NEPALESE JOURNAL OF MANAGEMENT SCIENCE & RESEARCH

(NJMSR)
V.3 Issue 2 (2019) ISSN : 2467-9356

A peer reviewed journal

Published by

(Mid-Western University Affiliate)

Mid-Baneshwor, Kathmandu, Nepal
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Nepalese Journal of Management Science
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 Editorial
Nepalese Journal of Management Science and Research-NJMSR is an institutional publication
of Global College International-GCI affiliated to Mid-Western University, Surkhet-Nepal. GCI
is a renowned academic institution established to deliver higher education in management
currently operating 5 different programs at bachelor and master level. The main academic
programs include BBA, BHM, BTTM, MBA, and MBA-Evening aligned with professional
training, leadership incubation center, research and publication management, and department
of international relations. The College operates the mainstream educational programs in
academically validated and standardized learning environment mentored by the professionally
renowned team of experienced faculty and subject experts who enjoy a prodigious reputation
internationally as well as at home. GCI is recognized as being a distinct benchmark of higher
studies for its academic legacy along with the teaching-learning practiced distinguished
within the philosophy of education for Globalite citizenship.
As a pioneer of global education, GCI is powered by commendably competent scholars
enrolled to materialize education in participative action framework contextualized under the
guidance of professionally renowned team of subject experts. This framework engages the
knowledge communities and competent intakes of students at GCI together with senior faculty
in the educational process that is designed within the student centric academic system. This
unique educational feature enables GCI to stand distinct and be recognized as an academic
and research center incepted to impart quality education. Volumes of context relevant and
time tested core and extra curriculars at GCI contribute to building academic system that
integrates research as a key tool for education to enrich aspirant communities of scholars not
only with subject-based information received passively from the drills of deliveries but instead
that enables them to create knowledge by means of plentiful research activities undertaken
on regular basis. Following this scheme the College also organizes international conference
in presence of and participated by researchers, scholarly practitioners, professors, business
leaders, and intellectual persons bearing national and international repute who are invited to
present research papers as well as research knowledge relating diverse key areas of business
management, development and economics. As signature event, the international conference
of GCI is also entailed with publication of scientific journal that works as a key medium to
make global dissemination of research knowledge. The publication of NJMSR is one of the
innovative tools adopted at GCI in the direction to improvising the existing knowledge that
at the same time helps new knowledge to generate at the nexus of theory and practice. In
this regard, NJMSR is seen as an impactful media that plays a vital role involving academic
communities in research action in developing critical thinking, creativity and academic skill
in knowledge communities of GCI, its associates, partner institutions, international academia,
and others engaged to achieving academic excellence.
This second issue of NJMSR is anticipated to be very eminent as it gives space to scientifically
written research papers that present statistically validated empirical analyses together with
qualitatively vigored findings relating diverse concepts, agenda and issues of management
and economics. The team deputed to peer review the submissions have in course paid special
attention upon statistical and analytical tools used in each work. The research analyses are
ascertained to have met numerically validated criteria as well as qualitatively discussed results
that the have been accepted in the works as being insightful to addressing various problems as
related to study of business management and economic enterprises.
This current (2nd) issue of NJMSR is presented as being an exceptionally enriching
manuscript made salient from the perspective of research quality. Most of the papers included
in this issue are based on primary research analyses. The other important attribute is that all
the articles included in this issue have been scientifically validated in content, research design,
and also organizational structures that essentially supplement designing part of research article
which needs to comply with standard criteria of academic writing. The articles in this issue as
based on empirical research in addition to literature-backed research analyses have been the
works not only of the people in academic sector but some of the papers have been from the
research degree students who co-authored with their subject experts and professors working
in different universities both at home and from across the international settings. As such,
NJMSR has come up as an enriching repository of globally linked research dissemination
that covers a wide range of knowledge areas related to business management and economics.
The papers included in this issue of NJMSR are also commendably valuable as each work
possesses a distinct capability to open up new realities, raise new debates also indicating new
scope for changes in different areas of business and management, leadership, organizational
practices, human resource management, governance, and economic systems etc. having high
degree of significance in gearing development. All 12 research papers published in this issue
are thematically selected and these represent several sub-areas of business management and
economics that include leadership, online media communications, total quality management,
international business, cross-border trade and custom focused issues that variably relate to
and influence studies and practices of business management and economics.
Relating the theme of media communication in business promotion, in their paper based on
structural equation modelling design of research, the authors Suman Dahal, Bharat Singh
Thapa and Biraj Ghimire explore relationship between social media content of advertisement
and consumer perception as accountable to influencing a purchase decision. The study
indicates that advertisement contents on social media if informative and entertaining, are
more likely to be used by the consumers as being the enablers of favourable attitude towards
Ads on social media. Evidenced from factor analysis, the study finally argues that favourable
attitude toward social media content is positively related to an intention to use the message
for a purchase decision.
Drawing upon quality management in production business Guarav Ojha and Upama Shakya
in their co-authored paper examines the factors that affect the consumers’ perception upon
the consumption of organic tea in Nepal. Based on their quantitative analysis, the study
reports that the purchase intention of customers towards organic tea product is associated
with perceived health benefits and environmental concerns. Also drawing upon sustainable
consumption patterns perspective as suggested in SDG-12, their study indicates that consumers
belonging to upper economic class are prepared for responsible consumption as they perceive
environmental and health benefits in a given product.
Focusing on the theme of business management at the level of cross-border, the author
Gautam Maharjan in his research paper identifies the magnitude of issues relating to customs
duty evasion in Nepal. Using descriptive statistical analysis, the research highlights from
stakeholders’ perception difficulties in managing open border’, ‘ambiguous customs policy’
and ‘poor infrastructure and inconvenient location’ ranked first, second and third respectively
as being serious issues in managing the open border as faced in Nepal.
Locating banking as vital determinant of business management and related issue, in his paper
designed on the panel data analysis model, Kishor Hakuduwal has assessed productivity and
efficiency of banking sector in Nepal. Using observation of nine years’ panel data, the study
reports on 20 sample banks and maintains that commercial banks are more efficient than the
development banks of Nepal. As a result, the study concludes productivity of human resource,
deposit and capital significantly related with productivity and efficiency of banking sector.
Linking the role of modern technology, the authors Maliha Tabassum and Priyanka Kundu
in their paper argue a necessity to develop e-leadership for transformational leadership over
conventional leadership also linking its influential and transformative role in entrepreneurship.
The paper defines E-leadership as an act of using digital platform especially social media
as leaders virtually influence and instruct followers to achieve a common goal. Based on
qualitative research design that reports on in-depth interview and content analysis used for
data, their study investigates how social media is used as a platform by E-leaders to practice
their leadership and how E-leaders perceive the media for social change.
Considering consumer perception as one of the determinants on the sale of business products,
the authors, Nazrul Islam and colleagues in their survey paper based on 211 frozen and
ready-to-cook food consumers, investigate the influencing factors related to the consumers’
perception about frozen and ready-to-cook food products. The regression analysis results show
that the factors which influence the perception of the consumers about frozen and ready-to-
cook food products are concerned with saving time, helpful and economic, low price, variety
and good for health, brand image and quality, availability of the frozen foods, taste of the
food, and attractive packaging of the food. The study suggests giving importance on the listed
factors for increasing the demand of the products among the city dwellers of Bangladesh.
In his paper designed to evaluate the explanatory power of firm specific attributes that include;
size [Ln(ME], book-to-market equity [Ln(BE/ME)], and net worth per share [Ln(NWPS)
on stock return, the author Purna Man Shrestha’s research concludes that, size [Ln(ME],
book-to-market equity [Ln(BE/ME)] and net worth per share [Ln(NWPS) have explanatory
power to explain the cross-section of stock return of Nepalese insurance companies. Among
these variables book-to-market equity [Ln(BE/ME)] has strong explanatory power than other
variables.
Projecting the theme of knowledge management as a significant component on organizational
development, the author Pushpa Maharjan in her paper examines the relationships between
the knowledge management enablers and knowledge creation socialisation in the hospitality
industry. Based on primary data from 382, the study illustrates that the key knowledge
management enablers such as collaboration, trust, learning, and information technology do
influence the knowledge creation socialization positively. As such, the study suggests that
managers should promote collaboration, trust, learning, and information technology facilities
for employees to create knowledge in organization.
Focusing on international trade management, the author Raj Kumar KC examines in his paper
diversification achieved in trade relationships, factors responsible for the situation in Nepal
and then it suggests a package to foster more sustainable trading relationships to maximize the
benefits. Powered by secondary analysis, the study shows that trade has increased in volume
following 1990’s liberalization in Nepal. However, export has remained too meagre to sustain
Nepal’s imports. Therefore, the trade deficit is ever widening. Reforms to expedite exports
that began in the late seventies have failed to yield a positive outcome. The liberalization of
eighties, nineties and membership of WTO have failed to ensure a diversified trading structure
in product, service and in partners. Nepal’s growing dependency on India has been one of the
major challenges in the economy.
Designed to exploring performance of insurance companies from the practice of reinsurance,
Rajendra Maharjan’s paper based on descriptive statistical analysis conducted on quantitative
research design finds reinsurance positively impactful on performance of insurance companies.
Reinsurance is reported to improve the cost efficiency of primary insurers and complements
the capital in order to enhance solvency. While negative relation indicates solvency of the
insurers that increases with the level of used reinsurance, to the extent that reinsurance and
capital can be substituted for each other. Thus, this study concludes that primary insurers as
benefiting from reinsurance.
The final paper by Sarita Maharjan drawing upon quality management as a significant variant
for the promotion of business performance and credibility, analyses the relationships between
store environment and customer satisfaction of Bhat-Bhateni Supermarket and Department
Store. Based on the quantitative research design that allows the use of Gamma coefficients,
the study shows that customer satisfaction has a significant positive association with music,
lighting, assortment, interior design and employees except layout. As one of the significant
findings the study communicates that store environment plays an important role in business.
As such, the study has a conclusion that friendly store environment could be a good factor for
supermarket to enhance customers’ satisfaction level.
Lastly, the articles included in this journal that have gone through scientific process of peer
review prior to the final selection, either ways address any of the several areas of management
sciences, business management practices and streams of economics. It is due to the areas
covered; the articles justify the core theme of the journal. Matched with the aim of the journal
that is to disseminate research information capturing the meaning of management science and
research as shown in the title of the journal, the selections have accordingly done thematic
justice to the publication of this second issue of NJMSR. Besides, this issue of the journal
stands out to be distinctly significant and this because the journal has been successful to select
and give space to rigorously reviewed works communicating validated research knowledge
derived from valid statistical analyses or qualitative interpretations that qualify for an academic
dissemination as this. The papers have been presented in APA style that NJMSR adopts for
research communication and hence, to the extent acceptable, uniformity has been maintained
in format of all papers published in this issue. Nevertheless, some tangible efforts of editing
and proof reading were put to ensure accuracy in language and validity in research analysis
that is to guarantee good results that a piece of research work should ensure to disseminate
useful finding, the individual authors are yet to be taken accountable for the information,
procedures, ethical limitations and others. As such, the readers are advised to consider the
individual articles as being the intellectual property of the respective individual authors who
should therefore be taken accountable for any shortcoming in the research related components
in their work.

