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Investigating the Impact of Governance, Risk and
Compliance on Investor Confidence in Maltese Credit
Institutions
Erica Kaye Scicluna
A dissertation submitted in partial fulfilment of the requirements of
the Degree of Bachelor of Commerce (Honours) in Banking and
Finance at the University of Malta.
May 2014
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Declaration of Authenticity
Faculty of Economics, Management & Accountancy
I, the undersigned, Erica Kaye Scicluna, do hereby declare that I am the legitimate
author of this dissertation, titled:
“Investigating the Impact of Governance, Risk and Compliance on Maltese Credit
Institutions”
And that it is an original work. No portion of this work has been submitted in
support of an application for another degree or qualification of this or any other
university or institution of learning.
ERICA KAYE SCICLUNA MAY 2014
18693(M)
i
Abstract
This research was carried out as a reaction to the post financial crisis era. The study aimed
to investigate whether the perceived adherence by financial institutions to Governance,
Risk and Compliance (GRC) practices as a holistic concept would increase consumer
confidence in credit institutions in Malta.
The research collected primary data through two different questionnaires, which were
distributed to both the general public and also to four officials from Maltese credit
institutions. By analysing the consumers’ opinions and contrasting these with those of
experienced professionals in the industry, an insight of the gaps between the professionals’
opinions and that of their customers was achieved.
The findings indicate that Governance, Risk and Compliance practices have a positive
impact upon investor confidence in the Maltese context. It also emerged that good
Corporate Governance had the highest impact on increasing investor confidence. The
findings also suggest that by emphasizing their adoption of strict Governance, Risk and
Compliance, local credit institutions would be achieving a more successful result than if
they were to simply use media campaigns or to offer high interest rates for depositors.
The results also seem to indicate that the growing level of tertiary and post-tertiary
education is also helping to increase investor awareness of the current financial
environment and the importance of assessing elements other than financial return when
choosing a financial institution. Thus, the use of GRC may ultimately bring benefits to the
credit institutions using it, apart from increasing investor confidence.
These findings build upon results seen during the review of existing academic literature. If
confirmed by a more extensive study, the results of this research could have a significant
impact on the shaping of local financial institutions’ future strategies.
Keywords: Governance; Risk; Compliance; GRC; Banking; Investor Confidence.
ii
Acknowledgements
I wish to convey my sincere gratitude to my Tutor, Dr. Mark Azzopardi. His guidance,
knowledge and corrective expertise were invaluable throughout this study.
My gratitude is also extended to the bank officials from HSBC Malta plc, Bank of Valletta plc,
Banif Bank (Malta) plc and Mediterranean Bank plc for allowing me to interview them and
thus gain further insight into my study.
I would also like to thank all the individuals who took the time out of their busy day and
filled in my questionnaires, thus providing me with data.
Last but not least, I would like to thank my family for being there whenever I needed them,
both for encouragement and for their infinite support and love which they have always
shown me.
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Table of Contents
Abstract ..................................................................................................................................... i
Acknowledgements .................................................................................................................. ii
List of Figures ......................................................................................................................... viii
List of Appendices .................................................................................................................... x
List of Abbreviations ................................................................................................................ xi
1 Introduction ..................................................................................................................... 1
1.1 Background .............................................................................................................. 1
1.2 Main Aims and Objectives ....................................................................................... 2
1.3 The Importance of the Study ................................................................................... 3
1.4 Study Outline ........................................................................................................... 4
2 Literature Review ............................................................................................................. 5
2.1 Introduction to GRC ................................................................................................. 5
2.1.1 Governance ...................................................................................................... 5
2.1.2 Risk ................................................................................................................... 6
2.1.3 Compliance....................................................................................................... 7
2.2 Integrated GRC ......................................................................................................... 7
2.3 GRC and IT: A Crucial Partnership .......................................................................... 10
2.4 Value Added ........................................................................................................... 11
iv
2.5 The 2008 Financial Crisis – Loss in Investor Confidence ........................................ 12
2.5.1 What caused the Global Banking Crisis? ........................................................ 12
2.5.2 Financial Institutions’ role .............................................................................. 12
2.5.3 Regulators ...................................................................................................... 13
2.6 Investor Behaviour ................................................................................................. 14
2.6.1 Investor Influences ......................................................................................... 15
2.7 GRC and Investor Decisions ................................................................................... 17
2.8 Conclusion .............................................................................................................. 17
3 Methodology .................................................................................................................. 18
3.1 Brief Overview ........................................................................................................ 18
3.2 Determining the Research Design.......................................................................... 18
3.2.1 Primary Research ........................................................................................... 18
3.2.2 Type of Data ................................................................................................... 19
3.2.3 Nature of Data................................................................................................ 19
3.3 Sample Design Process and Rationale ................................................................... 19
3.3.1 Sample Design – General Public Questionnaire ............................................. 20
3.3.2 Sample Design – Bank Official Questionnaire ................................................ 20
3.4 Data Collection Method ......................................................................................... 21
3.5 Questionnaires Design ........................................................................................... 22
v
3.5.1 Pre-Testing of Questionnaires ....................................................................... 22
3.5.2 Questionnaire Design – General Public ......................................................... 22
3.5.3 Design – Manager Interview Sessions............................................................ 22
3.6 Why not conduct the questionnaires online?........................................................ 23
3.6.1 Sampling Issues .............................................................................................. 23
3.6.2 Other Sampling Concerns .............................................................................. 23
3.7 Secondary Research ............................................................................................... 24
3.8 Limitations of the study ......................................................................................... 24
4 Analysis & Results .......................................................................................................... 25
4.1 Demographic Questions ......................................................................................... 25
4.1.1 Question 5 – Gender of Respondents ............................................................ 25
4.1.2 Question 6 – Age of Respondents .................................................................. 26
4.1.3 Question 7 – Respondents by Education ....................................................... 27
4.1.4 Question 8 – Respondents by Income ........................................................... 28
4.2 Likert Scale and Preference Questions .................................................................. 29
4.2.1 Q 1.1 – High Interest Rates ............................................................................ 29
4.2.2 Q 1.2 – Adverts in the Media ......................................................................... 31
4.2.3 Q 1.3 – Reputation of the Credit Institution .................................................. 32
4.2.4 Q 1.4 – Location of Branch ............................................................................. 33
vi
4.2.5 Q 1.5 – Low Charges for Products .................................................................. 34
4.3 Consumer Confidence ............................................................................................ 35
4.3.1 Q 2.1 – High Interest Rates increasing Confidence ........................................ 35
4.3.2 Q 2.2 – Low Charges and Confidence ............................................................ 36
4.3.3 Q 2.3 – Adequate Risk Management ............................................................. 37
4.3.4 Q 2.4 – Compliance with Local Law ............................................................... 38
4.3.5 Q 2.5 – Well-Governed Bank .......................................................................... 39
4.3.6 Sub-Analysis by Education ............................................................................. 40
4.3.7 Question 3 – The Effect of the Financial Crisis ............................................... 44
4.3.8 Question 4 - Lower Interest Rates in return for a well-run Institution ......... 45
4.4 Results of Interviews with Credit Institution Officials ........................................... 46
4.5 Findings and Comparative Analysis........................................................................ 47
4.5.1 Interest Rates ................................................................................................. 47
4.5.2 Adverts in the Media ...................................................................................... 47
4.5.3 Reputation of the Bank .................................................................................. 47
4.5.4 Location of Branch ......................................................................................... 48
4.5.5 Low Charges ................................................................................................... 48
