisal and feedback, potential appraisal, career planning, rewards and employee welfare has been examined in the units under study. In the questionnaire, 14 items were identified which deals with the implementation of HRD mechanisms. Mean and percentage score for HRD Mechanisms for the units under study has presented in Table 2. The responses of all these items put together indicated that a good degree of implementation of HRD mechanisms with 63 percent in private commercial banks and average degree of implementation with 58 percent in public commercial banks.
Table 2
HRD Mechanics
Factors Item No. Private Public
Mean % Std. Deviation Mean % Std. Deviation
Promotion decisions are based on the suitability of the promotee rather than on favouratism.
Item 14 3.41 60 .901 3.32 58 1.059
There are mechanisms in this organization to reward any good work done or any contribution made by the employees.
Item 15 3.13 53 .728 3.31 58 1.169
When an employee does good work his supervising officers take special care to appreciate it.
Item 16 3.50 63 .795 3.21 55 1.115
Performance appraisal reports in this organization are based on objective assessment and adequate information and not on favouritism.
Item 17 3.56 64 .883 3.19 55 1.001
Employees are encouraged to experiment with new methods for bringing out creative ideas.
Item 19 3.30 58 .816 3.14 54 .959
When any employee makes a mistake his/her supervisors treat it with understanding and help him to learn from such mistakes rather than punishing him or discouraging him.
Item 20 3.57 64 .716 3.26 57 .905
Weaknesses of employees are communicated to them in a non-threatening way.
Item 21 3.56 64 .718 3.37 59 .914
When behaviour feedback is given to employees they take it seriously and use it for their development.
Item 22 3.67 67 .727 3.41 60 .997
Employees take efforts to find out their strengths and weaknesses from their supervising officers or colleagues.
Item 23 3.50 63 .720 3.23 56 .884
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When employees are sponsored for training, they take it seriously and try to learn from the program they attend.
Item 24 3.98 75 .739 3.51 63 1.002
Employees returning from training programmes are given opportunities to try out what they have learnt.
Item 25 3.56 64 .861 3.15 54 .989
Employees are sponsored for training programs on the basis of their genuine training needs.
Item 26 3.83 71 .841 3.40 60 1.033
This organization ensures employee welfare to such an excellent that the employees can save a lot of their mental energy for work purposes.
Item 37 3.37 59 .784 3.58 65 .788
Job rotation in this organization facilitates employee development.
Item 38 3.31 58 .797 3.27 57 1.037
Overall HRDM 3.52 63 0.79 3.31 58 0.99
Source: Questionnaire Survey, January, 2012.
HRD mechanism-wise analysis
Training
Training is one of the most important functions that directly contribute to the development of human resources. In the private commercial banks a good number of respondents of the study expressed that when employees in their units were sponsored for training, they took it seriously and tried to learn from the programmes they attended (mean score 3.98, percentage score 75); employees returning from training programmes were given opportunities to try out what they have learnt (mean score 3.56, percentage score 64); and employees were sponsored for training programmes on the basis of genuine training needs (mean score 3.83, percentage score 71). Whereas in public commercial banks employees expresses that when employees in their units were sponsored for training, they took it seriously and tried to learn from the programmes they attended (mean score 3.51, percentage score 63) is less than compared to private banks; employees returning from training programmes were given less opportunity to try out what they have learnt (mean score 3.15, percentage score 54) compared to response in private commercial banks; and employees were sponsored for training programmes on the basis of genuine training needs (mean score 3.40, percentage score 60) is at average level in public banks and appeared excellent in private commercial banks.
The study shows that implementation of training is better in private banks under the study with mean value 3.79 and percentage score 70 percent in private commercial banks and implementation of training appeared to be at average level in public banks under the study with mean value 3.35 and percentage score 59. Thus it can be concluded that the training dimension is more implemented in private commercial banks as compared to public commercial banks.