Dev Raj Paneru, PhD

Chief Editor
NJMSR -2019
 Contents
Page number

Consumers Attitude towards Ads on Social Media

Biraj Ghimire, Suman Dahal, Bharat Singh Thapa 1

A Study on Factors Affecting Consumption of Organic Tea: Evidence from

Consumers in Kathmandu Valley
Gaurav Ojha, Upama Shakya 15

Customs Duty Evasion Issues in Nepal

Gautam Maharjan t31

Productivity and Efficiency of Banking Sector in Nepal

Kishor Hakuduwal 44

International Experience in Business Processes Improving on the Base of

Architectural Approach
Luigi Fici, Pavel Malyzhenkov, Maurizio Masi, Fabrizio Rossi, and University
of Tuscia 61

E-leadership in Social Change : A New Paradigm in Bangladesh

Maliha Tabassum, Priyanka Kundu 74

Factors Influencing the Consumers’ Perceptions towards Frozen and Ready-to-

Cook Food Products in Bangladesh
Nazrul Islam, Naziah Tahsin, Nowshin Tarrannum, Rumaisa Zahara Salihee,
Sumaiya Tarannum, Sujana, Jarin Tasneem Mishma 88

Firm Specific Attributes and Stock Returns: A Case of Nepalese Insurance Companies
Purna Man Shrestha 102

Knowledge Management Enablers for Knowledge Creation Socialisation

in Nepalese Hospitality Industry
Pushpa Maharjan 114

Export Diversification of Nepal: Policy Context and Impacts

Raj Kumar KC 128

Impact of Reinsurance on Performance of Nepalese Insurance Companies

Rajendra Maharjan 139

Association of Customer Satisfaction with Store Environment

A Study on Bhat-Bhateni Super Market and Departmental Store
Sarita Maharjan 152
Notes
Articles are subject to editorial by referees from the community of management and
economics. Comments or notes regarding articles are welcome and will be considered
for publication to the extent possible. The opinions and the interpretations expressed in
the articles are the personal opinions of the authors and reviewers and do not necessarily
reflect the views of the publisher and editors, or of any institution with the information with
which the author may be associated. The editorial board does not guarantee the accuracy
of the data and the information included in the articles and accepts no responsibility,
whatsoever, for any consequences of their use.

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 Consumers Attitude towards Ads on Social Media

Consumers Attitude towards Ads

on Social Media
Biraj Ghimire *
[email protected]
Suman Dahal **
[email protected]
Bharat Singh Thapa ***
[email protected]

Abstract
The purpose of the study was to investigate influence of advertisement traits on attitude
towards Ads on social media and intention to use them for purchase decision. The study
used Structural Equation Modeling (SEM) to examine the relationship. The validity and
reliability of the constructs were evaluated using exploratory factor analysis (EFA). The
EFA was conducted using Principal Component Analysis and Varimax Rotation Method. 7
factors explained 67% of variation. The result also showed sampling adequacy with Kaiser-
Meyer-Olin (KMO) test and Bartlett’s Test of Sphericity indicated that sample of 255 was
appropriate for factor analysis. The result provided a justifiable range of construct reliability
and discriminant validity. Consequently, structural model was developed. Confirmatory
Factor Analysis was conducted to test the goodness of the model. The result indicated that
advertisement on social media with informative and entertaining contents were more likely
to be used by the consumers. Similarly, favorable attitude towards Ads on social media had a
positive intention to use the message for purchase decision.

Keywords: Marketing, Attitude, Ads on social media, Consumers, Factor analysis, Message

1. Introduction
Digital marketing has added a refreshing dimension in promotion of products and services.
Marketers are found to leverage their business and brand popularity with the use of digital
marketing. Marketers use social media promotion strategies as it is cost effective. Many
organizations now tend to outsource social media management to the specialized agencies. As
a result, relatively similar messages across digital advertising platforms have created a state
of confusion among the consumers. As the development of electronic commerce and digital
advertising has sprung to a full scale, there is a need to examine attitudes towards Ads on
social media when content generated by the organizations are becoming less differentiated.
Karr (2016) noted Ads on social media provide a firm to inform, educate, persuade, remind
and reinforce the campaigns to build awareness among target customers with the help of

* Faculty member, Global College of Management

** Faculty member, Global College International
*** Lecturer, Central Department of Management Tribhuvan University

NJMSR V. 3 Issue 2 (2019) 1

Consumers Attitude towards Ads on Social Media
data. Relevant advertisement can be placed on a complimenting discussion topic across
social media. On the other hand, even if the customers have switched the brand, social media
marketing campaign delivers opportunity for the firms to conduct remarketing campaign and
deliver values.

Susan (2015) argued, after 2010, both the small and large organizations started to integrate
social media marketing plan and strategies with credible presence on the Web. Basic instances
of social media marketing tasks performed by the organizations were announcing discount
vouchers, price cuts and flash sale on Facebook and Twitter, soliciting deals through LinkedIn,
captivate customers through useful blog posts and relieve customers’ pain through a utility
video on YouTube. Bennet (2014) mentioned in a report that more than 80% of business
executives recognized social media presence to be crucial factor for business success. Bowden
(2014) presented the fact that around 70% of businesses used social media platforms for
their marketing success. In addition, 71% of consumers used electronic word of mouth and
testimony to support their purchase decision in developed countries. Social media marketing
generates data and information (Kaplan & Haenlein, 2010). Such platforms also provide an
opportunity to co-create marketing programs through user generated contents (Keitzmann,
Hermkens, McCarthy & Silvestere, 2011). Social media offer a unique dimension in marketing
communications (Eagleman, 2013). When targeted customers engage on the social media
contents, it promotes interaction, collaboration and knowledge sharing between them (Richter
& Koch, 2008). Social media platform exist in form of web pages, social networking sites,
micro blogging, wikis, podcasts, pictures, video, ratings and social bookmarking sites. The
users of social media are always making reflection of personal images, self-concepts and also
take notice of global happenings (Frolova, 2014). Social media marketing generates data and
information (Kaplan & Haenlein, 2010). Such platforms also gives an opportunity to co create
marketing programs through user generated contents (Keitzmann, Hermkens, McCarthy &
Silvestere, 2011). In order to increase brand popularity companies can use videos, messages,
quizzes, information, and other useful material (Vires, Gensler & Leeflang, 2012). In the
words of Castronovo (2012) social media helps to build awareness, increase sales and
build loyalty. As Michaelidou et al., (2011) noted that seamless commercial messages and
interactions with partners and contributors is facilitated by social media regarding media,
events, entertainment, retail and digital services.

1.1 Statement of the Problem

There are claims that Ad agencies are no longer transforming the branding while Companies
are striving to create a great customer experience using social media platforms. Ads on social
media is still not able to provide solutions to new promotions and branding challenges in a
competitive marketplace (Rammal , 2019). At global and local level organizations are striving
to understand local brand perception, leverage brand originality, stretch among middle and
lower income segment, enhance brand awareness through corporate reputation, employ co-
creation and communication between brand and customers, establishing of sub categories
of brand and developing brand heritage among others (Schaffmeister, 2015). Excessive
advertising on social media have become a clutter and consumers employ defensive cognitive
schemas to recognize and avoid undesired advertising contents (Jurca, Romonti-Maniu, &
Zaharie, 2013). In light of this, a research by Content Marketing Institute from a survey of
2 NJMSR V. 3 Issue 2 (2019)
 Consumers Attitude towards Ads on Social Media
global pool of 1,246 companies revealed that 80% of the content created by marketing were
not beneficial for sales strategy or sales team. Whereas, the new future in digital engagement
is believed to be content marketing (Guta, 2018). More consumers are willing to give inputs in
product development process and other business stages in anticipation of customized products
or services (Kara & Kaynak, 1997).
This study evokes a need of possible consumers’ involvement in message design and marketing
communications. Design thinking has emerged as a human centered tool to solve problems of
consumers. Marketers are willing to connect with customer segment at more personal level so
that products and services become more desirable and appealing (Naiman, 2019).

1.2 Objectives of the Study

The objective of this study is to find out response of audience upon advertisement content
placed on the social media. Specific objectives of this study are
• To examine the factors affecting consumers’ attitude towards social media advertisements
• To analyze the effect of entertainment, informativeness, irritation, credibility, hedonic
pleasure and materialism on perceived usefulness of social media advertisements
• To assess the influence of perceived usefulness of social media advertisement on
intention towards use of social media advertising

2. Literature Review
McCann (2008) defined social media to be online applications, platforms that facilitate
communication, coordination and collaboration with the use of content and media. On the
other hand, Weinberg (2009) explained that social media platforms equip individuals to create
their websites and combine products and service information to reach into a larger audience.
Zarrella (2010) stated that social permits everyone to create, synthesize and disseminate the
desired contents.
Consumer buying process is disrupted in different decision making processes like information
search, development of alternatives, evaluation of alternatives and evidence based decision
making (Albors, Ramos, & Hervas, 2008). These developments have an impact on how
marketers prepare their strategies and tactical goals to respond to opportunities and choose the
best strategies among alternatives (Thomas, 2007). According to Manglod and Faulds (2009)
social media allows firms to communicate with their customers and also enable exchange of
word or mouth among customers. Two-way communication between firms and customers
enhances value to the existing brand loyalty in more effective manner (which stands above
from informing products and services and reaches to creation of a brand fan-base or a powerful
brand community (Jackson, 2011; Kaplan & Haenlein, 2010).
According to eMarketer (2013) firms are induced to create a social media marketing strategy
to support as brand building measures, conduct market research, include customer relationship
management, implement customer services management, and execute sales promotion
strategies. Alves et al., (2016) again stressed on the issue that messages on social media
increases brand loyalty, acceptance, electronic word of mouth and consumer based brand
equity. The advantage of using social media as per Weinberg (2009) is the way it is affordable
and cost effective as marketers can measure the return of marketing investment.
NJMSR V. 3 Issue 2 (2019) 3
Consumers Attitude towards Ads on Social Media
Ducoffe (1996) was one of early contributors in the field of online advertisement who
confirmed attitudes towards Web advertising were directly dependent on advertising value
and their attributes like perceived levels of entertainment, informativeness, and irritation.
Brackett and Carr (2001) analyzed Ducoffe’s model and extended it to include credibility
and consumer demographics. Demographic variables were found to have effect on attitudes
formation.
Wang, Zhang, Choi and D’Eredita (2002) included the variable interactivity along with
entertainment, information, irritation, credibility and demographics. The researchers weighed
consumer’s attitudes toward advertisements for different purposes or functions such as brand
building and directional and with both the traditional and online media.
Chowdhury et al., (2006) determined there was a significant relationship only between the
credibility factor and attitude.
Unal et al., (2011) took reference from (Tsang, Ho, & Liang, 2004; Brackett & Carr, 2001) to
determine attitudes towards internet advertising. The theoretical model was that of the Theory
of Reasoned Action by Fishbein and Ajzen (1975) which they adapted to mobile advertising.
Similarly, Tsang, Ho, & Liang (2004) used entertainment, informative, irritation, credibility,
relevant demographic variables. The study found that consumers had negative attitude towards
mobile advertisements in the beginning. However, the same consumers were found to develop
positive responses when they were asked with permission. A negative relationship was
determined between entertainment, informativeness, reliability, and attitude. Nair, Hosanagar
and Lee (2018) analyzed advertisement content and consumer engagement particularly related
to Facebook. Contents related to brand traits like humor, emotion and positioning of the
brand’s generous image increased consumer engagement with a message. Other dimension of
social media advertisement is brand endorsements. Opinion leaders have now increased their
influence and presence in the social media (Shi & Wojnicki, 2014).

