The Journal of Nepalese Business Studies

The Journal of Nepalese Business Studies BY hanni2604 The Journal of Nepalese Business Studies The Journal of Nepalese Business Studies vol. Ill NO. 1 Dec. 2006 Application of Management Control System in Nepalese Commercial Banks SaroJ RiJal ABSTRACT This paper attempts to examine the application of management control system in Nepalese commercial banks. The Nepalese commercial banking sector is very competitive. The commercial banks are competing mainly in service and many of them adapting differentiation strategy.

The priority of the majority of commercial banks is customer retention.

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Commercial banks are encouraging employees to pgrade their knowledge and skill. The working environment is also congenial in Nepalese commercial banks and the informal organization and communication system also gradually exist in some of the commercial banks of Nepal. However, the future research needs to examine the relationship between management control system and effectiveness of the commercial banks of Nepal. Key words: commercial bank, management control system IN NEPAL, DURING 1990S AND later many organizations faced major changes in competitive business environment.

Before 1990s organizations such as those operating in the airlines, tilities, and financial sectors were either government owned monopolies or operated in a highly regulated and non-competitive environment. These organizations were not subject to any great pressure to improve the quality and efficiency of their operations or by eliminating services that were making losses. Some public enterprises were getting direct subsidies from government for equalizing their operational losses.

Privatization of some of the government owned enterprises and deregulation in early 1990s changed the competitive environment in Nepalese business environment. Large number of Joint venture commercial banks and evelopment banks were established and the process is being continued. Commercial banks play significant role in the economic development in the nation.

In Nepal 19 commercial banks are in operation and providing services to the business and industries through long-term and short-term loans and facilitating business for foreign exchange and remittance via national and international network.

The development of banking system in Nepal was emerged after the liberalization and free market concept. In the beginning of 1980s, private commercial banks came into operation in collaboration with foreign banks. It took pace after 1990s and number of inancial institutions has been increased. All the newly established commercial banks tired to operate efficiently and effectively resulting high competition in Nepalese banking industry.

In this connection, the service operation of commercial banks has become more important for the number of reasons: Competition in financial other financial intermediaries. The cost of operating the bank branches has been increased with the need of better quality service. Increased in Non Performing Assets and 92 Application of Management Control System in Nepalese Commercial Banks Increased in liquidity position Today and more precisely in future, companies, rganizations and other decision making entities whether profit making or not, will face major management challenges.

Irrespective of whether the main goal of the organization is to make profit or not, it becomes necessary to institute a mechanism in those entities to control the activities of managers so that they remain on track of the proper routes as established by management. In order to keep activities of the organization in track a management control system is essential.

Control in the broad sense of the term relates both organizational structure (Chandler 1962) and informal process (Cyert and March 1963).

Management control system a logical integration of techniques to gather and use information to make planning and control decision, to motivate employees behavior, and to evaluate performance (Horngren, Sundem and Stratton 2002). It is the process by which managers assure that resources are used effectively and efficiently in the accomplishment of the organization’s objectives’ – in other words control using both financial and non-financial objectives.

It is specifically concerned with the process by which managers influence other members of the organization to implement the organizational strategies (GovindaraJan and Anthony 001). It involves number of activities: Planning what the organization should do Coordinating the activities of several parts of the organization Communicating information Evaluating information In coping with the competitive forces, there are three potentially successful generic strategic approaches to outperforming other firms in an industry; overall cost leadership, differentiation and focus (Porter 1998).

A control system is a set of formal and informal systems that designed to asset management in steering the organization towards the achievement of its purpose by ringing unity out of the diverse efforts of subunits and individuals (Marciallo and Kirby 1994).

The formal system and informal system are independent but they are highly interrelated, indistinguishable, subdivision of control system. Formal system makes possible the delegation of authority.

Formal documentation of structure, policies, and procedures assist members of the organization in performing their duties (Wu 2003). An effective set of formal control includes three major mechanism- operational plans, performance measurement systems, and feedback mechanism Stewart, 2002) Operational plans: Operational plans include the firm’s annual master budget and related supporting work plans. They provide the linkage between senior management’s strategic plans and the day-to-day organizational activities of each employee.

Performance Measurement: Performance measurement systems compile and report the result of the collective work activities on periodic basis. An effective performance measurement system presents both financial results and operating data on a responsibility basis. Feedback Mechanism: Feedback mechanism reports the variances between actual and planned performance. The variance is various interim reports. Informal system requires management a mindset that differs from that required for formal controls.

Informally” refers to the flexibility to deal with any action beyond the documentary discipline and regulation. In this 93 respect formally leads to a pattern of defined behaviors whereas informally leads to a pattern of interacting roles between two systems (Marciall and Kirby 1994). The informal control system consists of five components: Informal Control Process: Under certain conditions and uncertainty, management will try to gather more and accurate nformation from the dynamic environment and adapt organizational goal.

All these goal-directed actions are based on the experience and skill of management. Infrastructure: Infrastructure includes personal contacts and network.

A personal contact is a model of communication within the organization that acts an efficient method to exchange ideas and information between different levels of the organization Management Style and Culture: Management and culture represent the dominant way that the top management and whole organization have chosen to conduct their work.