Performance Appraisal and Feedback
Performance appraisal consists of a framework of planned goals, standards and competence requirements and plays an important role in integrating the individual‟s needs with the organizational needs. Performance appraisal of some type is practiced in most organizations all over the world. A good number of respondents in private commercial banks mentioned that the performance appraisal reports in their units were based on objective assessment and adequate information and not on favouritism,( mean value 3.56 and percentage score 64) but average level for this factor appeared in public commercial banks, (mean value 3.19 and percentage score 55); weaknesses of employees are communicated to them in a non threatening way and feedback communicated is taken by the employees seriously and used it for development have been scored better in private commercial banks i.e. percentage score more than 60 but in public banks these factors appeared to be at average level i.e. percentage score 60 and below. In private banks good number of respondents expressed that employees take efforts to find out their strengths and weaknesses from their supervising officers and colleagues i.e. mean value 3.50 and percentage score 63, but in public banks this factor appeared to be at average level i.e. mean value 3.23 and percentage score 56. Thus the overall score to performance appraisal and feedback put together has been scored 3.57, percentage score 64 in private commercial
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banks and mean score 3.3, percentage score 58 in public commercial banks under study. This indicates a good implementation of performance appraisal and feedback mechanisms in private commercial banks and an average level of implementation in public sector commercial banks.
Potential Appraisal and Career Planning
In organizations that subscribe to HRD, the potential (career enhancement possibilities) of every employee is assessed periodically. Such assessment is used for developmental planning as well as for placement. Pareek, Udai and Rao in their discussions of potential appraisal say that in most Indian organizations, the normal practice is to promote people on the basis of past performance. Most young executives coming to organizations are career minded, ambitious and looking for fast growth.
In private commercial banks and public commercial banks the normal practice to promote people on the basis of suitability rather than favourtism scored at average level i.e. mean score 3.41, percentage score 60 and mean value 3.32 and percentage score 58 respectively. Employee development through job rotation have been scored at average level i.e mean value 3.31, percentage score 58 and mean value 3.27, percentage score 57 in private and public commercial banks respectively. Efforts taken by the supervisors to encourage employees to innovate new ways has been rated average for both private and public commercial banks i.e mean value 3.30, percentage score 58 for private and mean value 3.14, percentage score 54 for public. Thus the overall score of all the items pertaining to this dimension put together has been calculated as 3.34 in private and 3.24 in public banks, which indicates an average implementation of potential appraisal and career planning. Both banks have to do a lot in this area for their own organizational development.
Rewards and Employee welfare
Factors Item No. Private Public
Mean % Std. Deviation Mean % Std. Deviation
People trust each other in this organization. Item 27 3.96 74 .613 3.83 71 .919
Employees are not afraid to express or discuss their feelings with their supervisors.
Item 28 3.81 70 .729 3.83 71 .997
Employees are not afraid to express or discuss their feelings with their subordinates.
Item 29 3.83 71 .771 3.84 71 .955
Employees are encouraged to take initiative and do things on their own without having to wait for instructions from supervisors.
Item 30 3.31 58 .668 3.27 57 .866
Delegation of authority to encourage juniors to develop handling higher responsibilities is quite common in this organization.
Item 31 3.44 61 .861 3.12 53 1.017
When seniors delegate authority to juniors, the juniors use it as an opportunity for development.
Item 32 3.89 72 .634 3.51 63 .937
Team spirit is of high order in this organization.
Item 33 4.11 78 .718 3.48 62 1.014
When problems arise people discuss these problems openly and try to solve them rather than keep accusing each other behind the back.
Item 34 3.61 65 .899 3.33 58 .880
Career opportunities are pointed out to juniors by senior officers in the organization.
Item 35 3.35 59 .894 3.31 58 .889
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Rewarding employee performance and behaviour is an important part of HRD. Organizations with better learning, training and development systems, reward and recognition, and information systems promoted human resource development climate.The study indicated that the mechanisms in both the organizations to reward any good work done or any contribution made by employees has been secured average i.e. mean value 3.13, percentage score 53 for private and mean value 3.31, percentage score 58 for public ;supervising officers efforts to take special care to appreciate an employees who does good work has been secured good in private banks ( mean value 3.50, percentage score 63) and an average in public banks (mean value 3.21, percentage score 55).