4.5.6 Good Governance, Risk Management and Compliance ................................ 49
4.5.7 Accepting a lower credit interest rate due to strong GRC practices ............. 50
vii
4.5.8 Changes in customers’ confidence in local Credit Institutions ...................... 50
4.5.9 Officials’ Personal Opinions ........................................................................... 50
4.5.10 Remarks.......................................................................................................... 51
5 Discussion, Conclusion and Recommendations ............................................................. 52
5.1 Discussion of Results .............................................................................................. 52
5.1.1 GRC ................................................................................................................. 52
5.2 Limitations.............................................................................................................. 54
5.3 Recommendations for Further Research ............................................................... 55
5.4 Conclusion .............................................................................................................. 56
Bibliography ........................................................................................................................... 57
Appendix I – General Public Questionnaire ....................................................................... 64
Appendix II – Bank Official Questionnaire ......................................................................... 66
Appendix III – List of Credit Institutions from the MFSA ................................................... 68
viii
List of Figures
Figure 1.1 – Structure of the Study .......................................................................................... 4
Figure 2.1 – GRC Framework ................................................................................................... 9
Figure 4.1 – Respondents by Gender ..................................................................................... 25
Figure 4.2 – Respondents by Age ........................................................................................... 26
Figure 4.3 – Respondents by Education ................................................................................. 27
Figure 4.4 – Respondents by Income ..................................................................................... 28
Figure 4.5 – High Interest Rates ............................................................................................. 29
Figure 4.6 – Sub-Analysis by Gender...................................................................................... 30
Figure 4.7 – Adverts in the Media .......................................................................................... 31
Figure 4.8 – Reputation of the Credit Institution ................................................................... 32
Figure 4.9 – Location of the Branch ....................................................................................... 33
Figure 4.10 – Low Charges for Products ................................................................................ 34
Figure 4.11 – High Interest Rates Increasing Confidence ...................................................... 35
Figure 4.12 – Low Charges and Confidence ........................................................................... 36
Figure 4.13 – Adequate Risk Management ............................................................................ 37
Figure 4.14 – Compliance with Local Law .............................................................................. 38
Figure 4.15 – Well-Governed Bank ........................................................................................ 39
Figure 4.16 – Tertiary Level of Education .............................................................................. 40
Figure 4.17 – Secondary Level of Education .......................................................................... 41
Figure 4.18 – Post-graduate Level of Education .................................................................... 41
Figure 4.19 – The Importance of Corporate Governance ...................................................... 43
Figure 4.20 – The Effects of the Financial Crisis ..................................................................... 44
ix
Figure 4.21 – Lower Interest Rates in Return for a well-run Institution ................................ 45
Figure 4.22 – Confidence Increase ......................................................................................... 49
x
List of Appendices
Appendix I General Public Questionnaire
Appendix II Credit Institution Official Questionnaire
Appendix III List of Credit Institutions
xi
List of Abbreviations
GRC Governance, Risk & Compliance
IT Information Technology
MFSA Malta Financial Services Authority
OECD Organisation for Economic Co-operation & Development
UOM University of Malta
1
1 Introduction
1.1 Background
We are living in a post financial crisis era - a financial crisis which was triggered by the U.S.
subprime mortgages and which saw the collapse of Lehman Brothers and the take-over and
bail outs of other household names like Merrill Lynch & Co, Inc., Bradford and Bingley, AIG
and Royal Bank of Scotland among others. The so-called post crisis era is indicated by a
more stable state after the crisis (Xiao-yan, et al., 2011). However, many uncertainties
remain in the world’s economy as the effects of the crisis continue to reverberate in the
financial markets around the globe.
One effect of the crisis was a decrease in public confidence in financial institutions. There
was a massive fall in markets as well as a credit crunch which turned into the worst
recession in 80 years (The Economist, 2013).
New legislation has, as a result, been introduced by the world’s leading economies to
reform the financial system. This is being done in an attempt to avert future similar crises,
through further regulation of the financial sector (Rhee, 2013). An example of this new
legislation is the Dodd-Frank Act in the United States, the Alternative Investment Funds
Managers Directive (AIFMD) in Europe as well as Basle III.
2
1.2 Main Aims and Objectives
This study aims to understand whether this change has had an effect upon Maltese
consumer confidence in local institutions and whether they value a financial institution’s
Governance, Risk and Compliance practices. The individual concepts of Governance, Risk
and Compliance can be found in countless research papers and articles. GRC combines
these factors and tries to render them as three different facets united by the same
objective, which is to bring benefit to an organisation.
However, “… this emerging perception – contrary to the acronym itself – is not well-
established” (Racz, et al., 2010, p. 1). It is a concept which is difficult to define and indeed,
there is no rigid scientifically grounded definition, although a tentative one is provided
within the review of literature.
The objective of this research is to combine the emerging concepts of integrated GRC, in
order to determine whether this affects investor confidence. It is of utmost importance
that consumers continue to trust the institutions where they deposit their money and
invest their savings as otherwise the financial well-being of a country and even of the global
economy will be put at risk. If integrated GRC can positively affect consumer confidence,
this will in turn bring benefits to credit institutions and the world economy.
As a result of the series of financial scandals and the recent crisis a new flood of financial
regulation, such as the Sarbanes-Oxley Act and Basel III to mention but a few, has emerged.
The key criterion for regulation is that regulation should make it more difficult for bad firms
to imitate good firms. However, theories such as described by Teschner, et al., (2008), state
how the financial crisis did not arise from failures in regulation but from bad governance
3
and poor risk management. Short term memory is a persistent problem in financial markets
and now is the time for bank managers to establish a strong risk culture. There are various
debates as to regulation versus governance such as Wood, (2006). This is where the new
school of thought regarding GRC practices needs to get involved.
The practice of GRC should ultimately provide benefit to the credit institution using it, as
the research which has been carried out so far suggests; this will be reviewed in depth in
the next chapter. By increasing investor confidence in a credit institution, that same
institution could then experience gains, both reputation wise as well as financially.
The main problem encountered by this study is the lack of existing data on the subject at
the moment, however, that also leaves a wider field to be explored.
1.3 The Importance of the Study
This study was primarily encouraged by the current market environment, as well as the
potential impact of GRC, which could prove decisive towards credit institutions’ continued
success or otherwise. Although relatively new, GRC is a subject which should not be ignored.
One purpose of this study is to elicit further research and encourage pro-activeness within
the context of Maltese Credit Institutions. Malta’s reputation as a centre for international
banking is gaining ground. With the influx of several leading banking groups and more
expected to follow suit, Malta is thriving as a reputable international banking centre with a
strong financial services industry. This significant change has been occurring in the past
decade where previously there were only four main banks in Malta (Finance Malta, 2014).
Malta has a strong regulatory body through the Malta Financial Services Authority (MFSA)
and this has been a positive influence for local credit institutions. However, the level of
4
Governance, Risk Management & Compliance needs to be relied upon in order to perhaps
increase investor confidence. Whilst Malta’s financial system has remained strong despite
the challenges of the crisis, it is important to continue to strengthen it through good GRC
practices, in order for banks to retain and increase investor confidence despite the
uncertainty which remains in the markets. The use of a GRC framework is one of many
tools which a credit institution may use to ensure its smooth operation while maintaining
local and international standards.
1.4 Study Outline
After a brief introduction about the subject matter of the dissertation, more depth will be
achieved through the relevant literature review in Chapter Two. The research methodology
employed is described in detail in Chapter Three, with the analysis of the results in Chapter
Four. The last chapter discusses the final outcome of the dissertation as well as a number of
recommendations for further research. These are presented in Chapter Five.
Chapter 1: Introduction
Chapter 2: Literature Review
Chapter 3: Methodology
Chapter 4: Analysis of Results
Chapter 5: Discussion, Conclusions and Recommendations
Figure 1.1
5
2 Literature Review
2.1 Introduction to GRC
The objective of this literature review is to assess the view of academics on the subject of
integrated Governance, Risk & Compliance (GRC). The focus is not on the individual terms
but taking a holistic approach and considering these factors collectively. Its evolution and
close ties with Information Technology (IT) will be shown. The perceived merits of GRC are
discussed, along with the effects of the 2008 financial crisis on investor confidence.
The individual terms governance, risk and compliance have long been in widespread use.
So much so, that the distinction between one and the other might appear blurred to some
extent (Tarantino, 2008). While these individual facets are briefly described, the heart of
this literature review is to introduce these terms as a single concept – GRC.
Furthermore, this review seeks to understand what drives investor behaviour, particularly
investment buying decisions. It delves into the relative theories developed over the years.
Finally, it looks at the effect of GRC on areas related to investor purchasing such as bond
prices and firm performance.