2.1 Conceptual Framework

Entertainment

Informativeness

Irritation
Attitude towards
Consumer Intention
Ads on social media
Credibility

Hedonic Pleasure

Materialism

Figure 1. Conceptual framework.

4 NJMSR V. 3 Issue 2 (2019)
 Consumers Attitude towards Ads on Social Media

3. Research Design
Structural Equation Modeling (SEM) was used along with AMOS. In order to conduct
discriminant analysis, a proposed model was built using AMOS version 22. The Measurement
model was analyzed through CFA and the structural model analyzed with the help of path
analysis for a statistical test. Structural equation was used to find out how the factors relate with
each other’s. Afterwards, path analysis was conducted to provide a graphical representation of
structural relationships used from the theoretical concept.

Contrary to other research methods, appropriate sample size for SEM could be argued to be at
least five subjects or respondents per scale items (Nunnally, 1987). The study used 255 sample
sizes which was more than the minimum requirement of 145 samples to run the SEM.

3.1 Reliability and Validity

Convergent validity tests confirm the existence of a high correlation between the measure
being evaluated and other measures of the same construct. Rules of thumb for measuring
convergent validity include: item loadings greater than or equal to 0.70 that are statistically
significant and have the correct sign (Hulland, Chow, & Lam, 1996; Steenkamp & van Trijp,
1991). When the value of AVE is greater than 0.5, convergent validity is established.

Discriminant validity refers to the extent to which factors are unambiguous and uncorrelated.
In order to maintain discriminant validity, value of maximum shared variance should be greater
than average variance explained (AVE). In order to find out reliability of constructs, Cronbach
Alpha was calculated to test reliability of both the dependent and independent variable.

4. Result and Discussion

The study recorded (58%) male respondents. (68%) of the respondents were between age
21-30 and reasonably (49%) were from undergraduate level. (56%) of the respondents were
students and 33.4% were employed as an entrepreneur, private sector job holder and civil
service. 3 to 4 hours was average engagement on social media per day as suggested by (45%)
of the respondents. Among many platforms, Facebook (24%), Instagram (20%) and YouTube
(18%) were the most used platforms. Besides that, there was welcoming usage of different
social media platforms like photo sharing networks, video sharing networks, blogging sites,
micro blogging sites and sharing economy networks. Majority of the respondents positively
associated entertainment attribute of social media towards attitude formation. Ads on social
media was found to become slightly more entertaining, fun to use, exciting and enjoyable

Table 1
KMO and Bartlett’s Test
Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .844
Approx. Chi-Square 2123.959
Bartlett‘s Test of Sphericity Df 465
Sig. .000

NJMSR V. 3 Issue 2 (2019) 5

Consumers Attitude towards Ads on Social Media
The model was tested with KMO measure of sampling adequacy and data was found to be
suitable for factor analysis (KMO = .844). Similarly, Bartlett’s Test of Spericity was found
to be significant χ2 (465) = 2123.95, p ≤.001) and variances were found to be equal for all
samples.
Table 2
Factor Analysis Result
Eigenvalues % of variation explained
Entertainment 9.17 29.60
Informativeness 3.07 9.23
Irritation 2.41 7.77
Credibility 2.17 7.01
Hedonic Pleasure 1.46 4.71
Materialism 1.38 4.45
Attitude component 1.29 3.78

Note. Factor analysis table obtained with Principal Component Analysis method with Varimax
Rotation and Kaiser Normalization. Rotation converged in 7 iterations.

Factor Analysis revealed that there was a difference between dimensions perceived to perceive
attributes of Ads on social media. Factors ranged from .465 to .877. The factors explained
67% of variation.

4.1 Confirmatory Factor Analysis

Table 2
Confirmatory Factor Analysis
Fit Index Value Recommended Fit Result
Absolute Fit Index
Chi-Square 424.923
Degree of freedom 16
Chi-square/Degree of freedom 3.925 1-5 Good fit
GFI .951 0.90≤GFI≤0.95 Good fit
AGFI .868 0.85≤AGFI≤0.90 Good fit
PGFI .418
RMR .054 0.05≤RMR≤0.08 Good fit
RMSEA .009 0.05≤RMSEA≤0.08 Acceptable fit
Incremental Fit Index
CFI .950 0.95≤CFI≤0.97 Good fit
NFI .986 0.95≤NFI≤0.97 Good fit
TLI .948 0.90≤TLI≤0.95 Good fit

Chi Square is a measure for evaluating over all model fit which assesses intensity of
inconsistency between the sample and fitted covariance matrices. The model received the
ratio of 3.925 which showed a good fit.
6 NJMSR V. 3 Issue 2 (2019)
 Consumers Attitude towards Ads on Social Media
Goodness of Fit Index (GFI) evaluates the proportion of variance caused by the estimated
population covariance (Diamantopoulos & Siguaw, 2000, Jöreskog & Sorbom, 1993;
Tabachnick & Fidell, 2007). GFI differ between values of 0 to 1. GFI provided a good fit of
the model.

Adjusted Goodness of Fit Index (AGFI) adjusts the GFI based upon degrees of freedom where
saturated model reduces the fit. Thus, tighter and close models are preferred than complicated
models. AFI indicated a good fit of the model.

Root Mean Square Residual (RMR) is the square root of the difference between the residuals of
the sample covariance matrix and the hypothesized covariance model. RMR gave a goodness
of the fit of the model.

Root Mean Square Error of Approximation (RMSEA) explains how well the model, with
unknown but optimally chosen parameter estimates would fit the populations covariance
matrix (Byrne, 1998). RMSEA favors good fit values between 0.06 or a tighter upper limit of
0.07 for analysis purpose (Steiger, 2007). REMSEA indicated an acceptable fit of the model.

Comparative Fit Index (CFI) considers relatively small sample size (Tabachnick and Fidell,
2007). Researchers argue that CFI values closer to 0.90 tends to become acceptable fit.
However, a good fit would be CFI greater than 0.95 (Hu & Bentler, 1999). CFI provided good
acceptable fitness of model.

Normed Fit Index (NFI) is popularly known as Bentler-Bonett Index and evaluated by
comparing the Chi square value of the model to the Chi square value of the null model.
Bentler and Bonnet (as cited in Hooper, Coughlan and Mullen, 2008) recommended that
values greater than 0.90 indicating a good fit. NFI showed a good fit of the model.

Non-Normed Fit Index (NNFI) is popularly known as Tucker Lewis Index (TLI). The test is
preferred for simulation experiments. The TLI depends on the average size of the correlations
in the data. TLI value for the model indicated that the model has good-fit.

Table 3
Discriminant Validity Test
AVE CR MSV MaxR(H) Ent Info Irrt Cre Plea Mat
Ent .821 .513 .120 .897 .717
Info .829 .560 .120 .868 .347 .748
Irrt .726 .513 .125 .887 -.153 .084 .716
Cre .780 .516 .125 .874 .063 -.015 -.354 .718
Plea .809 .511 .122 .889 .103 .212 -.190 .349 .715
Matt .798 .505 .107 .874 .087 .327 .038 -.043 .242 .710

Note. MaxR is maximum reliability, Diagonal values denote square root of AVE and off-
diagonal values represent correlation coefficients between constructs.

NJMSR V. 3 Issue 2 (2019) 7

Consumers Attitude towards Ads on Social Media
Discriminant Analysis uses Composite Reliability (CR), Average Variance Extracted (AVE),
Maximum Shared Variance (MSV), and Average Shared Variance (ASV). CR for all constructs
was greater than 0.7 limit. Hence Composite Reliability was established. All constructs have
AVE value greater than 0.5 which established Convergent Validity. In addition, values of
MSV was greater than that of AVE, so the model is tested with discriminant validity.

Table 4
Construct Reliability
Construct No. of items Cronbach’s Alpha
Entertainment 4 .872
Information 3 .863
Irritation 3 .853
Credibility 3 .862
Pleasure 4 .875
Materialism 4 .868
Attitude 4 .854
Intention 4 .888

The research had total number of 29 questionnaires, 6 constructs belonged to independent

variable and 2 of them for dependent variable which had 8 questionnaires for them. Intention
construct had the highest Cronbach Alpha (α =.888) and Irritation construct had the least
value (α = .853).

4.2 Evaluation of Final Models

Table 5
Model Evaluation and Hypothesis
Unstandardized Standardized
Estimates Estimates p
Att <--- Ent .191 .241 ***
Att <--- Info .308 .365 ***
Att <--- Irrt -.139 -.155 .005
Att <--- Cre .092 .104 .068
Att <--- Ple .066 .067 .250
Att <--- Mat -.003 -.003 .958
Intn <--- Att .817 .804 ***

Note. *** P value ≤ .001

Entertainment based advertisement contents have positive implication in forming attitudes

towards Ads on social media (p ≤ .001). Information based advertisement content is effectives
towards building attitude towards Ads on social media (p ≤ .001). However, irritation has
a negative but a significant influence in determining attitudes towards Ads on social media
(p = .005). Credibility based advertisement is insignificant in building attitude towards Ads
8 NJMSR V. 3 Issue 2 (2019)
 Consumers Attitude towards Ads on Social Media
on social media (p = .068). However, the relationship is positive. Hedonic pleasure based
advertisement is insignificant in determining attitudes towards Ads on social media (p =.250).
However, the relationship is positive. Materialism based advertisement content has a negative
relationship as well as insignificant inn determining attitude towards Ads on social media
(p =.958). Positive consumer attitude towards Ads on social media has significant relationship
with intention to use Ads messages (p ≤ .001).

5. Discussion
The research aimed to investigate use of social media advertisement on perceived
advertisement value for consumers. The result showed the negative and significant effect of
irritation on attitude towards Ads on social media (Ashill & Yavas, 2005; Barrio & Luque,
2002; Koraonkar, Silverblan & O’Leary, 2001). Other studies showed entertainment and
informativeness having positive and significant impact on attitudes towards Ads on social
media (D’Souza & Taghian, 2005; Petroviei & Mannov, 2003; Wang, Sun, Lei &Toncar,
2009, Zhang & Wang, 2005). While other studies have shown significant and positive effect
of credibility, materialism and hedonic pleasure on determining attitude towards Ads on social
media (Pitando et al, 2017; Unal et al., 2010).