The employee welfare is also implemented in both types of organizations with an average level in private banks ( mean value 3.37, percentage score 59 ), and a good degree of implementation in public banks (mean value 3.58, percentage score 65). Similarly, when the employees makes the mistake his/her supervisors treat it with understanding and help them to learn from such mistakes rather than punishing or discouraging stands at good position in private banks and an average in public banks. Thus the overall score of all the items pertaining to this dimension put together has been calculated as 3.39 for private and 3.34 for public commercial banks. This indicates an average implementation of rewards and employee welfare mechanism.
Overall, it is found that training secured high compared to performance appraisal and feedback, potential appraisal and career planning, rewards and employee welfare. Thus it appears that training is highly implemented in private banks and others are at average in both sectors of banks.
OCTAPAC Culture
In order to study OCTAPAC culture 10 items were identified from the questionnaire and the scores on the responses of the sampled employees in the organizations have been calculated and presented in Table 3. The overall OCTAPAC culture in the organizations under study appeared to be good with 67% (mean value 3.66) in private banks and in public banks to be above average with 62% (mean value 3.49).
Table 3
OCTAPAC Culture
Source: Questionnaire Survey, January, 2012.
In private and public commercial banks, respondents expressed highly on trusting each other in the organization;employees are not afraid to express or discuss their feelings with their supervisors;employees are not afraid to express or discuss their feelings with their subordinates with percentage score of 70 and above. Similarly career opportunities are pointed out to juniors by senior officers in the organization and employees are encouraged to take initiative and do things on their own without having to wait for instructions from supervisors scores appeared to be at average level i.e. percentage score of below 60. Delegation of authority to encourage juniors to develop handling higher responsibilities is quite common in this organization scored above average in private banks while it appeared average in public banks.When seniors delegate authority to juniors, the juniors use it as an opportunity for development scored excellent in private banks with percentage of 73 percent while it was above average in public banks with percentage score of 63 percent. Team spirit was found excellent in private banks with percentage score of 78 percent while it was above average for public banks with percentage score of 62 percent.When problems arise people discuss these problems openly and try to solve them rather than keep accusing each other behind the back scored above average in private banks with score of 65 percent while in public banks it was found average with score of 58 percent.The organization's future plans are made known to the managerial staff to help them develop their juniors and prepare them for the future scored average in private banks with score of 57 percent while it appeared above average in public banks with score of 61 percent.
The study indicates that OCTAPAC culture in both banks seems to be above average but overall score result suggests that private banks are a bit ahead than public banks in OCTAPAC culture (mean value 3.66 for private and 3.49 for public). Though both banks are more or less same in this category there is a good deal of scope for improvement in both organizations.
Comparative analysis of HRD climate
The organization's future plans are made known to the managerial staff to help them develop their juniors and prepare them for the future.
Item 36 3.28 57 .834 3.42 61 .835
Average 3.66 67 0.76 3.49 62 0.93
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In comparison, it was observed that the units that engaged in private commercial banks provide HRD climate with an overall percentage of 64% (mean score 3.57) and the public commercial banks (61 percentage score, mean score 3.43). This means that good HRD climate or above average climate was prevalent in the units surveyed. Table 4shows the Average Mean Score (AMS), Standard Deviation (SD), z-value of the variables: General Climate, HRD Mechanisms and OCTAPAC and P- value of Public and Private commercial banks.
Table 4
Comparative Analysis of HRD Climate
Source:
Questionnaire Survey, January, 2012.
Significance at 0.05 levels, AMS= Average Mean Score, SD= Standard Deviation, E3= 1000
The Table 4shows that the general climate for private commercial banks with an average mean score of 3.56 is a bit better than public commercial banks, which is estimated at 3.49. The average mean score as regard to HRD Mechanisms and OCTAPAC culture for private banks have been computed at 3.52 and 3.66 respectively. But in case of public banks, the extent is below in these two variables which have been calculated at 3.31 and 3.49 respectively. It is also exhibited from the table that the extent of General Climate, HRD Mechanisms and OCTAPAC Culture of private commercial banks is a bit better than public commercial banks. This is clear from the average mean score that the overall HRD climate for private is a bit better than public commercial banks.