2.1.1 Governance
Governance, or Corporate Governance, has gradually become a phrase in more common
use. Sir Adrian Cadbury, chairman of the Committee on the Financial Aspects of Corporate
Governance, back in 1992, defined Corporate Governance as the “… whole system of
controls, both financial or otherwise, by which a company is directed and controlled”
(Cadbury, cited in Malin, 2011, p. 3).
6
Since the late 1980s and the early 1990s, corporate governance issues such as the pay of
company executives, the powers and responsibilities of boards of directors, rules governing
takeovers, corporate social responsibility and corporate impact on the environment have
increased in importance. Hence, there has been greater scrutiny of corporate governance
by the public as well as increased regulation governing such issues (Blaire, 1995). The
Organisation for Economic Co-operation and Development (OECD) in 2004 published a set
of principles to be followed by organisations and institutions. The MFSA then published its
own set of guidelines locally based upon these principles (MFSA, n.d.).
2.1.2 Risk
Risk Management’s roots date to the 1950s in the United States’ insurance industry. At the
time, despite limited coverage, the cost of insurance became very high. This led to higher
awareness of the importance of risk control. Since then, the spread of companies
recognizing its importance and hence adopting and implementing risk management
structures has increased.
Specifically in the financial services industry, introduction of internal risk management
systems and capital models took off in the new millennium. The Sarbanes Oxley Act of
2002 in the United States led to the investment of more effort in Enterprise Risk
Management. This term describes very accurately the wider approach to risk management,
which includes integrated, strategic, holistic and enterprise-wide risk management.
Reporting requirements have also increased (Hopkin, 2013). In addition, it can be said that
from a GRC perspective, the principle interest is Enterprise Risk Management (ERM).
7
2.1.3 Compliance
Compliance has become an even more important function within the financial services
sector in light of ever increasing regulations and legislation governing this area. There has
been a tsunami of regulation in recent years as the control and monitoring of financial
services activities has become more rigorous. The scrutiny is set to increase even further as
a result of the financial crisis. In fact, stringent regulations to ensure capital adequacy,
sufficient liquidity and improved governance of financial services organisations have
resulted from the Basel III accord. Regulations are also in place to ensure proper conduct,
management and employee behaviour. Not complying with all these rules and regulations
can result in serious repercussions for a financial services organisation and that is why the
role of the Compliance department is crucial to ensure the smooth operation of a financial
institution.
2.2 Integrated GRC
GRC is an emerging and ever growing topic within the business and Information Technology
(IT) domain. PricewaterhouseCoopers (2004a, p. 3) noted: “In itself GRC is not new… What
is new is an emerging perception of GRC as an integrated set of concepts.”
In the White Paper entitled ‘Integrity-Driven Performance’, (Pricewaterhouse Coopers,
2004b), proposed an integrity-driven performance approach meant to bridge the gaps in
businesses where Governance, Risk and Compliance were viewed as separate activities
which were separately managed. The White Paper also suggested that if GRC is strategically
integrated into their businesses, organisations would be able to create value. According to
8
a META Group study, it was noted by respondents that the following performance
dimensions can be enhanced through an integrated approach:
Reputation value by 23%;
Employee retention by 10%;
Revenue by 8% (Pricewaterhouse Coopers, 2004b).
The same research showed that apart from the above, business leaders were of the opinion
that an integrated approach could have a beneficial effect on the cost of capital and on the
cost of insurance.
However, no scientific research exists on GRC as a concept (Racz, et al., 2010). A definition
is suggested, based on a merging of observations, an extensive GRC review as well as an
analysis of previous definitions. In consultation with 131 GRC professionals, the final
definition emerges as follows:
“GRC is an integrated, holistic approach to organisation-wide governance, risk and
compliance ensuring that an organisation acts ethically correct and in accordance
with its risk appetite, internal policies and external regulations through the
alignment of strategy, processes, technology and people, thereby improving
efficiency and effectiveness” (Racz, et al., 2010, p. 7).
9
With this definition, a framework may be visualised:
In fact, research has shown that competitive advantage may be achieved through this
integrated approach. A report by KPMG also mentions a framework approach towards GRC
(KPMG, 2008).
Figure 2.1
Source (Racz, et al., 2010).
10
2.3 GRC and IT: A Crucial Partnership
The relationship between GRC and IT is one which cannot be ignored. As with most
problems these days, a software solution is available. There are a large number of
technological oriented views of GRC. As early as 2004, META Group research suggested
that using technology for GRC purposes brings sizeable projected benefits.
“Technology deployed to meet GRC objectives can deliver substantial benefits and
improvements by enabling an enterprise view of risk, thereby helping to facilitate
accountability and ownership. These in turn help build confidence and trust with
key stakeholders, including the board, investors and regulators” (Pricewaterhouse
Coopers, 2004b, p. 8).
Banham (2007), opines that in general GRC should be thought of as an Information
Technology platform in order to centralise procedures and documentation requirements.
On the contrary, KPMG (2008) state that GRC should be a concept embedded in the culture
of the organisation and is more than a software solution. The author believes that
technology is a key factor, but only as an enabler of GRC.
A company’s GRC professionals should work in harmony in order to gauge technology
needs, which can be coupled with the company’s already existing IT assets.
11
In his article ‘Enabler of GRC: What does Utopia look like?’, Dittmar (2006) suggests three
steps to align GRC and IT:
1. GRC should be aligned to core business processes;
2. Technologists and strategists must pool their knowledge in order to standardise the
processes required;
3. The use of technology to automate and even enforce GRC will require IT to deliver
on a much broader scale as well as increasing cross-functional communication.
This is further confirmed by the results of the 2009 Business Finance GRC Maturity Study,
stating, “Technology, ...helps, but the right GRC processes must be in place for the
technology to support” (Krell, 2009, p. 1). Technology can therefore help decision-makers
since it enables the relevant information to be collected and delivered (Krell, 2009).
2.4 Value Added
A large number of surveys over many years have shown the idea that a well governed
company will induce investors to pay a stock premium. An example of this can be seen in a
survey by McKinsey & Company in 2002. This survey suggests that premiums were as high
as 40 percent in developing countries. Tarantino (2008) suggests that a lower risk
investment will always be seen as a safe haven and this premium can increase if combined
with stability and growth. In fact, increased GRC should “open up new markets and increase
growth” (Tarantino 2008, p. 25).
In contrast to this however, in a survey conducted by PricewaterhouseCoopers, only
approximately one third of CEOs believe that GRC impacts their relationship with ratings
agencies (38 percent), their financial performance (37 percent), their operational
12
excellence (37 percent) and also has an impact on customer loyalty (32 percent)
(PricewaterhouseCoopers, 2004a).
The White Paper ‘Integrity-Driven Performance’ published in the same year proposed that
“organisations can create value by strategically integrating GRC into their businesses to
form an ethical and operational backbone against which business is managed”
(Pricewaterhouse Coopers, 2004b, p. 7).
2.5 The 2008 Financial Crisis – Loss in Investor Confidence
The global banking crisis of 2008 has dealt a severe blow to investor confidence. As firms
collapsed, investors found themselves in a position of not knowing which financial
institution to trust. Past scandals, such as the Enron and Parmalat debacles, combined with
the unfolding events raised doubts on the balance sheets of financial institutions and on
their creditworthiness.
2.5.1 What caused the Global Banking Crisis?
The two main culprits are identified as the financiers and the regulators. Investor pressure
on financial institutions for ever higher returns as well as political pressures to maintain the
‘status quo’ in a period of economic stability and low inflation also bear part of the blame
(The Economist, 2013).
2.5.2 Financial Institutions’ role
The first identified cause is the financiers themselves. A key factor was the amount of
mortgages given in the United States to people whose credit history was poor and who
13
could not really afford to repay them. These were then combined together by the big banks
with the premise that since there were a large number of them the risk was being reduced.
It was also assumed that property prices in American cities were independent of each other.
This was unfortunately not the case as prices starting falling everywhere in 2006.
These mortgages were collectively used to guarantee collateralised debt obligations (CDOs).