The differences might occur because respondents of different age and education level could
have different attitude towards Ads on social media. Regarding attitude formation process,
entertainment and information had significant and positive impact whereas, irritation had
negative but significant impact on formation of attitude towards Ads on social media. In case
of expensive purchase, consumption of branded goods and fondness of lavish fashion Ads on
social alone was not enough drive expensive purchases. Tendency of materialistic consumption
had negative as well as insignificant relationship towards Ads on social media. It can be traced
that exposure from Ads on social media in return would generate a favorable attitude products
and services. However, advertisement alone may not be the predictor for purchase. Other
elements of promotions mix for example sales promotions, interactive marketing, public
relations, events and experiences are equally considerate for promotion efficiency.

6. Conclusion
Entertainment and information based advertisement content was found to be have impact
on perceived usefulness or advertisement value. Irritation based advertisement content on
the other hand had negative but significant impact on perceived usefulness or advertisement
value. The effect of credibility, hedonic pleasure and materialism based advertisement content
were not significant in generating advertisement value among the respondents. However,
this study did not consider style of execution and appeals used for advertisement contents.
Manari, Manari and Broach (1992) investigated message content and message execution
along of tone and appeal of the commercials and pointed that message content was strong
enough to differentiate between emotional appeal and functional appeal of advertisement.
It can be argued that the consumers have difference of opinion and attitude formation based
on emotional appeals, rational appeals and different set of executions. Further research can
be carried taking execution styles into consideration like direct sell, scientific evidence,
demonstration, comparison, testimonials, slice of life, animation, personality, fantasy,

NJMSR V. 3 Issue 2 (2019) 9

Consumers Attitude towards Ads on Social Media
dramatization, humor and playful execution style (Solomon, 2011). Perceived usefulness of
social media advertisement had positive relationship with intention to use the advertisement.
As to the research gap, no conclusions could be made that the customers wanted to participate
in products and services phase or marketing communication process. A design thinking model
can be used to become more customer driven while disseminating advertising messages on
social media.

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Appendix A: Measurement Model

Appendix B: Structural Model

.19

.31

–.14
.09
.17
.07 .82
.02

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 A Study on Factors Affecting Consumption of Organic Tea: Evidence from Consumers in Kathmandu Valley

A Study on Factors Affecting Consumption

of Organic Tea: Evidence from Consumers
in Kathmandu Valley
Gaurav Ojha *
[email protected]
Upama Shakya **
[email protected]

Abstract
This study examines the factors affecting consumption of organic tea with evidence from
organic tea consumers in Kathmandu Valley. In this study, purchase intention for consuming
organic tea is the dependent variable, whereas health benefits, environmental concerns,
together with taste and price are considered as independent variables. The study has utilized
different types of non-probability sampling procedures to locate 50 regular organic tea
consumers within Kathmandu valley. Since, the study on purchase intention regarding organic
tea product is a relatively new phenomenon, hence this study is exploratory in its orientation.
In this study descriptive analysis, together with Chi-Square results and correlation coefficients
have been computed to examine nature, direction and significance of the relationship between
selected factors and purchase intention for consuming organic tea. Results indicate that
purchase intention of customers towards organic tea product is associated with perceived
health benefits and environmental concerns. Besides, consumers are willing to pay higher
price to consume organic tea when they perceive significant health benefits even with non-
preferable taste of organic tea products. Furthermore, marketing implications of data analysis
and findings have been comprehensively elaborated in this study. And, more importantly, in
regards to sustainable consumption patterns, as SDG-12 indicates, this study indicates that
consumers in Kathmandu Valley are prepared for responsible consumption as they perceive
environmental and health benefits in a given product.

Keywords: Organic tea, purchase intention, health benefits, environmental concern, SDG-12

1. Introduction
Since, organic is a new marketing concept, retailers and marketers find it difficult to attract
customers with this new product concept. However, consumers are gradually giving more
attention to organic products as a result of its distinguished production method, which is
different from the conventional tea products. Besides, these days consumers are not only
searching for product with quality and fair price, in addition they are also becoming conscious
about health and environmental issues associated with the product they are purchasing.

* Faculty of Post Graduate Research, Sunway International Business School, Maitidevi Marg, Kathmandu.
* MBA Graduate Sunway International Business School, Maitidevi Marg, Kathmandu, Nepal.
NJMSR V. 3 Issue 2 (2019) 15
A Study on Factors Affecting Consumption of Organic Tea: Evidence from Consumers in Kathmandu Valley

With this as a reference, in the context of Kathmandu valley also many organic producers
and retailers have increased their offering of organic products due to the increased demand
from the regular customers. Hence, due to the existence of a great deal of consumer interest,
it can be assumed that organic tea industry will continue to evolve and eventually cover larger
portion of tea market in Kathmandu Valley. Gradually, customers are becoming aware that
organic tea brings health benefits in terms of rejuvenating human body, reducing toxic levels
and also providing relief from stress that arises from the hustles and bustles of busy life-style.
Besides awareness of consumer is positively moderated by health and environment concern
regarding their intention to purchase organic products (Asif, Xuhui, Nasiri, & Ayyub, 2018)

Moreover, the reference for problem formulation in this study has been derived from the
market evidence, from organic farms, organic food restaurants, and shops to organic farmer’s
market for needs and wants for everything organic among consumers has been gradually
building up. However, even with this growth, the people who consume organic products are
still very less. Despite social media being used to share information, organic tea marketers
lack effective marketing mix for organic products even though it is known that they are better
and beneficial for the individual, society and community as a whole.

Acknowledging these market realities as a research problem, this study aims to analyze
the factors that influence the consumption of organic tea in the context of customers within
Kathmandu Valley. After all, the market for organic food has grown continuously over the
last few decades, despite the surge of organic food products; there is little research on organic
products tea in the context of Kathmandu valley.

Moreover, a study conducted on organic product reveal that consumer perceive them as
healthier and environmental friendly (Magnusson, Arvola, Koivisto-Hursti, Aberg, & Sjoden,
2003) and another study associates Consumers also associate organic food with natural
process and care for the environment (Shafie & Rennie, 2012). Similarly, acknowledging
demographic variables, different studies regarding regular consumers of organic food argue
that their profile tend to be educated and affluent (Padel & Foster, 2005; Stobelaar et al, 2006).
In addition, consumers are willing to pay higher prices for environmental friendly products
to indicate their ecological friendly behavior (Laroche, Bergeron, & Barbaro-Forleo, 2001).

In addition, this study also acknowledges larger social problem put forward by SDG-12,
sustainable development goal which aims to ensure sustainable consumption and production
patterns. Therefore, this study explores increasing interest among consumers for organic
tea within Kathmandu Valley and aims to discern whether this increasing trend is based on
concerns for health and environment. After all, surge of organic market, retailers and shops
indicate that consumers within Kathmandu Valley are gradually realizing the importance
environmental and social consequences of their consumption matter, hence express greater
environmental concern and are also more conscious organic products (Joshi & Rahman, 2015)
Since, organic tea products are without chemical residues, food additives and preservatives,
these products also support SDG-3, which aims to ensure healthy lives and promote well-
being for people at all ages.

This study has reviewed previous studies that have identified various factors affecting
16 NJMSR V. 3 Issue 2 (2019)
 A Study on Factors Affecting Consumption of Organic Tea: Evidence from Consumers in Kathmandu Valley

consumer behavior toward organic tea. However, factors that have been used to study
purchase intention regarding organic tea have remained inconsistent and it also tends to be
different depending on context, sample size and sampling procedures. Therefore, this study
aims to examine actual factors that affect people to consume organic tea in the context of
organic market within Kathmandu Valley. Hence, the main purpose is to identify the factors
that determine the consumers’ consumption pattern towards organic tea and also to support
organic producers or marketers to better understand purchasing intention of their consumers
when it comes to buying organic tea productions.

2. Literature Review and Theoretical Framework

An independent and rational consumer assumes personal control over what to buy and
what to consumer. Besides, consumer’s purchasing intentions are influenced by various
external factors, such as place, time, and labeling. All these external factors may influence
the consumers’ purchase intention to purchasing organic tea products (Y. Chen, 2011). For
example, in any case if a consumer is able to easily identify the organic products labels,
then the intention to purchase the organic tea produce would be much higher. In this study,
theoretical framework has been developed from the perspective of theory of planned behavior.
This theory indicates that consumer’s intention to perform a particular behavior is driven by
their attitude, subjective norm, and perceived behavioral control (Ajzen, 2006).

According to this theory (Fishbein & Ajzen, 1980), individual behavior is determined by
individual attitude, social norms and perceived behavior. Based on this theory, the study
postulates that consumers’ purchase intention towards organic tea is influence by individual
attitude towards health and environment, social norms emerging from, demographic factors
such as gender, education, income level and awareness about environment and perceived
behavior towards organic tea producing considering its higher price and tolerance towards it
indifferent taste. After all, as this theory proposes attitude towards a behavior is determined
by a cognitive structure based on accessible beliefs about the consequences of the behavior
(Ajzen, 2015). Therefore, consumers are eager to pay for and consume organic tea products
because they perceive these products having health benefits and also consumption of organic
product also exhibits their environmental concern.

Similarly, association of organic tea products with environmental issues, wellness and health
benefits also creates a perception among customers that it is much healthier, safer and more
environmentally friendly than conventionally grown tea products. Likewise, SDG-12 calls
for sustainable consumption and production patterns. Therefore, organic tea consumption
reflects consumers concerns for health, environment and other larger social issues. Besides,
producers are also playing an important role to help and support environmental protection by
producing organic products that are environmentally friendly and their increasing emphasis
on sustainability is gradually changing the landscape for businesses today (Tuttle & Heap,
2008).

According to Dumea (2012) consumption patterns especially related with foods and beverages
are rapidly changing nowadays. Therefore, environmental awareness and health concerns
continue to influence the consumer’s food purchase decision and both these factors have also

NJMSR V. 3 Issue 2 (2019) 17

A Study on Factors Affecting Consumption of Organic Tea: Evidence from Consumers in Kathmandu Valley

become main motivators for consuming organic tea products. However, there are other factors
such as high price, poor appearance and inconsistent taste remains as major obstacles against
the consumption of organic tea products.

Regarding willingness and ability to pay for organic tea products, Rodriguez, Lupin, and
Lacaze (2007) have stated that educated and affluent consumers tend to purchase more organic
products as they are more exposed to health information sources and diet and they are willing
to pay for organic tea product even though it is more expensive compared to non-organic tea
products. However, many consumers from lower income group are unable to afford the high
priced organic products. According to Radman (2005) consumers are motivated to consume in
organic products is the belief that it has a superior taste as compared to non-organic products.
However, the concept of taste can be highly subjective, differing from person to person.