The overall average mean score of HRD climate for private and public has been computed at 3.57 and 3.43 respectively. The standard deviation of overall HRD climate for private is 0.77 and for public is 0.97. The p value of overall HRD climate for both banks has been worked out at .217 which is greater than Alfa value 0.05; therefore, alternative hypothesis is rejected. Hence there is not a significant difference between the extent of HRD climate prevailing in the private commercial banks and public commercial banks. The above result shows that the HRD climate for private and public is at same level.The researcher also found that the overall scores on private and public banks as a whole appeared to be 132.39 which is quiet at satisfactory level. The researcher also computed score on private, where the score appeared to be 135.69 which is also at satisfactory level and in public the score stands out at 130.19, though score for private is 5 points greater than public both are at more or less satisfactory level.
Employees are the valuable assets of any organization. The present study is an attempt to contribute to a betterunderstanding of the HRD climate prevailing in Private and Public commercial banks of Nepal and to make a comparative analysis to understand whether they have same degree of HRD climate or not. The General Climate, HRD Mechanisms and OCTAPAC culture are good in Private sector commercial bank compared to Public sector commercial bank. From the comparative analysis, it is concluded that there is not a significant difference between the extent of HRD climate prevailing in the private commercial banks and public commercial banks. Based on the overall analysis it can be concluded that the good HRD climate was prevalent in the organizations surveyed. Thus, the extent
Variables Public Private Z-value Mann-Whitney U
Asymp. Sig. (2-tailed
AMS SD AMS SD
General Climate 3.49
0.97
3.56
0.77 -.252 2.131E3 .801
HRD Mechanism 3.31 0.99 3.52 0.79 -1.446 1.866E3 .148
OCTAPAC 3.49 0.93 3.66 0.76 -1.685 1.812E3 .092
Overall HRD Climate
3.43
0.97
3.57
0.77
-1.236
1.912E3
.217
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of HRD climate prevailing in both the sector commercial banks seems to be at the same level. For organizational and employees performance it is important to focus on various aspects of the HRD climate prevalent in the organization.
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Multicultural Approaches to Sustainable Development of Human resource in Nepalese Public enterprises
Daya Raj Dhakal8
Abstract
Diversity is a reality in the modern workplace across the globe. A culturally diverse workforce can present some disadvantages for an organization, however if managed well it can yield many advantages, such as developing employee and organizational potential, improving customer service and business growth. The main objective of this paper is to explore the existing condition of multi culture approaches adopted by human resource manager and find whether this is strong enough for the sustainable human resource development in public enterprises Nepal. This paper explores four countries (U.S, Australia, China & India) multiculturalism approaches from different part of the world and explain how it manages for sustainable HRD. Theresult is compared with Nepalese public enterprises context. The findings show that Nepalese PEs are adopting and continuing traditional approach i.e. socialization for cultural diversity management from long time. Real sense, this practice is only for formality rather human resource development.
Key words: Multiculturalism, Sustainable HRD, Workforce diversity, Culture
I . Introduction
The long term sustainability of the organization depends on managers who understand and adopt the principles of sustainable development. One of the five key challenges for senior managers over the next ten years is the requirement to work well with new sorts of colleagues and to manage diversity in the workforce. The whole societal trend is towards being more accepting of diversity, valuing diversity, and that has a major impact. There is no doubt that it influences the leaders in this company to behave in a more sophisticated way around diversity issues. The term „diversity‟ refers significant differences between people relating to gender, ethnicity, age, religion that need to be considered in particular circumstances. A culturally diverse workforce, if not managed effectively, may create employee related problems caused by high turnover, absenteeism, reduced individual and organizational productivity. Effective management of diversity can give competitive advantages to the organization with optimization of human capital development and increasing opportunities to drive business growth (Plummer, 2003). Since each person has individual characteristics and culture, the integration of the human resources into sustainable development can be a complex process (Sadri et al., 2002). With globalization and rising migration as well as increasing competition to hire and retain best employees, companies around the world have to manage diverse workforces and therefore multiculturalism is basic issue to manage today's corporate world (Kwak, 2003).