These were rated by rating agencies such as Standard and Poor’s and Moody’s. A number
of these CDOs had AAA ratings. This lulled investors into a false sense of security. The low
interest rate environment also helped make these securities seem more attractive.
Severe financial losses were suffered by US and European financial institutions in 2007
following the dramatic fall in property prices which lead to loan repayment defaults and
foreclosures. These defaults and foreclosures created havoc in the structured finance
instruments market since these instruments were backed by these property loans. Mutual
trust was eroded, inter-bank liquidity decreased and hence cost of funds increased. The
liquidity crisis escalated into a general systemic crisis which brought about a number of
financial failures (Buttigieg, 2012).
Financiers’ bonus and remuneration packages encouraged the chasing of short-term profits
to the exclusion of a long-term risk-aware policy.
2.5.3 Regulators
According to (The Economist, 2013), central bankers and other regulators also have their
share of responsibility, “for mishandling the crisis, for failing to keep economic imbalances
in check and for failing to exercise proper oversight of financial institutions.”
14
When regulators did nothing to stop Lehman Brothers from going bankrupt, trust flew out
of the window. With a big name such as Lehman Brothers going under, investors felt that
no-one could actually be trusted. The resulting panic led to regulators having to bail out a
number of companies. However, even before this, regulators had ignored outflows of
capital from European Banks which were buying American securities, sometimes even
borrowing to purchase these. The Basel definition of capital was also not strict enough.
The international, regional and national financial regulations in force at the time did not
identify the risk being taken by financial institutions. Thus they failed to take any mitigating
action to prevent the crisis. This has subsequently led to a number of initiatives aimed at
avoiding future similar happenings. In the European Union, the De Larosiere Report led the
policy response to the crisis. In the United States, the Consumer Protection Act and the
Dodd-Frank Wall Street Reform led the way (Buttigieg, 2012).
Five years on, the effects of the crisis are still being felt.
2.6 Investor Behaviour
Numerous studies have been undertaken to examine what drives an investor to purchase a
particular stock/equity or to make other purchasing decisions such as a bank deposit.
In the 1960s, Eugene Fama’s PH.D dissertation helped to evolve the Efficient Market
Hypothesis. This stated that in an active market where there are a numerous well-informed
and intelligent investors, securities prices will be correct taking into consideration all
information available to these investors (Fama, cited by Karz 2011).
15
2.6.1 Investor Influences
First of all, when buying a stock or financial product, all investors are expecting to make a
profit or some kind of return. Thus it follows that, when purchasing an equity, an investor
is expecting its price to go up. In a study conducted in 2012 to investigate investor
rationality and financial decisions, Cohen & Kudryavtsev (2012) concluded that decisions to
invest in stocks were “influenced by expectations, past experience in the capital market, and
knowledge about the past performance of selected market indices” (Cohen & Kudryavtsev,
2012, p. 11). On the other hand, investors in corporate bonds were influenced by interest
rate change expectations. Similarly, when depositing funds in account, the return is
considered adequate for the depositor’s expectations.
According to Moldovan (2010), human emotions have a big role to play when taking
investment decisions. When prices are going up (bull market) people see this as a positive
sign and continue buying, while when prices are going down and shares start being sold
(bear market), fear and doubt keep increasing. Investors tend to ignore anything but the
most obvious signs.
A number of theories have evolved regarding investor behaviour such as:
Anchoring (Kahnemann and Tversky , 1974);
Mental Accounting (Thaler, 1985);
Regret Theory (Boles, 1995);
Overconfidence (Daniel, Hirshliefer and Subrahmanyam , 1998);
Loss Aversion (Barberis and Huang, 2001);
Optimism and Wishful Thinking (Purohit & Srivastava, 2013).
16
Aspara and Tikkanen (2011), in a study to determine whether other influences other than
prospective financial returns and risk influenced investor decisions, found that their study
participants experienced motivation which was not only limited to the financial returns.
They also found that the motivation to invest in a company increased the higher the
investor’s positive attitude to same. They concluded:
“This finding implies that the influence of company effect on investment decision
making goes beyond the alleviating influence that affect (heuristic) has on
information-processing challenges (MacGregor et al. [2000], Slovic et al. [2007]). The
finding suggests that investors may use company affect as a shortcut for selecting a
certain stock over others, when facing the inherent difficulties in estimating the exact
financial return-risk profiles of alternative stocks. The finding also suggests that
company affect can also lead the investor to be prepared to give up on the
motivation to pursue a stock that has the absolutely optimum expected return-risk
profile, that is, partially substitute motivation to invest in a likeable company for the
financial returns motivation” (Aspara & Tikkanen 2011, p.85).
17
2.7 GRC and Investor Decisions
In view of the above, does GRC actually effect investor decisions and perceptions? Does it
have any influence on firm performance?
Alali et al., (2012), found evidence that firms with increased corporate governance had
higher credit ratings. They also concluded that information regarding changes in corporate
governance was value relevant since any improvement helped obtain an investment grade
rating status change.
It has been shown that while good corporate governance might have a negative effect on
banks’ stock market valuations during crises and post-crises, “banks with strong corporate
governance practices had substantially higher stock returns” after the financial crisis (Peni &
Vähämaa 2012, p.19).
2.8 Conclusion
GRC is still a work in progress, evolving with the times. The concept is still lacking in
scientific research but it is definitely a growing area. Implementing it is certainly not
without its challenges and it is up to further research to prove that the benefits definitely
outweigh its costs. However, existing literature does imply that good GRC practices lead to
better financial performance. Since financial performance is linked to investor buying
decisions this is positive for investors. No literature has been found by the author whether
stricter GRC practices directly impact investor decisions. It will be the objective of this study
to find out whether this is so, at least in Malta.
18
3 Methodology
3.1 Brief Overview
The objective of this study is to throw light upon whether GRC practices in credit
institutions have an impact on investor decisions and confidence. The aim is not to simply
gather information regarding the practices of GRC in Malta but to see whether these
practices evolve into benefits which customers appreciate. Thus GRC practices would
ultimately outweigh the costs of implementing them.
The study commenced through exploratory research, where an extensive review of
literature has been carried out in order to understand the uses of GRC, as it is a relatively
new concept. Exploratory research emphasises insights and ideas (Churchill & Iacobucci,
2010). Through this, the research problem was defined and narrowed which led to the
formulation of the research questions, subsequently tested in the primary research which
was carried out.
3.2 Determining the Research Design
3.2.1 Primary Research
The setting of the primary research is based in Malta. Data originated by the researcher for
the purpose of the investigation at hand is called primary data (Churchill and Iacobucci,
2010). This provides the researcher with a number of advantages such as having current
and updated data. Primary data was collected through two distinct and separate surveys,
one targeted at customers of local banks and financial institutions and the other at
investment and relationship managers of local credit institutions.
19
3.2.2 Type of Data
The data gathered was non-causal or descriptive. This type of data permits only inferences
about relationships among variables. Consequently, cause-and-effect inferences are
unusual and usually weak (Peterson, 1982). The collection of causal data which would have
permitted strong cause-and-effect inferences was considered unsuitable in view of the cost
and time constraints in which this study was carried out.
3.2.3 Nature of Data
Cross-sectional analysis was used in order to provide a snapshot of the variables of interest
at a single point in time.
3.3 Sample Design Process and Rationale
Prior to the selection of the actual sample, sampling decisions relating to the definition of
the population, sampling procedure and sampling technique and size were taken (Churchill,
1999).
To structure the sample design, two separate samples were established for the two surveys.
Data from both samples was collected during the same period of time in order to enable
data analysis to be carried out separately yet concurrently. Questions were all formulated
in a way which was expected to reduce bias as much as possible, coupled with the use of
simple and direct language. Also, leading and double barrelled questions were avoided in
order to further reduce the risk of bias.
20
3.3.1 Sample Design – General Public Questionnaire
The population framing of this sample included the population of Malta. Due to the size of
the population, a systematic sampling approach was used. Systematic sampling procedures
are used when the population is very large and of no known characteristics (Walliman,
2005). This entailed the researcher going to Valletta on two different days. In order to
reduce bias, an adult was interviewed every five minutes regardless of gender and age.