Regarding recent studies, a study conducted on factors affecting the buying intention of organic
tea consumers in Bangladesh, Sumi and Kabir (2018) have demonstrated trust and perceived
price as the most affecting factors in buying intention of organic tea consumers over product
attributes, health consciousness, and environmental concern. Likewise, acknowledging Indian
organic market, Sakthirama (2012) argues that nowadays due to awareness of environmental
degradation and related issues on food, the consumer behavior is changing towards purchase
of many environmentally friendly and organic products.

Among the many organic products, organic tea is one of the consumer food products produced
and consumed in India. Furthermore, in a study conducted in the context of South Korea,
Kim, and Na (2013) state that concern for well-being lifestyle of the organic tea drinkers and
also the concern for the environmental resource have mutually affected brand preference most
strongly and this was the main reason behind organic tea repurchases intentions.

Considering, these studies, in this study also, the perceived value of the customers will be
measured with the effect of the perceived quality derived from the health benefit issues,
environmental awareness, taste, and price, because these attributes consequently influence
the buying intention of the customers. Hence, independent variables that have been applied
in this study are health benefits, environmental concerns, together with taste and price. After
all, M.F. Chen (2009) indicates as a customer searches for healthy lifestyle, there is positive
association among health consciousness, environmental attitudes and organic products.

More importantly, these independent variables illustrate the factors that influence the dependent
variable, which is consumption level of organic products. All the independent variables have
been considered based on previous studies and contextual assessments and the development
of specific research hypothesis have been presented below. Since, this study is exploratory in
nature; these hypotheses are more akin to guidelines rather than propositions for testing.

2.1 Conceptual Framework and Hypothesis

In this study, purchase intention for consuming organic tea refers to consumers’ willingness
to purchase products and operational definition of intentions captures the motivational
factors that influence purchase behavior of consumers (Ramayah, Lee, & Mohamad, 2010),
this study based on review of recent and relevant literature assumes that consumption or
18 NJMSR V. 3 Issue 2 (2019)
 A Study on Factors Affecting Consumption of Organic Tea: Evidence from Consumers in Kathmandu Valley

purchase intention of organic tea depends upon health benefits, environmental concerns,
together with taste and price (Sumi & Kabir, 2018; Bryła, 2016; Joshi & Rahman, 2015).
Regarding demographic factors, a study on organic products indicates significant difference
in purchase intention towards organic product based on gender, females indicate significantly
stronger environmental attitude and green purchase behavior than their male counterparts
(Liobikienė, Grincevičienė, & Bernatonienė, 2017). Similarly, Bieak, Kreidler, and Joseph-
Mathews (2009) indicate that education and income are strongly affecting purchase behavior
towards organic product.

For conceptualizing consumer behavior for organic tea products, this study assumes that a
relationship exists between various factors, purchase intention and consumer purchasing
behavior (Sahney, 2011). Thus, this research examines attitude and behavior pattern of organic
tea product consumption.

Antecedents
(a) Health Benefits Outcome
Purchase Consumption of
(b) Environmental concern
(c) Taste Intention Organic Tea
(d) Price

Figure 1. Relationship between health benefits, environmental concerns taste, and price, and
purchase intention for consuming organic tea.

2.1.1 Environmental Concern

Organic farming avoids the use of synthetic chemicals such as fertilizers and pesticides by
substituting them with natural manure that are safe for the health of human beings. Therefore,
environment concern has directed customers toward consuming organic products.
Hypothesis (H1): Environmental concern significantly influences consumption of organic
tea within consumers of Kathmandu.

2.1.2 Health Benefit

Health benefits have been identified as one of the major factors that influence the purchase
of organic food. Hence, this study also attempts to examine positive influence of health
orientation on consumption of organic tea with consumers in Kathmandu valley.

Hypothesis (H2): Health concern of consumers significantly influences consumption of

organic tea within Kathmandu Valley.

2.1.3 Price
Because of the high price, organic food is relatively unpopular with consumers in developing
countries (Demiryürek, Stopes, & Güzel, 2008) however, in this study; this conclusion has
been put under scrutiny. Besides, another study also mentions that price remains a barrier
for consumption of organic product and existing gap between conventional and organic food
prices needs to be reduced to increase consumption (Gil, Gracia, & Sanchez, 2000).
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A Study on Factors Affecting Consumption of Organic Tea: Evidence from Consumers in Kathmandu Valley

Hypothesis (H3): Price of organic tea has a moderately lesser influence on consumption for
the customers within Kathmandu.

2.1.4 Taste
Along with environmental concern and health consciousness, other specific product attributes,
such as nutritional value, taste, freshness, and price (Davis, Titterington, & Cochrane, 1995)
are also perceived by consumers of organic tea products. Therefore taste, natural content,
and the nutrient value of organic tea makes it a popular choice for people. However, in this
study based on explorative orientations, finding of previous studies have been put under
examination.

Hypothesis (H4): Taste has insignificant and indifferent influence on the consumption of
organic tea.

3. Research Design
In this study, different dimensions of research designs have been used from the problem
formulation to data analysis. Following on with Zikmund and Babin (2006), this research
has also used exploratory research to explore the nature of problem. A cross-sectional
quantitative method has been used for this study. Furthermore, descriptive research has been
used to summarize the data gathered from consumers of organic tea in percentages, frequency,
averages and distributions. Similarly, considering correlation research designs, in this study,
correlation analysis has been used to understand the nature and direction of relationships
between dependent and independent variables.

3.1 Participants and Procedure

In this study, consumers of organic tea were approached through boutiques or the tea shops
selling authentic organic tea. The study has utilized different types of non-probability sampling
procedures such as judgmental, snowball and convenience, to locate 50 regular organic tea
consumers (N=50) within Kathmandu valley. Many of the boutiques and shop owners agreed
to distribute the survey questionnaire to the target customers within different vicinities. For
the purpose of collecting data, structured questionnaire was prepared and the questionnaire
was distributed to organic tea customers with support from organic outlets and shops. And,
as an emphasis, among non-probability sampling procedures, snowball sampling technique
was used to effectively reach a dispersed sample within different locations of Kathmandu
Valley and this process has improved the representativeness of the sample significantly. And,
only those consumers with latest annual purchase intention towards organic tea were asked
to respond to the survey questionnaire. The final sample of study consisted of 50 participants,
with 33 female and 17 male.

Since, the study on purchase intention regarding organic tea product is a relatively new
phenomenon, hence this study is exploratory in its orientation. After all, exploratory research
seeks to provide new explanations that have been previously overlooked. In spite being
quantitative in its methodological orientations, due to the exploratory nature of the study, this
study has also adopted the interpretivism dimension to understand differences of customers

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 A Study on Factors Affecting Consumption of Organic Tea: Evidence from Consumers in Kathmandu Valley

perceptions regarding organic tea products (Saunders, Lewis, & Thornhill, 2012) and it is
also inductive in a way, when it comes to credible explaining behaviors of customers that
have been observed. Together with descriptive statistics to measure of central tendency and
dispersion, general respondent demographics, in this study, Pearson’s correlation coefficients
have been computed to examine the nature, direction and significance of the relationship
between selected factors and consumption of organic tea. For the analysis of data collected
from questionnaires, statistical package for social sciences (SPSS) was selected because of its
ability to extensively analyze quantitative data. Besides, to examine the relationship between
demographic factors, specifically gender related responses of participants concerning factors
that influences purchase decision on organic tea product chi-square test has been used to
analyze the data.

3.2 Instruments and Measures

Besides, five point Likert-type scale was used to measure variables respondents are required
to rate on a scale starting from 1=strongly disagree, 2=disagree, 3=neutral, 4=agree and
5=strongly agree. In this study, data from columns (strongly agree/agree) were combined and
also the data from columns (strongly disagree/disagree). In this study, the survey instrument
consisted 20 items included a sub group of variables with independent variables-environmental
concern (4 items), health benefit (4 items), price (4 items), and taste (4 items), dependent
variable-purchase intention for consuming organic tea product (4 items), Cronbach’s Alpha
for all the items ranged from= .76 to .85, and 7 items were included for questions related with
demographic variable. Research instrument was developed in this study for collecting primary
data from regular consumers of organic tea and the data set consists of socio-demographic
factors, individual’s attitudes and perceptions towards variables considered in this study.

4. Findings
This section of the study firstly this study deals with the demographic profile of the respondents,
next descriptive analysis of the primary data collected from a questionnaire survey, and
then this section covers chi-square analysis of survey response and correlation analysis of
dependent and independent variables considered for this study.

4.1 Demographic Profile of Consumers

In this study, purposively selected 50 regular consumers (N=50) of organic tea consisted
of approximately 66% female (n=33) and 34% male consumers (n=17). This indicates
that female consumer buy and consume organic tea more than male consumers. Similarly,
respondents in this study appear as highly educated, 50% of participants had completed their
post-graduation (n=25), 35% of participants have completed their graduation degree (n=17)
and 15% of participants have completed high school (n=8). This indicates that consumers
with higher education are also able to perceive health and environmental benefits associated
with the products. Likewise, the study also finds that 10% of respondents (n=5) are aged
between 26–35 years, 20% between 36–46 years (n=10), 30% belong to 47-56 (n=15) and
40% of them are 57 and above (n=20). Hence, the majority of consumer buying organic tea
products is above 35 years old and from this finding we can draw an inference that people

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A Study on Factors Affecting Consumption of Organic Tea: Evidence from Consumers in Kathmandu Valley

above 35 tend to be more health conscious and are also aware of health benefits associated
with organic tea products.
Similarly, this study indicates that homemakers (n=20) and consumers involved in business
activities (n=20) consume organic tea. And, the remaining (n=10) customers are either students
or engagement in government service. Regarding monthly income, most of the consumers
purchase organic tea on a monthly basis and most of consumers (n=25, 50%) on average
spend about Rs. 400 or above for purchasing organic tea products. Likewise, 40% (n=20) of
organic tea consumers spend within the range of 200-400 for purchasing organic tea product.
Furthermore, regarding monthly income, 80 %( n=40) of participants earn within the range of
50,000-70,000 or 70,000 and above.
More importantly, demographic information regarding income and education level of organic
tea customers are comparable with a study by Rodriguez, Lupin, and Lacaze (2007), which
mentions educated and affluent people has regular consumers of organic products. Similarly,
concerning gender differences, Laroche, Bergeron, and Barbaro-Forleo (2017) indicate in their
study that females have significantly stronger purchase intention towards organic products.
Demographic information is similar to study by Wier, Jensen, Andersen, and Millock (2008)
that suggest the purchases of organic products are affected by age, educational level and
disposable income and purchase intention towards organic products is higher among middle
and upper age customers. Hence, organic marketers and retailer need to position their organic
tea product acknowledging needs and wants of this demographic segment.