Currently majority of PEs (major shares hold by government) of Nepal are operating under loss. NTC, NEPSE, Industrial District Management Ltd, and Hydroelectricity Investment and Development Company Ltd are four that have been able to providedividend. Therefore there is big question mark ahead why it happened. One basic reason behind this problem is well management of HR and cultural diversity (MOF, 2013).Hence this study carried out to analyze the effects of multiculturalism with to sustainable HR development in PEs Nepal.
II. Theoretical Framework
Multiculturalism and HRM
At first the concept has developed how multiculturalism affects the HRD and develops the relationship between cultural diversity of the employee to sustainable HRD. It is noted that many aspects of HRM are affected by differences in culture. The success of HRM activities across cultures is largely dependent on managers‟ abilities to understand and balance the dichotomy of various culture values and practices.If the practices do not fit locally, or expectations of local employees are incongruent with organization practices, the results are often more destructive than constructive (Aronson, 2002). Various country cultures with different values may lead to different strengths and capabilities and create sustainable competitive advantages (Hoecklin, 1994). Several theorists propose multilevel models in attempting to explain variations across cultures in HRM. Some have a tight culture and others loose. Some are collectivist and others individualist. However, numerous additional factors reflecting the macroeconomic
8 Mr. Dhakal is a lecturer at School of Business, Pokhara University, Pokhara. He can be reached at [email protected].
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environment, competition, and the legal–political environment will also have an influence.There is a growing realization among companies to fine tune their HR policy in alignment with growing diversity and multi culturalism(Albrecht, 2000).
III. Research Methodology
The study explores existing situation of current world explaining how they manage such multi cultures for sustainable HRD. For this, four countries (United States, Australia, China and India) have selected randomly and study their practices individually. Based on early literatures; the study explores present practices of multiculturalism of PEs Nepal. Compare this with four countries result and come to conclusions.
IV. Results and Conclusion
Multiculturalism in Australian Context
Australia has long been a diverse place, with over 500 language groups and evidence of interaction between indigenous people. Australia has a continuous history of absorbing new people and practiced world‟s religions. Almost 1 in 4 people living in Australia are born overseas.The largest net addition to Australia‟s population over the past 8 years was from people in New Zealand up by 127,000, while China contributed 60,800, South Africa 47,400 and India 43,800 (Australian Bureau of Statistic, 2007).
Current Practices in Australia
Australian organizations highly focused on training to adopt multi-cultural approach for sustainable HRD. The aim of this training program is to enable enterprises to better understand cultural diversity and manage it effectively and learn about cultural effect in the workforce for the organizational benefits(Allen et al., 2004)Cultural is most complex of all the many dimensions of diversity that influence a person‟s motivations. It is fair to say that managers in most Australian organizations have always managed diversity in one way. Most business owners and managers deal with situations involving cultural differences as they arise or simply avoid or ignore them(Sadri et al., 2002)
Multiculturalism in American Context
American communication culture is typically direct and explicit. They prefer direct warning to the employee if any problem arises. American managers are isolated not just socially but also physically. They do not like to visit employee desks and they would communicate with employee only as needed. In American cultures, people are treated differently according to their status. They defer to higher-status team members, their behavior is appropriate when most of the team comes from a hierarchical culture. In Mexican culture, you‟re always supposed to be humble. So whether you understand something or not, you‟re supposed to put it in the form of a question. But in American context it is quite opposite (Mannix& Neale, 2005)
Current Practices in America
Brett (2006) stated that in order cope such diversity into meaningful human resource development, the most successful teams and managers used four strategies for dealing with these challenges. They are:
Adoption
Adaptation works when team members are willing to acknowledge and name their cultural differences and to assume responsibility for figuring out how to live with them. It‟s often the best possible approach, because it typically involves less managerial time than other strategies. Structural intervention: A structural intervention is a deliberate reorganization to reduce interpersonal friction and conflict for one or more groups. This approach can be extremely effective when obvious subgroups demarcate the team or if team members are proud, defensive, threatened of one another. It might be create smaller working groups of mixed cultures or mixed corporate identities in order to get at information.