3.3.1.1 Sample Size – General Public Questionnaire
In order to obtain a truly representative sample of the population, more than 400
interviews needed to be conducted. Due to time and economic constraints, the sample size
was predetermined at 50 interviews as agreed with the Tutor. If a potential respondent did
not want to answer the questionnaire he/she was thanked and another person selected.
3.3.2 Sample Design – Bank Official Questionnaire
The population framing of this sample consisted of bank officials from credit institutions in
Malta. A non-probabilistic sample was chosen. The credit institutions were chosen
systematically from the list provided on the MFSA website with advice from an industry
official, in order to avoid a convenience sample. The utmost effort was put into gathering
accurate data from the right people.
3.3.2.1 Sample Size – Bank Official Questionnaire
Five Credit Institutions were hand-picked for the sample. One of the Credit Institutions did
not reply therefore the sample size was four of the largest credit institutions in Malta. The
credit institutions used for the study are HSBC Bank Malta plc, Bank of Valletta plc, Banif
Bank (Malta) plc and Mediterranean Bank plc.
21
3.4 Data Collection Method
Personal interviews were carried out in order to increase participation rates and to ensure
a higher quality of data given the limitation regarding quantity. However, two completely
structured questionnaires (vide Appendix I and II) were designed in order to ensure that all
participants were asked the same questions in the same order using the same wording. To
further aid uniformity, respondents were asked to fill in the questionnaires themselves.
Replies were then vetted to ensure that all questions were answered.
This helped to reduce any influence, which the interviewer might have had on the
respondents since even by asking the same question in a different tone, different
interpretations of the question could result (Churchill, 1999). Due to the fact that pilot
studies were conducted, very few respondents asked for any clarifications. This was further
helped by the use of simple and clear language. Since this study needed to delve into
people’s attitudes and perceptions, non-overt collection such as audit, trace analysis and
mechanical or personal observation was not considered appropriate.
Through the use of this method overall comparability of data remained high, while quality
was ensured through the on-the-spot vetting of responses undertaken.
A structured questionnaire (vide Appendix II) was also used to aid the interviewer during
the interview sessions with bank officials.
22
3.5 Questionnaires Design
3.5.1 Pre-Testing of Questionnaires
A pilot study was carried out in order to test the questionnaires for ambiguity and to
evaluate their clarity. Two questions relating to the general public questionnaire had to be
reworded. A convenience sample of five acquaintances was used. The questionnaire
relating to the bank officials needed the removal of a direct mention of GRC in order to
avoid possible confusion, as suggested by the Tutor.
3.5.2 Questionnaire Design – General Public
The final questionnaire was made up of sixteen questions. The first ten questions sought
the respondents’ choice of credit institutions in general and what increased their
confidence in banks. These questions were based upon a five point Likert Scale. The last six
questions related to demographics. Since the questions relating to demographics are
perceived to be personal, this section was left for last. All questions in this questionnaire
were close ended. When wording the questions, guidelines relating to brevity, relevancy,
objectivity, non-ambiguity and specificity were kept in mind (Peterson, 1982).
3.5.3 Design – Manager Interview Sessions
A structured questionnaire (vide Appendix II) was prepared before the interview sessions to
ensure that all managers were asked the same questions. However, in order to gain as
much insight into the subject as possible, the officials were encouraged to elaborate further
on their initial replies if they wished. The concept of GRC as defined for the scope of this
research project was mentioned beforehand.
23
3.6 Why not conduct the questionnaires online?
In this day and age, the popularity of the internet is only continuing to grow and with it the
trend of conducting research, such as surveys, through web-based media. Internet based
surveys can save time as well as cost for researchers, even in a relatively small sample.
However, the questionnaires in this study were not carried out through this method due to
certain issues believed to be critical related to sampling.
3.6.1 Sampling Issues
Problems can be encountered by researchers when carrying out online research. According
to Dillman (2000), and Stanton (1998), it is always difficult to be certain about the
characteristics of the responders in on-line communities aside from their demographic
values.
3.6.2 Other Sampling Concerns
Some findings relating to the fact that response rate in emailed surveys are superior to
traditional surveys methods may be questionable. This is due to the fact that tracking
responses is difficult to ascertain when using web-based media. Some individuals may also
be more likely than others to complete an online survey, thus self-selection bias can be said
to be another major limitation (Stanton, 1998).
24
3.7 Secondary Research
Secondary data are collected for the function of first-time use and also potential future
uses, from sources already created (Panneerselvam, 2004).
Secondary data for this research was primarily collected through a large amount of
academic journals and periodicals. Various internet websites were also utilised. A list of
local credit institutions was obtained from the MFSA website and can be found in Appendix
III.
3.8 Limitations of the study
Several limitations were encountered during the course of this study. The gathering of
secondary data was limited by the fact that the study of GRC is still in its early stages, this
being even more applicable in the Maltese sector.
Another factor which influenced this study is the fact that its effectiveness would increase
when coupled with quantitative data gathered from the institutions being analysed, where
one would be able to see cost versus benefit. In addition, one can add that time and budget
limitations constrained the author from being able to use a larger sample size for the
investigation.
The results and findings of both the General Public Questionnaire and the Bank Official
interview sessions are found in the next chapter.
25
4 Analysis & Results
Analysis of General Public Questionnaire
This chapter will present the results, findings and interpretation of both the General Public
and Bank Official Questionnaires. The General Public questionnaire was analysed first,
starting with the demographic section in order to provide a platform for further analysis.
4.1 Demographic Questions
4.1.1 Question 5 – Gender of Respondents
Figure 4.1
The sample was composed of 50 interviewees of whom 60% were males while 40% were
females (Fig 4.1). The respondents were chosen randomly, as described in more detail in
Chapter 3.
40%
60%
Q 5 - Respondents by Gender
Female
Male
26
4.1.2 Question 6 – Age of Respondents
Figure 4.2
Figure 4.2 shows the distribution of age. The highest proportion of respondents was found
in the 25-34 age-bracket, at a total of 31%. 21% of the total sample was found in the 35-44
age-bracket. The lowest number of respondents came from the 65-74 age-bracket.
18%
31%
21%
16% 8%
2% 4%
Q 6 - Respondents by Age
18-24
25-34
35-44
45-54
55-64
65-74
75 +
27
4.1.3 Question 7 – Respondents by Education
Figure 4.3
The distribution of education for respondents shows that that the majority of respondents
(48%) had a tertiary level of education or higher, with 22% having a postgraduate education.
28% of the respondents had obtained a secondary level education. Only 2% of the total
sample had received a level of education up to primary level or less. From this result, one
can see the effect of the increasing level of education in Malta, while also suggesting that
those with a tertiary or higher level of education may be more inclined to answer a survey
in order to help out a student, as they were once in the same situation themselves.
2%
28% 48%
22%
Q 7 - Respondents by Education
Primary
Secondary
Tertiary
Postgraduate
28
4.1.4 Question 8 – Respondents by Income
Figure 4.4 shows the income earned by the respondents, in Euro. The majority of
respondents (36%) earn €25,000 or higher. This figure is higher than the Maltese Average
Gross Wage. At the fourth quarter of 2013, the Average Gross Wage stood at EUR
16,021.79 (Trading Economics, 2013). Thus, it may indicate the prevalence of graduates
within the respondents of the study which might have influenced these levels of income.
36%
28%
22%
14%
Q 8 - Respondents by Income
25000+
24999-15000
14999-8000
< 8000
Figure 4.4
29
4.2 Likert Scale and Preference Questions
These questions tried to determine which elements affected the respondents when
choosing a bank and also which factors then increased a respondent’s confidence in a bank.
This section tries to assess which factors influence the respondents, in order to further
gauge the importance of GRC practices in their view as opposed to other factors.
4.2.1 Q 1.1 – High Interest Rates
Figure 4.5
Figure 4.5 shows that the majority of respondents (40%) agreed that high interest rate
effected their judgement when choosing a bank, while 30% strongly agreed. In this context,
high interest rates refer to credit interest rates earned on deposits.
4%
6%
20%
40%
30%
Q 1.1 - To what extent do high interest rates effect a customer when choosing a bank?