4.2 Descriptive Analysis

In this study multi-items concepts associated with selected variables were measured on a
5-point scale from 1 to 5 (here, 1 = strongly disagree, 5 = strongly agree).As indicated in the
table-2 below, the majority of respondents in this study have positive intention to purchase
organic tea based on their perceptions regarding the product. Majority of the respondents agree
with the items concepts, which indicates that they perceive independent variables selected in
this study as having determining influence when it comes to purchasing organic tea.

Table 2
Descriptive Analysis of Variables
N = 50 Weighted MEA ) Stander Deviation
Environment Concern 3.50 .71
Health Benefit 3.70 .64
Taste 2.43 .81
Price 2.78 .69

It is evident from the above table that the majority of respondents agree that organic tea
is environment friendly. Weighted mean for environmental concern is 3.50, which indicates
environmental concern positively influences consumption of organic tea. Similarly, it is evident
that majority of the respondents agree that organic tea is beneficial for health. Since, it has the
highest weighted mean value; health benefits associated with organic tea appears as the most
influencing factor when it comes to purchase intention regarding organic products. Likewise,
22 NJMSR V. 3 Issue 2 (2019)
 A Study on Factors Affecting Consumption of Organic Tea: Evidence from Consumers in Kathmandu Valley

as indicated in the table, price and taste seems to have lesser influence on purchase intention
of customers regarding organic tea. Customers are prepared to buy organic tea products if they
perceive health benefits and environmental concern associated with the product.

4.3 Chi-Square Analysis of Survey Response among Male and

Female Respondents
In this study, regarding health benefits, results of Pearson Chi-square indicate that female
participants are significantly influenced by health benefits associated with organic tea products
(= 4.86, df = 1, N = 50, p = .030) in comparison to male consumers. In other words, female
consumers are more likely to purchase organic tea products compared to male consumers
considering its health benefits. However, responses of males and females are not significantly
different on whether they would purchase organic tea based on environmental concern
(= .016, df = 1, N = 50, p = .964).
Similarly, this study indicates regarding price, an integral part of marketing mix, male and
female consumers have significantly different perception, price influences male consumer
more than female consumer. In other words, male consumers are less likely to purchase
organic tea considering its slightly higher price than regular tea ( = 4.34, df = 1, N = 50,
p = .022). After all within the variable (willing to pay more for organic tea products than
regular tea products), 65% of female respondents either strongly Agree/Agree or have
remained neutral. Besides, as the data analysis also indicates that regarding taste of organic
tea products, male consumers are more sensitive than female consumers.
Female consumer tends to purchase more organic products as they are more conscious
toward the health of their family. After all, other studies on organic food have also indicated
that female consumers are much aware than males on organic food products and they also
have more awareness and stronger belief towards consumption of organic products (Dahm,
Samonte, & Shows, 2009). In overall, as this study also suggest by gender, women will be more
likely to be concerned on the issues regarding to health. Besides, considering demographic
segmentation of organic market, this study indicates that organic tea market needs to consider
female consumers as its main target market group and develop marketing mix regarding
organic tea products acknowledging their needs, wants and demands.
Table 3
Pearson Chi-Square Analysis of Survey Response
Variable (N = 50) (Chi-Square) Female = 33, Male = 17 P
Health Benefits = 4.86, ( Female = 25 & Male = 10 Agree) 0.017*
Environmental concern = .016, (Male = 14 & Female = 25 Agree) 0.677
Price = 4.34, ( Female = 24 & Male: 7 Agree) .022*
Taste = 4.44, ( Female = 24 & Male: 6 Agree ) 0.034*

P Value significant at *05 levels (2-tailed)

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4.4 Correlation Analysis

Main focus of correlation analysis is to examine the extent changes in one variable influences
degree of change in the other factor. Hence, in this study to evaluate and measure the degree of
association or relationship between independent and dependent variables Pearson’s correlation
coefficients have been computed to analyze the strength of linear relationship among them.
The result shows that there is a positive relationship between consumption of organic tea as
dependent variable and health benefits, environmental concerns, together with taste and price
as independent variables. As the table below indicates, environmental concerns and health
benefits are significantly correlated, whereas price and taste has rather moderate or even weak
correlations.

Table 4
Correlation Coefficients (Pearson’s r)
Correlation Statistics between Explanatory factors and Purchase intention to consume organic
tea
N = 50 Explanatory Factors Correlations Coefficient
Environmental Concern r = .66* (p = 0.22 < 0.05)
Health Benefits r = 0.78* (p = 0.17 < 0.05)
Price r = 0.13 (p = 0.164 > 0.05)
Taste r = 0.11 (P = 0.276 > 0.05 )
* Correlation is significant at the .05 level (2-tailed)

As the above table indicates Environmental concern (H1), Health Benefits (H2), Price
(H3), Taste (H4) are correlated with consumption of organic tea. Concerning the strength
of relationship, two independent variables environmental concern and health benefits
indicate statistically significant relationship (r (49)=0.66,p<0.05) & r (49)=.78, p<0.05) with
consumption of organic tea products whereas price and taste indicate weak positive correlation
towards consumption of organic tea. Relationship between taste and price regarding purchase
of organic tea seems rather irrelevant and indifferent.

Moreover, correlation coefficients derived in this study are comparable with findings of
Durham and Andrade (2005) that main factors influencing purchase intension towards organic
product consists of health and environmental concerns. Similarly, comparing demographic
profile of organic tea consumers with correlation coefficients, this study also, similar to
findings of Schifferstein and Ophuis (1998) argues that organic food consumers tended to be
health conscious and they are willing to purchase healthier foods to improve their health and
these consumers are even accept higher price when their purchase intention correlates with
perceived health benefits and environment concern. Besides, organic product consumption is
an environmental behavior and consumer purchase organic products because they perceive
that their consumption pattern influences the environment (Krajhanzl, 2010).

Based on the nature of significance and relationship mentioned in the above table the
entire hypothesis in this study has been accepted. Besides, due to the confirmed linearity of
relationships between variables, there is a condition to run regression analysis in this study.

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 A Study on Factors Affecting Consumption of Organic Tea: Evidence from Consumers in Kathmandu Valley

However, due to the nature of sample size and sampling procedures, predictive relationship
between variables have been left out for further study, when calculated coefficient (β) for
environment concern and health benefits have revealed strong predictive association with
consumption of organic tea.

5. Discussions
This study finds that environmental concern and consumption of organic tea are positively
correlated and the relationship between these variables appears to be statistically significant,
hence with this as a reference, this study argues that realizing the environmental benefits of
organic tea, consumers consume organic tea. And, the finding of this study compares with
Yeon and Chung (2011) that environmental consciousness positively influences consumer
attitude toward buying organic products.

Similarly, this study finds that the relationship between health benefits and consumption of
organic tea are both positive and highly significantly correlated. Hence, from this finding
it can be inferred that most of the people consume organic tea for health benefits. More
importantly finding of this study are similar with a study by Al-Taie, Rahal, AL-Sudani, and
AL-Farsi (2015), as the article explores that health concerns and environmental awareness as
main reasons that people consume organic products. Likewise, another study also concludes
that basic motives for purchasing organic product are associated with healthiness and organic
character of the product (Bryła, 2016).

Moreover, the study also observes that taste and consumption are positively correlated but
co-variation appears rather weak and there is no significant relationship between these two
variables on consumption, therefore this study argues that consumers of organic tea are
indifference to its taste. Therefore, people consume organic tea in larger amount for its health
benefits without much consideration for its taste. This finding contradicts with indication of
previous study that taste is one of the main factors organic foods that consumer consider for
purchase decision (Joshi & Rahman, 2015). In addition, price and consumption of organic
tea have indifferent and insignificant relationship, which means that people will still continue
to consume organic tea even when prices are high or have increased. This finding is rather
significant because it suggests that consumers are prepared to pay more for organic tea as
compared to conventional tea products if they perceive the product they are buying as having
health and environmental benefits. And, this finding also related with a study by Chang and
Zepeda (2005) that concludes organic product consumers more tolerant of higher prices.

Demographic information presented in this study is also comparable with a study that finds
high levels of education, income, and social class influences regular consumption of organic
products (Padel & Foster, 2005). Besides, as Chi-square analysis in this study suggests that
female consumers are significant more likely to purchase organic tea acknowledging its health
benefits. Similarly, a study by Laroche, Bergeron, and Barbaro-Forleo (2001) indicates that
consumers are willing to pay more for environmentally friendly products and the segment of
consumers were more likely to purchase organic products are females. Therefore, this study
also suggests organic tea marketers, retailers and producers to develop preference-based
market segmentation acknowledging health concerns and ecological awareness of customers.

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And, the significant findings of this study are comparable with Argan (2008) that there is
a statistically meaningful relationship between health care practice and the consumption of
organic food, and that female respondents were more concerned about organic food than
men. In addition, most of the relevant findings of this study are comparable with Basha,
Mason, Shamsudin, Hussain, and Salem (2015) that purchase intention of consumers regarding
organic tea is based on factors like environmental concern, health concern and lifestyle and
subjective norms.

As first part of SDG 12 indicates, this study also suggests that consumers in Kathmandu
Valley are prepared for responsible consumption if they perceive environmental value in any
product. Customers are prepared to transact even with higher prices for organic tea products
for its perceived environmental and health benefits. Besides, the study also finds that most
of the consumers consume organic tea twice a day. Most of the consumers/ respondents
purchased organic tea on a monthly basis and on average consumers spent above Rs. 400 on
organic tea. And, as a conclusive finding in this study, health benefit is the most influencing
factor when it comes to consuming organic tea in Kathmandu Valley and this finding also
relates with a study by Sirieix, Kledal, and Sulitang (2011) where health has been considered
as the basic reason for consumption of organic products and this finding contradicts with
finding of Michaelidou & Hassan (2008) that health consciousness is the least important
motive in predicting attitudes towards organic products.

More importantly, this study finds also comparable to previous study that consumers of
organic tea products have more positive attitudes toward these products, and they exhibit
an increased willingness to pay higher prices for these products (Radman, 2005).Hence,
this study also suggests organic tea product marketers, retailers and producers to increase
consumers’ knowledge about their product by effectively promoting health and environmental
benefits of consuming organic tea.

Moreover, as in an article that studies association between time perspective and organic food
consumption among large sample of adults, Bénard et al (2018) argue that consideration of
future consequences significantly represents a psychological determinant for consumption of
organic food products and the cognitive factor associated with predicting environmental and
health concerns influences dietary behaviors towards organic food. Similarly, the findings
of this study also indicate that concern for future when associated with environment and
health positively influences a consumer to consume organic tea products. Again interpreted
from the perspective of SDG-3, associated with healthy lives and well-being for people at all
ages, the study explore that the consumers are prepared to substitute momentary benefits of
taste and low price with future consequences of consuming organic tea, for both health and
environmental benefits. Regarding implication for identifying target market and formulating
marketing mix, this study suggests for organic tea producers and marketers to segment
environmentally conscious consumers within the framework of attitudinal and behavioral
variables (Golob & Kronegger, 2019). After all, attitudinal variable, environmental concern
and behavioral variables that include, health benefits and willingness to tolerate higher price,
determine sustainable consumer segments.