Managerial intervention
When a manager behaves like an arbitrator or a judge, making a final decision without team involvement, neither the manager nor the team gains much insight into why the team has stalemated. But it is possible for team members to use managerial intervention effectively to sort out problems. If problem arises through cultural diversity, managers may take initiative action and management power to manage cultural diversity for proper human resource management. This model is aggressive decision for the organization.
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Exit
An American member of a multicultural consulting team described the conflict between two senior consultants, one a Greek woman and the other a Polish man, over how to approach problems: “The woman from Greece would say, „Here‟s the way I think we should do it.‟ It would be something that she was in control of. The guy from Poland would say, „I think we should actually do it this way instead.‟ The woman would kind of turn red in the face, upset, and say, „I just don‟t think that‟s the right way of doing it.‟ It would definitely switch from just professional differences to personal differences. The woman from Greece ended up leaving the firm
Multiculturalism in Chinese Context
It is very hard for the Chinese to deal with cultural complexities that will arise over the next 20 years. China now has different cultures in the world competing with each other and that is a tremendous opportunity from business point of view. The companies able to seize such enormous opportunities are those that can operate successfully on a global multicultural basis (Li, 2006). Parhizgar (2002) stated that cultural opacity is the major limiting factor in global commerce to and from China. China remains culturally opaque to the rest of the world. Because China is one of the few countries in the world that in its entirety is not colonized, there is very little Western influence in China. The challenge in China is that the nature of management is intensely contextual. hang &Tharenou (2004) stated that institutional trust is the foundation for managing complexity and its absence is a major barrier to grow in China. Institutional trust and the Chinese approach to business relationships are mutually exclusive. Therefore bringing in “new blood” could add major value in retuning the culture to address this problem. However, Chinese business relationships are based on personal trust and this doesn‟t allow the enterprise to manage complexity. So, challenges in China are the lack of institutional trust – it is both contextual and cultural.”
Current Practices in China
Turn diversity to advantage in a unified culture of merit. Cultural diversity must be managed very closely. The key is to use cultural diversity to create one unifying culture based on merit and corporate success, rather than individual financial gain. Chinese executives have international interaction – not just for the language, but from a policy and compliance point of view, and to open each other‟s minds through exchange and rotation program. (Shen, 2009). Hence this is best solution to manage cultural diversity to sustainable HRD.
Bridge the cultural divide
Building an effective organization in China is about bridge-building – developing and blending the skills between Chinese and foreign executives, and getting these groups to recognize each other‟s strengths and limitations. HR managers address sustainability and blend together the advantages of Western and Chinese cultures to achieve organizational efficiency. However, this is a major challenge because in such fast-paced environment, people are impatient and want to grab opportunity when they can, so cross-cultural understanding is pushed aside (Shen& Edwards, 2006).Encourage knowledge-sharing and relate it to success: The hardest thing to do when managing a group of Chinese is to get them to share information with each other. It‟s an ongoing quest to create institutionalized trust – among Chinese and between different groups of people. Encouraging knowledge-sharing is a question of returning old influences so that collective and individual success can be understood in a new context. This requires a strong HR infrastructure; so that executives feel safe in the knowledge that while they are personally accountable, recognition and success from sharing knowledge (Chow & Crawford, 2004).
Multiculturalism in Indian Context
India is a country with many types of diversities in religion, languages, cultures, food preferences and many more. The term multiculturalism is not much used in India. Within Indian culture, the term unity in diversity is more commonly used. India has 1652 languages and highest diversity in terms of religion. India is culturally, linguistically, religiously and ethnically, one of the most diverse countries. Religiously, the Hindus form the majority, followed by Muslims and Christian and remaining are others. Hinduism is the most popular religion in India with almost three-forth of India being Hindus. India has a huge population of Muslims and Christians as well. Importantly, religions like Sikhism, Buddhism and Jainism have taken birth here and hence most of their significant places in terms of religion and history are present in India (Vashistha&Garga, 2014).With diverse cultures, languages, religions and communities, multiculturalism has its reflections in every sphere of social life in the country (Koshy, 2009). The idea of India as captured in the Indian constitution itself is as „an egalitarian, multi-cultural society which is established in rule of law, human dignity and harmonious co-existence of diversity inall its forms and shades. (EOCReport, 2008).India, with its tremendous diversity, stands first among nations with its much hyped contradictions. This being the case, the caste, and community and language proclivities of an employer in India could invariably reflect in the recruitment and HR policies of an organization.