Informal Rewards: Informal rewards are status oriented. Individual employees are rewarded not only in financial terms. The informal rewards are important because it encourages employees to carryout their Job efficiently Coordination and Integration: Coordination and integration is considered as interpersonal relationship, which can be changed and adapted to meet the needs of the organization members. Informal communication helps deeper discussion of sensitive issues in a softer and flexible environment.

The reward system is not so much the money; it is also the friendship and working relationship (Wo 2003). The quality of work life is having work environment where an employee’s activities ecome more important (Decenzo and Robbins 1996). It means implementing procedure that makes the work less routine and more rewarding for the employees. These procedures include autonomy, recognition, belongingness, progress and development, and external rewards. The importance of management control system has been increased significantly in recent years (Kald, Nilson ; Rapp 2002).

One indication of this growing importance is the impact of balance scorecard.

The balance scorecard is a management system (not only measurement system) that enables organization to clarify their vision and strategy and translate them into ction. The balance scorecard suggests that management views the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives: 1. The learning and growth perspective 2. The business process perspective 3. The customer perspective and 4.

Financial perspective The four perspective of the scorecard permit a balance between Short term and long term objectives External measures for shareholders and customers and internal measures of critical business process, innovation, and learning and growth Outcomes designed and the performance drives of those outcomes Hard inancial theory-Economic Value Added (EVA) has been developed for the measurement of financial performance of a company (Stern Stewart 1993). 94 EVA is both a measure of value and also measure of performance.

The value of a business depends on investor’s expectation about the future profits of the enterprise. Stock prices track EVA far more closely than they track earning per share or return on equity. A sustained increase in EVA will bring an increase in the market value of the company. EVA is changing the way managers run their business.

When business decisions are aligned with the interest of the shareholders, it is only a atter of time before these efforts are reflected in a higher stock price (Durant Micheal 1998). 1. Problem Identification Banking industry is high-risk business but not necessarily high profit industry.

It is quite difficult to manage risk and return in banking industry. The internal management system in some of the commercial banks of Nepal is inebriated from traditional management system of government. The pyramid shape organizational structure of some banks caused adverse effect in their business development.

In any institution human resources, which is not listed in balance sheet but very important intangible assets? Modern economy entered into information age. Competitive business environment in banking industry also caused lateral movement of human resources.

The traditional management theory could not completely fit the operational environment in banking business in Nepal. In this context, this paper attempts to find some hints from the well-developed theory to get some new ideas. To sum up, the major issues discussed in this paper are as follows: Competitive situation in Nepalese banking sector What kind of management control system do the Nepalese commercial banks apply? How the performance is evaluated? What reward system the commercial banks have been adopting? How commercial banks are encouraging their employees to learn new skill and knowledge? 2.

Data and Methodology The paper is based on both primary and secondary data. Primary data have been collected from the structured questionnaire developed for branch manager and employees of different commercial banks at different branches. The responses were received from the 26 managers and 76 supporting employees of 13 commercial banks. Secondary data have been collected from the website of Nepal Stock Exchange Limited, Nepal Rastra Bank, and concerned ommercial banks. The data, collected from various source have been analyzed using statistical tools and with the support of previously developed theory. .

Results Competitive Environment in Nepalese Commercial Banking Sector: The degree of competition in Nepalese commercial banking sector is very high. The majority (76. 9 percent) managers of the branches of the commercial banks of Nepal feel intense competition. The commercial banks of Nepal are competing mainly on service followed by the cost and other factors respectively. 95 commercial banks has been divided for two main areas of business: deposit and ending. The different branches of the same commercial banks at the different geographical location are adapting different strategy.

Around fifty two percent branches of commercial banks are concentrating on differentiation strategy and 47. 4 percent are following focus strategy to attract the depositors. In case of lending, majority of branches (52. 6 percent) of such banks are adapting differentiation strategy followed by focus (42. 1 percent) and cost leadership (5.

3 percent). Services Offered by Nepalese Commercial Banks: Nepalese commercial banks have been offering number of services to their customers. The services are ranging from 3 to more than 25. The majority of such branches of commercial banks (42. percent) are offering more than 21 products.

Similarly, 15. 4 percent and 30. 8 percent of such braches of commercial banks are offering 16-20 and 5-10 services respectively. Only few (1 1. 5 percent) are offering 1-5 services to their customers. In order to compete in highly competitive environment, these banks are continuously introducing new services through their branches established at different places in the country.

Majority (76. 9 percent) of such commercial banks are introducing 3-4 services every year, and only 1 1. percent of such braches of the commercial banks are offering 5-6 and 6-7 services every year.

Marketing of New Services: Twenty-three percent branches of the commercial banks of Nepal promote their products/service very aggressively. Similarly, 30. 8 percent and 46.

2 percent branches promote/advertise their new services aggressively and normally respectively. The majority of the commercial banks branches are concentrating in maintaining (retaining) customers and only 28 percent of such branches are competing for customer acquisition. Target Setting Practice: All the commercial banks of Nepal set target for their branches for he purpose of planning and controlling the activities.

In majority (96. 2 percent) of the branches the target is fixed in terms of number of clients, amount of deposit, and the amount of lending. Only in few (3.

8 percent) braches the target is fixed in other terms. Concerning to individual level, 83. 3% employees responded their banks set target for them and only 16. 7% responded they don’t get any target for their performance. Out of the individuals who think their bank set target for them, 95. 4% feel the target is clearly communicated to them and only 4.

6% feel that the target is not clearly communicated to them.