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 A Study on Factors Affecting Consumption of Organic Tea: Evidence from Consumers in Kathmandu Valley

6. Conclusion & Recommendations

People are getting more and more conscious about the usage and the benefits of organic
food and organic tea. Various factors can affect the consumption of organic tea such as
environmental concern, health benefits, taste and price. Most people start their day with a cup
of tea. So, the tea market has been growing tremendously within Kathmandu Valley. Various
range and quality of tea are available in the market to meet the customer demand. Even there
is a vast array of choices available to suit the taste of people. But the problem is that while the
significance of organic tea products are being realized slowly, but surely, there is still a very
small population consuming organic tea. And, this small population is convinced by the prior
mentioned factors to consume organic tea.

In this study, health concern appears as most determining and pertinent. However, with the
growing supply and variety of organic tea in the market, people have started to make their
consumption decisions based on diverse factors; hence this study creates scope for further
research regarding organic tea products. Besides, in order to promote organic and push the
sales of organic tea sellers need to make health and environmental benefits of the product
visible to the customers by using eco-labels highlighting health benefits effectively After
all, even among young consumers health concerns resonates as the most critical factor in
stimulating their purchase attitudes and intention towards organic products (Yadav & Pathak,
2015)

This study provides valuable insight about consumer buying behavior towards organic tea
products by examining the factors that influence consumers’ purchase intentions. Moreover, in
an article on organic consumer segmentation based on their research findings Curiel, Castro,
and Quisimalín (2015) suggest that people who have heard something about organic products,
later on they have more interest in consuming them. Hence, this study also recommends
organic product retailers make organic tea available casually in all department stores and
other small shops, which will make it more convenient for people. Promotional activities
need to be carried out on a regular basis like free tea tasting and sampling of tea bag. Besides,
comparable with implications suggested Azzurra, Massimiliano, and Angela (2019), this
study also indicates to organic product retailers and marketers to communicate health, as well
as environmental and social benefits related to the production and consumption of such food,
focusing on sustainable consumer segment for sustainable consumption. There is also a need
to introduce new offers such as reward cards or gift coupons to increase customers’ loyalty
towards organic tea. Moreover, as environmental concern positively relates to purchase
intention towards eco-friendly organic products. Therefore, this study also recommends
marketers of organic tea products to develop creative marketing strategies for exemplifying
ecology benefits and environments values of consuming their products. After all, organic
products marketers need to understand how to promote their products more effectively
realizing needs and wants of environmentally conscious consumers.

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30 NJMSR V. 3 Issue 2 (2019)

 Customs Duty Evasion Issues in Nepal

Customs Duty Evasion Issues in Nepal

Gautam Maharjan, PhD *
[email protected]

Abstract
The main objective of this study is to identify the magnitude of issues relating to customs
duty evasion in Nepal. Judgmental sampling technique has been applied with the total of 819
respondents: 421 from business communities and 398 from government officials. Descriptive
statistics and compare mean test has been used for the data analysis. From the ranking analy-
sis, it is concluded that respondents are more serious on the issue of ‘difficulties in managing
open border’, ‘ambiguous customs policy’ and ‘poor infrastructure and inconvenient location’
which were ranked first, second and third respectively. However, the respondents become
less serious in the issue of ‘poor technology adoption’ which is ranked last (seventh). The
mean scores on each issue were above three and it indicates that the respondents agree on
seriousness of the customs duty evasion. However, the mean difference test across business
communities and government officials on each issue were found to be significantly different
as the mean scores for business communities were higher. Identification of the seriousness on
the issues of customs duty evasion in this study could be advantageous for the revenue planner
to make newer customs policy.

Keywords: Customs duty evasion, Open border, Customs policy, Infrastructure and location,
Technology

1. Introduction
Customs duty is defined as duty chargeable on goods to be exported or imported in accordance
with laws (DoC, 2007). In other words customs revenue is a tax imposed on imports and exports
of commodities through country boundaries (Singh, 2010). Tax evasion in customs occurs
mainly through misclassification and undervaluation of imports in developing countries. This
in fact also occurs due to threat of higher valuation and lengthy time for customs clearance,
thus encouraging importers to engage in illegal settlement. King (2003) indicated a practice
of under-invoicing and lack of effective valuation process in developing countries. The study
highlighted the necessity of capacity development for implementation of customs valuation
system. In the same fashion, Ghimire (2005) identified the discretionary power of customs
authorities in Nepal as a major issue with customs valuation process.
Finger and Schuler (2000) also observed that the customs valuation agreement provides
neither appropriate diagnosis nor appropriate remedy for least developed countries problems

* Faculty at Public Youth Campus, Tribhuvan University. This paper was presented in the 1st Global
International Conference dated 13-14 December 2019.

NJMSR V. 3 Issue 2 (2019) 31

Customs Duty Evasion Issues in Nepal

with customs administration. They suggested capacity building in the form of introduction
of IT systems and database to customs for sound implementation of agreement as proper
administrative environment does not exist in many developing countries. Trade liberalization
shows a negative association with total tax revenue and international trade tax revenues
(Khattry & Rao, 2002). Bhagwati (1964) argued that the discrepancies between reported
imports and corresponding exports by trading partners could be explained by undervaluation
and misclassification of imports to reduce the burden of tariff.
Rege (2002) accounted the resentment of developing countries for the application of transaction
values as it would supposedly decrease the customs revenue due to undervaluation. The
study on effect of technology on revenue collection by Embu County Government, Kenya,
concluded that the technological advancements positively affect revenue collection (Karimi,
Kimani, & Kinyua, 2017).
Amin, Nadeem, Parveen, Kamran and Anwar (2014), in their empirical investigation on
factors affecting tax collection in Pakistan, concluded that the tax collection reduced due
to corruption, inflation and political instability; whereas, trade openness and real per capita
income increase the revenue.
Awan (2014) highlighted six main causes of tax evasion: unproductive expenditures / misuse
of funds, anti-tax culture, corrupt tax administration, multiple & higher tax rates, complex tax
system and amnesties and incentives for tax evaders.
Wei (2013) found that inefficient knowledge management, misuse of trade facilitation
standards or misunderstanding of multilaterally acknowledged trade rules on the part of both
policymakers and administrators might create distortions to Customs’ mandate. The traders
in Bangladesh faced delays due to excessive official formalities, inefficiencies and arbitrary
discretion in conducting their trade, especially in Customs and the Port Authority (Uzzaman
& Yusuf, 2011).
The average size of informal economy in Nepal was found to be about 40 percent of official
economy during the period of 2001/02-2009/10. Further, it also showed a significant impact
on total revenue loss for Nepalese customs (Paudel, 2010).
Taneja and Pohit (2004) reported that Raxaul, Naxalbari, Jogbani, Nautanwa Barhni in India
emerged as the important centers of informal trade in India whereas Kankkadvita, Biratnagar,
Birgunj, Bhairahawa, and Nepalgunj are noted as the important informal trading centers in
the Nepalese territory.
Ghimire (2006) estimated evasion was more than 40 percent of taxable capacity. The study
found that the penalty provisions of the Customs Act 1962 could not be implemented
perfectly. Informal and unauthorized part covered a large volume which was around 38.9
percent of the formal import from India to Nepal (MountDigit Technology, 2006). German
Development Cooperation (2015) also found tax evasion is the function of high tax rate, low
penalty rate, low possibility of detection of the fraud, weak administration and its behaviour
towards taxpayers.
The major reasons as identified by the past studies are the presence of poor technology
adoption, weak customs administration, poor human resource base, and the poor customs
infrastructure. The past studies also do not provide the evidence on the aggregate responses

32 NJMSR V. 3 Issue 2 (2019)

 Customs Duty Evasion Issues in Nepal

of business communities and government officials about importance of several factors

associated with customs duty evasion. Similarly, none of the past studies have done cross
sectional analysis and identified issues in the order of seriousness.
It has been well understood that customs duty evasion negatively affects the customs revenue.
The most common problem in a developing country like Nepal is the difficulty in achieving
the desired economic growth primarily due to the lack of adequate revenue generation.

2. Literature Review
Akindele (2011) has revealed that insufficient training, barriers in communication and bad
management skills are the root cause of fraud in the organization. Abodher, Ariffin and Saad
(2018) revealed that both political affiliation and political instability have a significant effect
on tax non-compliance among self-employed Libyans. Tax-evasion goods and use of agents
to import goods substantially affect small business performance in open border region (Paudel
& Devkota, 2018).
According to Bridi (2010), tax officials are those who are responsible for the administration of
tax collection and enforcement, including the registration and removal of tax-payers from the
national registry, the collection of tax dues (filling, payment and processing), the identification
prosecution of alleged tax offences. Similarly OECD report (2014), said that tax officers also
play an important role in combating corruption as in the course of their work they may uncover
corruption and other wrongdoings.
Mishra, Subramanian and Topalova (2007) found a significant and robust impact of tariffs
policy on evasion. It was found among others that Transit and Warehousing activities have
a lot of rot being perpetuated independently and collectively by importers and tax officials
(Adu1, Poku & Anarfi, 2014).
Randrianarisoa, Bolduc, Choo, Oum and Yan (2015) revealed in their study that strong
evidence of negative impacts of corruption on airport operating efficiency using panel data
for selected European airports between 2003 and 2009.
Delays in clearance of goods and evasion of duties will negatively impact the efficiency
of customs services. Corruption negatively affects the absolute effectiveness of customs
clearance process (Onogwu, 2018).
Edirisinghe (2013) has underlined one of the key components is infrastructure in international
logistic performance. Infrastructure comprises ports, railroads, roads, information technology
assessing the quality of trade-and-transport. So, in order to control the customs evasion,
infrastructure facilities should be provided adequately and effectively.
In this way, several research studies are available in the area of tax evasion in the countries
around the globe and many of them provide conflicting views in the behaviour of customs
duty evasion. In Nepal there is a dearth of such literature regarding the different issues related
to customs duty evasion. Therefore, the present study attempts to address the magnitude of
issues related customs duty evasion based on Nepalese experience in border tax management.
From the literature review, following research questions have been developed to study the
magnitude of issues relating to customs duty evasion in Nepal.

NJMSR V. 3 Issue 2 (2019) 33

Customs Duty Evasion Issues in Nepal

What is the magnitude of the issues like “poor technology adoption (PTA)”?
What is the magnitude of the issues like “political disturbance (PD)”?
What is the magnitude of issues on “difficulties in managing open border (OB)”?
What is magnitude of issue on “poor human resource base (PHR)”?
What is the magnitude of issue on “ambiguous customs policy (ACP)”?
What is the magnitude of issue on “poor infrastructure and inconvenient location (PIIL)”?
What is magnitude of issue on “Lengthy customs clearance procedure (LCCP)”?