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Current Practices in India:Changes of mindset
HR managers practicing and changed their old mindset to change the ways organization operate, shift organizational culture, redesign policies, create new structures and reform human resource systems. They are giving value of diversity. A cultural climate allows differences to be celebrated rather of merely tolerated. All employees are inspired to understand the competitive and moral advantage of diversity. They respect and support cultural diversity through the recognition of distinctive cultural and religious holidays, diet restrictions etc.
Redesign HR policies
Redesigned HR practice also need to be revamped.HR professionals often focus internally on their own function and roles, rather than externally. But the biggest challenge they face today is managing diversified group towards their organizations success. However, HR professionals should be at least as concerned multiculturalism with the outcomes of these activities.
Multiculturalism in Nepalese Context
Nepal is an extremely diverse country with over 100 ethnic and caste groups and practice a variety of religions, mainly Hinduism (80.6%) but also Buddhism (10.7%), Kiranta (3.6%), Islam, Christianity and other localized Religions. Each group has their separate cultural traditions of their own. Pluralistic and heterogeneous nature of Nepali society and the multiple identities that characterize its people and culture might produce unpredictable complication in the Nepalese organizations. Despites liberalized economic system PEs is not practicing foreign employees in their organization. Recruitment of PEshave their own policy. They rarely introduce foreign employees to fulfill their job vacancy. Hence HR managers need to manage internal cultural diversity which is comparatively comfortable. Managing internal diversity and difference for the purpose a nation building is indeed a tremendous challenge.
Before 1990, Human resource management in the majority of the enterprises of Nepal was not satisfactory because there were no training and transfer policies and strategies in public enterprises, poor state of employee participation, lacked systematic HR management. After 1990, when multiparty democracy restored, HRM practices has gradually changed (Adhikari,2000) Though, there is low integration of human resource policies and practices with business strategies, organizations are realizing the significance of HR practices (Adhikari&Gautam 2010).
Current Practices in PEs Nepal
Sole agenda of multi-cultural approaches to HRD in PEs Nepal is socialization. At the beginning when employee newly appointed he/she get training. The objective is to orient the employees that ensure adapt to the organizational culture as soon as possible. Apart from this picnic, tea program, sports and talk program are also organized for cultural adoption. The process includes introduce new employee to the organization. This process has been carried out from long time as a traditional approach. In real sense, HR managers are not serious about it rather just follow what their senior did. However, after democracy the situation is quite different but this practice is not changed.Managers are not rethinking for cultural diversity except socialization. For employees, this training opportunity is only for refreshment rather than learning for cultural diversity. Organizations too have no evaluation system of employee performance after they socialized. Therefore this socialization practices in PEs is only for formality rather human resource development.
Implication of the Study
Taking account of current issues of diversified culture group it is urgent to search alternative ways to deal cultural diversity and the problems of variations. One such perspective could be developed by focusing on shared meaning and identities rather than group difference. Such perspective assumes that Nepali nation may be depicted as identical with the 'mosaic of cultures' that it embodies. Similarly, PEs Nepal could be portrayed as encouraging knowledge-sharing between the diversified groups will be the best so that collective and individual success can be understood in a new context. For this, PEs Nepal should adopt more inclusive model of democratic system which could be built on the principle and shared to protect diversified groups for sustainable HRD.We should acknowledge that each society has its own particular character and history of pluralism and understanding of pluralism in different contexts. Thus, pluralism is an issue that needs to be addressed at the personal, social and cultural levels. In personal level it is about whom we are and how we define ourselves. In social level it concerns about how we interact with each other. We need to address pluralism at cultural level because it inevitably involves our beliefs, ideas and understandings. Therefore adoption strategy will be the best suited ideas as explained in American context for the betterment of PEs Nepal.
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