Strongly Disagree Disagree Neutral Agree Strongly Agree
30
4.2.1.1 Sub-Analysis by Gender
Figure 4.6
As can be seen in Figure 4.6, only males strongly disagreed with the notion of high interest
rates affecting them. In contrast to this, 24% of males strongly agreed which was higher
than the female rate of agreement. There was no discernable contrast between the
opinions of males and females in this regard.
0 2 4 6 8 10 12 14
Strongly Disagree
Disagree
Neutral
Agree
Strongly Agree
Sub-analysis by Gender
Females
Males
31
4%
24%
52%
14%
6%
Q 1.2 - To what extent do adverts in the media effect customers when choosing a bank?
Strongly Disagree Disagree Neutral Agree Strongly Agree
4.2.2 Q 1.2 – Adverts in the Media
Figure 4.7 shows a rather surprising result. 52% of respondents had a neutral stance when
asked if adverts in the media had any impact on their choice when choosing a bank. This
could show that money spent by banks on countless media adverts might be better spent in
a different avenue or that customers are not connecting to the message in these adverts.
The respondent reaction might also be due to the fact that customers are getting
bombarded with adverts everywhere they go, both on-line and in the physical world, and a
certain indifference might start to kick in. Only 6% strongly agreed that adverts had any
impact upon their decision making. This might be due to the fact that larger banks may
choose to focus their advertising upon these 6%.
Figure 4.7
32
4.2.3 Q 1.3 – Reputation of the Credit Institution
Figure 4.8
Bank reputation has been previously linked with an increase in investor confidence and this
is shown in Figure 4.8. Indeed, it is a main factor when trust is at the base of a company’s
affairs (Fiordelisi, et al., 2014). In fact, 70% of respondents strongly agree that reputation
influences their decision making, while 28% agree. This indicates that reputation (and thus
a well-run, incident-free bank) may matter more to customers than flashy adverts. This
continues to build upon the results of the previous question.
This result sends a very strong signal that the reputation of a bank has a large significance
and thus banks should continuously safeguard their reputation.
0% 0% 2%
28%
70%
Q1.3 - To what extent does the reputation of the bank effect customers?
Strongly Disagree Disagree Neutral Agree Strongly Agree
33
4.2.4 Q 1.4 – Location of Branch
Figure 4.9
As can be seen in Figure 4.9, no respondent stated that the location of the branch was not
important. In fact, if one amalgamates the respondents who agreed and strongly agreed,
70% of respondents gave location significant importance. This might be a factor to keep in
mind for banks, in light of the recent closure of certain bank branches in Malta.
It also implies that e-banking and mobile banking do not substitute the personal contact
and service given by staff at branches but only complements them.
0%
8%
22%
46%
24%
Q 1.4 - To what extent does the location of bank branches affect customers?
Strongly Disagree Disagree Neutral Agree Strongly Agree
34
4.2.5 Q 1.5 – Low Charges for Products
Figure 4.10
This is another instance where no one strongly disagreed that low charges affect judgement
while choosing a bank. In fact, only 2% disagreed. Whilst an unexpected percentage of
neutral answers (26%) arose, 72% of respondents agreed or strongly agreed that low
charges do affect these decisions.
0% 2%
26%
30%
42%
Q 1.5 - To what extent do low charges for products affect customers when choosing a bank?
Strongly Disagree Disagree Neutral Agree Strongly Agree
35
4.3 Consumer Confidence
The second part of the Likert Scale questions pertained to which factors increased the
respondents’ confidence in a credit institution. This would lead to a picture of whether
governance, risk and compliance do in fact have an impact upon investor confidence, or
whether factors such as high interest rates and low charges would over-ride these factors.
4.3.1 Q 2.1 – High Interest Rates increasing Confidence
Figure 4.11
Figure 4.11 shows that the majority (30%) of respondents had a neutral stance with regards
to interest rates. According to the results, interest rates do not majorly affect confidence,
although they did highly affect the reason for a customer to choose a bank. Only 18%
strongly agreed that higher credit interest rates increased their confidence.
Strongly Disagree
10% Disagree 16%
Neutral 30%
Agree 26%
Strongly Agree 18%
Q 2.1 - To what extent do you agree that high interest rates increase your confidence in a bank?
36
Indeed, higher interest rates usually reflect a lower credit rating. For example, a credit
institution which is ranked as an AAA would typically offer customers lower interest rates as
opposed to a BB rated credit institution. This finding indicates that consumers are
becoming more aware that higher interest rates imply higher risk to a depositor or investor.
4.3.2 Q 2.2 – Low Charges and Confidence
Figure 4.12
The proportion of results shows a divergence of opinions, with 26% of respondents strongly
agreeing that low charges increase their confidence in a bank, while an equal 26% were
neutral in their stance. However, no one strongly disagreed with this question. This may be
considered as inconclusive. A larger sample should be considered in order to validate this
finding.
0%
12%
26%
36%
26%
Q 2.2 - To what extent do you agree that low charges increase your confidence in a bank?
Strongly Disagree Disagree Neutral Agree Strongly Agree
37
4.3.3 Q 2.3 – Adequate Risk Management
Figure 4.13
This question produced very interesting answers as can be seen in Figure 4.13. The majority
of respondents (40%) agreed that adequate risk management would increase their
confidence in a credit institution, with only slightly less than this amount (36%) strongly
agreeing with this. To further strengthen this notion, none of the respondents strongly
disagreed or disagreed.
This begins to develop the idea that components of GRC effect investor confidence. Indeed,
the above results indicate awareness of risk is on the increase.
0% 0%
24%
40%
36%
Q 2.3 - To what extent do you agree that adequate risk management increases your confidence in a bank?
Strongly Disagree Disagree Neutral Agree Strongly Agree
38
4.3.4 Q 2.4 – Compliance with Local Law
Figure 4.14
Further strengthening the conclusions reached above, 44% of respondents confirmed that a
credit institution which complies with local law increases their confidence in such
institution, with a further 42% also agreeing with this. Compliance is a big part of GRC and
this was a welcome result to continue to arrive at whether GRC is indeed important to
investor confidence. None of the 50 respondents disagreed or strongly disagreed which
strengthens the result. The 14% portion of the sample which had a neutral stance shows
that it is not of importance to everyone.
0% 0%
14%
42%
44%
Q 2.4 - To What extent do you agree that compliance with local law increases your confidence in a bank?
Strongly Disagree Disagree Neutral Agree Strongly Agree
39
4.3.5 Q 2.5 – Well-Governed Bank
Figure 4.15
The last component of GRC tested was Governance. This emerged as the component of
highest importance to the respondents, with the majority (52%) replying that it is a factor
which increases their confidence. This is also backed up with 40% of respondents who
replied they agreed with this statement.
0% 0%
8%
40% 52%
Q 2.5 - To what extent do you agree that a well-governed bank increases your confidence in a bank?
Strongly Disagree Disagree Neutral Agree Strongly Agree
40
4.3.6 Sub-Analysis by Education
Since the questions 2.3, 2.4 and 2.4 are of high importance as they relate to components of
GRC, they were analysed further in order gauge whether the level of education of the
respondent had any influence upon the results. The highest percentage of respondents had
a tertiary level of education (48%) while the second largest percentage (28%) had a
secondary level of education.
4.3.6.1 Tertiary Level of Education
Figure 4.16
StronglyDisagree
Disagree Neutral AgreeStrongly
Agree
Risk Management 0 0 5 9 10
Compliance 0 0 2 10 12
Governance 0 0 1 9 14
02468
10121416
Tertiary Level of Education
41
4.3.6.2 Secondary Level of Education
Figure 4.17
4.3.6.3 Postgraduate Level of Education
Figure 4.18
When one observes the 3 graphs above, a striking note can be seen where at no level of
education does a respondent strongly disagree or disagree that Governance, Risk or
Compliance does not have an impact upon his/her confidence level.
StronglyDisagree
Disagree Neutral AgreeStrongly
Agree
Risk Management 0 0 2 5 4
Governance 0 0 1 4 6
Compliance 0 0 1 5 5
01234567
Postgraduate Level of Education
StronglyDisagree
Disagree Neutral AgreeStrongly
Agree
Risk Management 0 0 5 5 4
Compliance 0 0 4 6 4
Governance 0 0 2 7 5
012345678
Secondary Level of Education
42
Respondents who had a tertiary or postgraduate education were more likely to strongly
agree with these factors increasing their confidence. Therefore, one can conclude that a
higher level of education may lead to more awareness of the factors which lead to a
successful credit institution. However, the difference is not very large. A larger sample
would have to be tested to verify this further.
43
4.3.6.4 The importance of Corporate Governance
Figure 4.19
The individual component of GRC which respondents most strongly agreed affected their
level of confidence was good corporate governance practices. 58% of tertiary, 55% of
postgraduate and 36% of secondary educated respondents all rated this factor as one
which most highly affected their level of confidence.
0%
10%
20%
30%
40%
50%
60%
The importance of Corporate Governance
Secondary
Tertiary
Postgraduate
44
4.3.7 Question 3 – The Effect of the Financial Crisis
Figure 4.20
This question was meant to act as a baseline to gauge the general public’s opinion on the
impact of the financial crisis. The majority (68%) stated that the recent financial crisis did
not affect their confidence in Maltese credit institutions. This might be due to the fact that
in Malta, none of the banks ran into difficulties and business continued, to a large extent, as
usual. Credit institutions continued lending and there was no reason for a run on deposits.
0
5
10
15
20
25
30
35
Results
Increase 7
Decrease 9
No Change 34
Q 3 - Has the recent financial crisis increased or decreased your confidence in local banks?
Increase
Decrease
No Change
45
4.3.8 Question 4 - Lower Interest Rates in return for a well-run Institution
This question shows a very important aspect of the General Public Questionnaire, as it
mentions all the aspects of GRC without stating the fact directly.
Figure 4.21
The strong majority of respondents answered yes to this question. In fact, more than half
of the sample agreed that they would accept a lower dividend in return for a bank that
applies principles of GRC.
This is a result which, if confirmed through a larger sample, might be used by credit
institutions to try to generate interest income by lowering credit interest rates while
retaining the same debit interest rates.
32
18
0
5
10
15
20
25
30
35
YES
NO
46
4.4 Results of Interviews with Credit Institution Officials
In order to gain insight on Credit Institutions’ opinion regarding the impact and influence of
their organisation’s GRC practices on customer perceptions, a number of personal
interviews were held with officials of the main credit institutions. The interview results
were then contrasted with the results received from the general public questionnaires.
The institutions were:
Bank of Valletta plc;
HSBC Bank Malta plc;
Banif Bank (Malta) plc; and
Mediterranean Bank plc.
Of the above, Bank of Valletta plc, HSBC Bank Malta plc as well as Mediterranean Bank plc
offer a wide range of investment services including trading in local and foreign bonds and
shares as well as investment funds. Banif Bank (Malta) plc offers only deposit accounts.
All four respondents were males. The time in their current role ranged from just over a
year to over 14 years.
47
4.5 Findings and Comparative Analysis
4.5.1 Interest Rates
There was a strong consensus that interest rates play an important role when customers
choose a bank since all four respondents agreed or strongly agreed with this statement.
This result is consistent with the findings obtained from the questions addressed to the
general public where 70 per cent of respondents either agreed or strongly agreed that
interest rates played an important role in their decision making.
4.5.2 Adverts in the Media
Two of the bank officials believed that customers do not give adverts in the media
importance when making a decision regarding which institution to use. The other two
agreed that this was an important factor.
Again we can say that there is consistency between the results since 52% of the public
stated that adverts in the media played no part in their decisions. On the other hand, 20%
either agreed or strongly agreed that they give weight to adverts while the other 28%
disagreed or strongly disagreed.
4.5.3 Reputation of the Bank
The credit institutions’ officials all agreed that the reputation of the company is given quite
a level of importance by customers when making their decisions where three agreed and
one strongly agreed.
48
The general public overwhelmingly agreed that the reputation of the credit institution is
crucial in their decisions since 98 percent of respondents either agreed (28%) or strongly
agreed (70%). The other respondent did not take this factor into consideration.
Again, the credit institution officials proved to be in tune with their customers’ rationale.
4.5.4 Location of Branch
There was a mixed reaction to this factor. One official disagreed that location plays an
important part in customer decision making, one official believed that it has no influence
while the other two officials agreed.
Here we see quite a divergence between bank officials’ opinions against the public’s since
70% of the public either agreed or strongly agreed that branch location is an important
factor when choosing a bank.
It seems that despite the advent of new technologies such as internet and mobile banking,
the customer actually prefers the personal contact that visiting a branch provides.
4.5.5 Low Charges
Three of the respondents feel that charges do not play a role in the customer’s decision
making. The other respondent agreed that it was an important factor.
The officials are not in tune with what their customers really feel since 72% of the general
public respondents actually agreed or strongly agreed that they gave low charges for
products availed of/purchased were an important factor when choosing a bank.
Currently there is a low interest rate environment, with the resultant decrease in net
interest income. For example, that of HSBC in Malta decreased by 6% in 2013 when
49
compared with 2012 (HSBC Bank Malta plc, 2013). Non-interest income such as fees and
commissions help increase the bottom-line figures of credit institutions.
4.5.6 Good Governance, Risk Management and Compliance
Two of the credit institution officials are of the opinion that their GRC practices play no part
in customer decisions while the other two either agree or strongly agree.
This is somewhat surprising given the importance that even legislation is giving to GRC
practices. Does this mean that the bank officials see these as a necessary evil and just act
to comply with legislation?
On the other hand, 90% of the respondents questioned either agree or strongly agree that
a well governed bank increases their confidence in the bank. In Figure 4.22 below we can
see the results graphically:
Figure 4.22
0 0.5 1 1.5 2 2.5 3
High Interest rates
Adverts in Media
Reputation of the Bank
Location
Low Charges for Products
Good GRC
Confidence Increase
Strongly agree Agree Neutral Disagree Strongly Disagree
50
4.5.7 Accepting a lower credit interest rate due to strong GRC practices
Three of the four respondents agreed that a customer would accept lower interest rates if
the institution had strong GRC practices. The other respondent did not agree with this.
This compares well with the findings obtained from the general public questionnaire where
64% of respondents stated that they would accept lower credit interest rates if the bank in
question had strong GRC practices.
4.5.8 Changes in customers’ confidence in local Credit Institutions
Respondents’ opinions were mixed - two respondents believe there is no change in
customers’ confidence in local credit institutions while the other two believe confidence
has increased.
In actual fact, only 14% of the respondents in the public questionnaire stated that their
confidence in local banks had increased following the financial crisis. There was no change
in the confidence levels of the majority (68%) of the respondents.
4.5.9 Officials’ Personal Opinions
The officials were also asked to express their personal views. The answers give an
interesting insight into the effects of the financial crisis and the change it brought on
customers’ actions.
According to one of the respondents, the present low interest environment leads to some
customers being enticed by the higher returns of riskier investments. This could lead to
regrets and losses down the line.
51
All officials agree that in general the Maltese investor is rather cautious and favours an
amount of fixed interest securities in the portfolio. This helped avoid adverse effects on
investors and their confidence.
Two of the respondents agreed that Maltese investors’ awareness of Depositor and
Investor compensation schemes has increased as has the knowledge that higher returns
very often mean riskier investments and less stable institutions.
Another respondent believes that the majority of Maltese investors are still not educated
and sophisticated enough to give risk management and corporate governance practices
weighting when making investment decisions. This might be helped by further education,
perhaps run by the MFSA for investors. An interesting question arises as to whether it
would be beneficial to include financial management as a subject in schools.
4.5.10 Remarks
The results described in this section aimed to show the connection between the General
Public Questionnaire when compared and contrasted with the opinion of the officials from
four Credit Institutions. Thus each result does not stand only upon its own merit but can be
confirmed or rejected within other restrictions.
52
5 Discussion, Conclusion and Recommendations
5.1 Discussion of Results
This final chapter aims to present the culmination of the research carried out, as illustrated
in Chapter 4.
5.1.1 GRC
The main question posed by this study was whether GRC impacts investor confidence in
credit institutions in Malta. The research was carried out by gauging the opinion of the
general public and through interviews with credit institution officials in order to be able to
compare results. Due to GRC being a relatively new, and more importantly, technical
concept, the general public’s opinions were sought regarding the separate components of
Governance, Risk and Compliance while the interviews with credit institution officials gave
a more in depth view of GRC as a whole.
Governance, Risk and Compliance all appear to affect investor confidence in a positive
manner. This means that when a credit institution applies good governance, has adequate
risk management procedures and complies with the local law, investors and customers of
the bank will view this in a positive light and thus, this increases their confidence in the
credit institution. Since the majority of respondents agreed that their confidence in a
financial institution is positively impacted when this institution is well-governed, complies
with regulations and practices risk management, there is a very strong indication that for
investors in a Maltese context, credit institutions’ application of GRC practices do improve
investor confidence.
53
On the other hand, reputation was the most significant factor which influences a potential
financial institution’s customer. This finding continues to support the opinion of Lynn
Drennan FIRM, who is quoted in Risk Management Professional as saying:
“Reputation is arguably the most valuable asset a company owns. A company’s
products and services may be good quality and the majority of their staff excellent,
but an event that damages the reputation of the firm can send it into a slow
downward spiral” (Drennan, cited in Bovingdon, 2012, p.14).
Indeed, in the same article, Bovingdon quotes Warren Buffett who goes so far as to say: “It
takes 20 years to build a reputation and five minutes to ruin it. If you think about that you
will do things differently” (Buffett, cited in Bovingdon, 2012, p.14).
As a final thought to this, one of the officials interviewed believed that Maltese investors
are not yet sophisticated enough to be able to give weightings to practices such as risk
management. However, to counteract this, there was an agreement that investors are
becoming more aware of things such as compensation schemes. Since the financial crisis,
although this did not affect Malta as harshly as other countries, the author believes that
investor risk awareness is growing.
This is being helped by the rising level of education, especially tertiary and post-graduates
in Malta. In fact, more than 3000 students graduate from degree courses each year from
the University of Malta (University of Malta, 2014). Maltese investors are cautious and this
concurs with the fact that they would be aware of the practices which credit institutions
implement. Indeed it was shown in the research that the respondents with the highest level
54
of education tended to agree more strongly that components of GRC affected their
confidence. Good corporate governance emerged as the factor which increased investor
confidence most.
5.2 Limitations
The main limitation that restricted this study is the lack of information currently available
about the subject. One can find endless information about Governance, Risk and
Compliance practices as separate components. However, information is more rarely found
about the amalgamated holistic concept of GRC. This is an emerging topic especially in the
wake of the financial crisis and this is even more so when applied to the Maltese market.
Secondly, one can mention the limitations of time and lack of financial resources in respect
of the questionnaires, which would have benefitted from a larger sample size. It is also
possible for respondents to suffer from Central Tendency Bias, which is when respondents
avoid extreme response categories (Gingery, 2009). It would have also been more
beneficial for the study if more credit institutions officials were interviewed, however, all
possible effort was made to ensure accurate sampling.
55
5.3 Recommendations for Further Research
As with most undergraduate studies, this study suffered somewhat from a lack of time,
thus restricting the depth which could be reached. Therefore the author is offering certain
recommendations to further enhance the result of this study:
1. In order to more accurately gauge how GRC impacts an organization, a rating based
upon a set of criteria could be given to each organization, or bank which would be
taking part in the study. According to this rating, which would imply the level of
GRC which the company applies a whole, a comparison may then be applied. The
level of GRC might be compared to the financial well-being of the company as a
whole or also for certain parts of the finances separately. This would give an
indication as to whether GRC lead to financial benefits. Quantitative analysis would
thus begin to divulge further insights into the true benefits of GRC as one concept.
2. GRC and technology go hand in hand (Banham, 2007). Its application into
Information Systems can lead into various studies as to how the concept and
process of GRC can be coupled successfully with the appropriate Information
Systems and Information Technology, while still having economic benefits. The
initial outlay of funds in order to implement the system may be compared to the
competitive, financial and social effects, if any do, in fact, arise. Studies about this
already exist and may be built up further, such as studies by Sadiq, et al., (2011)
and Cangemi, (2008).
3. Given that 98% of respondents either agreed or strongly agreed that reputation
affects their decisions, further research could be carried out regarding consumers’
56
perception of reputation in Malta, that is, whether GRC practices actually influence
a bank’s reputation.
4. This study’s results showed that adverts ranked low in customers’ decision making
when choosing a credit institution, while GRC practices and reputation ranked
highly. These factors also play an important part in increasing consumer confidence.
If this result were confirmed through a larger sample, further research could be
undertaken as to whether changing the message in adverts from promoting
products to promoting the institutions’ good GRC practices would lead to adverts
having more influence on customer decisions.
5.4 Conclusion
Despite its sample limitations, this study has confirmed that Maltese investors place a
significant importance on Governance, Risk and Compliance practices of local financial
institutions. This, together with other findings relating to the influence of adverts,
interest rate levels, charges and location of branches, should help influence the
development of these firms’ future strategies to their positive advantage.
57
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Appendix I – General Public Questionnaire
This is a questionnaire relating to the study on investor confidence in Maltese credit institutions. All responses will be anonymous. Your co-operation is greatly appreciated.
1. To what extent do you agree with the statements below when choosing a bank?
Question Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
1.1 High Interest
Rates
1.2 Adverts in
Media
1.3 Reputation of
the Bank
1.4 Location of
Branch
1.5 Low Charges for
Products
2. To what extent do you agree that the factors below increase your confidence in a bank?
Question Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
2.1 High Interest
Rates
2.2 Low Charges
2.3 Adequate Risk
Management
2.4 Compliance with
Local Law
2.5 Well-Governed
65
3. Has the recent financial crisis increased or decreased your confidence in local banks?
(Please tick appropriate box)
⧠ Increased
⧠ Decreased
⧠ No change
4. Would you accept lower interest rates or dividend, in return for a well-run bank which complies with local regulation and applies good risk management? ⧠ YES ⧠ NO
Demographics (Please tick the box which applies to you)
5. Gender: ⧠ Male ⧠ Female
6. Age:
⧠ 18-24 years old ⧠ 25-34 years old ⧠ 35-44 years old ⧠ 45-54 years old ⧠ 55-64 years old ⧠ 65-74 years old ⧠ 75 years or older
7. Education:
⧠ Primary ⧠ Secondary ⧠ Tertiary ⧠ Postgraduate
8. Income:
⧠ 25000 + ⧠ 24999 – 15000 ⧠ 14999 – 8000 ⧠ Less than 8000
66
Appendix II – Bank Official Questionnaire
This is a questionnaire relating to the study on investor confidence along with GRC in Maltese credit
institutions. All responses will be anonymous. Your co-operation is greatly appreciated.
1. Which type of investments do you offer your clients?
⧠ Local Shares traded on MSE
⧠ Foreign Shares
⧠ Local Bonds traded on MSE
⧠ Foreign Bonds
⧠ Deposit Accounts
⧠ Investment Funds
⧠ Others (Please specify)
____________________________________________________________________
2. To what extent would your clients realistically perceive the factors below as
being important when choosing to deposit money with the bank?
Question Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
1.1 High Interest
Rates
1.2 Adverts in
Media
1.3 Reputation of
the Bank
1.4 Location of
Branch
1.5 Low Charges for
Products
1.6 Good
Governance,
Risk
Management &
Compliance
67
3. In your experience, is it likely that a customer would choose a bank where a
lower interest rate is offered, on the strength of its strong GRC practices?
⧠ YES
⧠ NO
4. Has the recent financial crisis increased or decreased your customer’s
confidence in local banks? (Please tick appropriate box)
⧠ Increased
⧠ Decreased
⧠ No change
5. What are your personal views on the matter?
Demographics
6. Gender:
⧠ Male
⧠ Female
7. What is your role at the bank?
_______________________________________________
8. How long have you been working in this role? ____________________________
68
Appendix III – List of Credit Institutions from the MFSA