In the light of the stated problems, the study has the objective of assesing the magnitude
of issues relating to customs duty evasion in the business communities and government
officials in Nepal. Further, the study also attempts to identify the degree of seriousness of the
stakeholders on the issues. The issues associated with customs duty evasion system are- (1)
Poor technology adoption (PTA), (2) Political disturbance (PD), (3) Difficulties in managing
open border (OB), (4) Poor human resource base (PHR), (5) Ambiguous customs policy
(ACP), (6) Poor infrastructure and inconvenient location (PIIL), and (7) Lengthy customs
clearance procedure (LCCP).

Political
disturbance

Poor Difficulties
technology in managing
adoption open border

Issues on
Customs Duty
Lengthy Evasion
Poor human
customs
resource base
clearance
procedure

Poor Ambiguous
infrastructure customs
and location policy

Figure 1. Research framework on issues on customs duty evasion.

3. Data and Methodology

Descriptive and analytical research design have been used in this study to identify the
seriousness of stakeholders on the issues related to customs duty evasion in Nepal. Data was
obtained from opinion survey. It was collected from major customs points and concerned
stakeholders of different places of Nepal through questionnaires. The responses are measured
in a Five point Likert scale for various sorts of problem statements.
34 NJMSR V. 3 Issue 2 (2019)
 Customs Duty Evasion Issues in Nepal

The scale of responses are numbered as 1 for ‘not agree’, 2 for ‘somehow agree’, 3 for ‘fairly
agree’, 4 for ‘agree’, and 5 for ‘strongly agree’. The data focuses on seven different issues
relating to customs duty evasion determines from past studies. The perceptions of stakeholders
have been collected to determine the most serious and the least serious factors on customs
duty evasion among the seven issues. The seven issues on customs duty evasion [ie., poor
technology adoption (10), political disturbance (06), difficulties in managing open border
(06), poor human resource base (10), ambiguous customs policy (10), poor infrastructure and
inconvenient location (10), and lengthy customs clearance procedure (11)] were evaluated
for the seriousness on the issues. The number of respondents were 819. Out of the total
respondents, 421 were from business communities and 398 from government officials, were
taken as a sample for this study. Independent sample mean test was employed to compare the
perception of both groups- business communities and government officials on the issues of
customs duty evasion. The percentages of total mean score were also distributed and ranked
to identify the degree of seriousness on each issue related to customs duty evasion.

4. Study Results and Discussion

Responses were collected from the opinion survey. The opinion survey of various stakeholders
(business communities and government officials related to customs revenue) shows the
average scores on seven issues. Table 1 depicts that distribution of respondents on the basis
of mean scores and standard deviation obtained in various categories of issues. Each of the
issue categories contains six to eleven statements. The result reveals that the respondents are
experiencing more problems on the seven different issues.

4.1 Descriptive Statistics

According to business communities’ views, the highest mean score (3.876) lies in ‘ambiguous
customs policy’ whereas the lowest mean score (3.609) lies in ‘poor technology adoption’.
But the lowest standard deviation (0.569) and the highest standard deviation (0.705) lie
in ‘ambiguous customs policy’ and ‘difficulties in managing open border’ respectively.
Similarly, from the point of view of government officials, the highest mean score of 3.642
lies in ‘difficulties in managing open border’ whereas the lowest mean score (2.925) lies in
‘poor technology adoption’. But the highest standard deviation of scores (0.881) lies in ‘poor
technology adoption’ and the lowest (0.616) lies in ‘ambiguous customs policy’. The structure
of mean and standard deviation of both groups are also similar with total respondents.
From the analysis of business communities’ perception on the basis of mean scores, the
respondents are more serious on the issue of ‘difficulties in managing open border’ but the
corresponding standard deviations reflects the views on the issue are seen as ups and downs.
Similarly, the view of government officials as well as in total respondents are more serious in
‘difficulties in managing open border’ but less serious in ‘poor technology adoption’. But the
highest standard deviation of the scores in ‘poor technology adoption’ reveals the perceptions
of the respondents on this issue are not consistent among the seven issues. However the
standard deviations of scores of all groups are low in ‘ambiguous customs policy’. This
indicates that the respondents’ views on the issue of ‘ambiguous customs policy’ have more
consistency. Eventually, the average views of total respondents are similar with the views of
government officials.

NJMSR V. 3 Issue 2 (2019) 35

Customs Duty Evasion Issues in Nepal

Table 1
Response of Stakeholders on the Issues of Customs Duty Evasion

Business Government
Total
Communities Officials
Issues of Customs Duty Evasion (421) (819)
(398)
Mean SD Mean SD Mean SD
Poor technology adoption 3.609 0.681 2.925 0.881 3.276 0.855
Political disturbance 3.733 0.670 3.334 0.811 3.539 0.768
Difficulties in Managing open border 3.776 0.705 3.642 0.698 3.711 0.704
Poor human resource base 3.782 0.662 3.366 0.787 3.579 0.754
Ambiguous customs policy 3.876 0.569 3.442 0.616 3.665 0.631
Poor infrastructure and inconvenient location 3.868 0.594 3.419 0.724 3.650 0.697
Lengthy customs clearance procedure 3.836 0.599 3.299 0.674 3.575 0.690
Source: Author’s calculation from Survey 2015
4.2 Levene’s Test
Table 2 reports Levene’s test for equality of variances for both groups of business communities
and government officials. Among seven different issues, Levene’s F-Statistic shows that all
the issues are significant at 1 percent and 5 percent level except two issues- (1) difficulties
in managing open border and (2) ambiguous customs policy. So, equality of variances is
not assumed for all issues except for ‘difficulties in managing open border and ambiguous
customs policy for independent samples test (t-Test for two sample mean). So, equality of
variances is assumed for these two issues to test the compare means of both groups.
Table 2
Levene’s Test for Equality of Variances

Sig. Equality of
Issues of Customs Duty Evasion F-Statistic p-value
Level Variance
Poor technology adoption 43.030 0.000 < 0.01 Not assumed
Political disturbance 16.630 0.000 < 0.01 Not assumed
Difficulties in managing open border 0.010 0.920 > 0.10 Assumed
Poor human resource base 15.749 0.000 < 0.01 Not assumed
Ambiguous customs policy 1.926 0.166 > 0.10 Assumed
Poor infrastructure and inconvenient location 23.478 0.000 < 0.01 Not assumed
Lengthy customs clearance procedure 4.656 0.031 < 0.05 Not assumed
Source: Author’s calculation from Survey 2015

4.3 Compare Mean Test

Table 3 demonstrates the deference mean-scores and corresponding t-statistics of each issue
of customs duty evasion between two groups of stakeholders (Business communities and
Government officials). The result reported that all corresponding p-values of each issue are
less than 0.01 (1%). This indicates that the mean differences of both groups are significant at
1 percent level in all issues. This means that there is a significant difference of mean-scores
between two groups. Therefore, it is clearly understood that the perception between business
communities and government officials are different in each issue.
36 NJMSR V. 3 Issue 2 (2019)
 Customs Duty Evasion Issues in Nepal

Table 3
t-Test for Equality of Means

Mean t- p- Sig.
Issues of Customs Duty Evasion Df Level
Difference Statistic value
Poor technology adoption 746.748 0.684 12.377 0.000 < 0.01
Political disturbance 771.020 0.399 7.654 0.000 < 0.01
Difficulties in Managing open border 817.000 0.135 2.742 0.006 < 0.01
Poor human resource base 777.268 0.416 8.161 0.000 < 0.01
Ambiguous customs policy 817.000 0.434 10.470 0.000 < 0.01
Poor infrastructure and inconvenient location 768.584 0.448 9.655 0.000 < 0.01
Lengthy customs clearance procedure 793.310 0.537 12.025 0.000 < 0.01
Source: Author’s calculation from Survey 2015
4.4 Seriousness of Business Communities on the Issues of Customs
Duty Evasion
Based on the response of the business communities for the issues on customs duty evasion,
an attempt has been made to present the mean score of each issue. Rounding the mean scores,
Table 4 depicts that the mean score of each issue of customs duty evasion is nearly 4 which
lie in ‘agree’ scale of response.
Table 4
Perception of Business Communities on the Issues of Customs Duty Evasion with Scale of
Responses

Mean Rounding Scale of

Issues of Customs Duty Evasion
Score Scores Response
Poor technology adoption 3.61 4 agree
Political disturbance 3.73 4 agree
Difficulties in Managing open border 3.78 4 agree
Poor human resource base 3.78 4 agree
Ambiguous customs policy 3.88 4 agree
Poor infrastructure and inconvenient location 3.87 4 agree
Lengthy customs clearance procedure 3.84 4 agree
Average 3.78 4 agree
Source: Author’s calculation from Survey 2015
In this process, average scores of business communities are computed as percentage and
ranked in order of seriousness. As presented in Table 5, the level of responses of the business
communities shows that ‘ambiguous customs policy’ has captured 14.64 percent of total
scores and ranked as the number one issue. Similarly, ‘poor infrastructure and inconvenient
location’ (14.61%) and ‘lengthy customs clearance procedure’(14.49%) are ranked two
and three respectively while poor technology adoption has captured only 13.67 percent and
ranked as the least serious issue among the seven related issues of the customs duty evasion.
Therefore, from the view point of business communities, ‘ambiguous customs policy’, ‘poor
infrastructure and inconvenient location’ and ‘lengthy customs clearance procedure’ are the
more serious issues of customs duty evasion.
NJMSR V. 3 Issue 2 (2019) 37
Customs Duty Evasion Issues in Nepal

Table 5
Rank of Various Issues Related to Customs Duty Evasion in the View of Business Communities

Issues of Customs Duty Evasion Mean Score % Rank

Poor technology adoption 3.61 13.63 7
Political disturbance 3.73 14.10 6
Difficulties in Managing open border 3.78 14.26 5
Poor human resource base 3.78 14.28 4
Ambiguous customs policy 3.88 14.64 1
Poor infrastructure and inconvenient location 3.87 14.61 2
Lengthy customs clearance procedure 3.84 14.49 3
Total 26.48 100
Source: Author’s calculation from Survey 2015

4.5 Seriousness of Government Officials on the Issues of Customs

Duty Evasion
According to perception of government officials, mean scores of each issue related to customs
duty evasion have been also presented. Table 6 shows that the mean score of the issue of
‘difficulties in managing open border’ is nearly 4.
According to distribution of scale, response at 4 lies in ‘agree’ scale of response. However, all
other scores related to customs duty evasion are nearly 3 which indicate ‘fairly agree’ scale of
response. However, on an average mean score of the total issues reaches at 3.35 that is nearly
3. This result also indicates that the average perception of government officials is observed as
‘fairly agree’ on the issues of customs duty evasion.
Table 6
Perception of Government Officials on the Issues of Customs Duty Evasion with Scale of
Responses

Mean Rounding Scale of

Issues of Customs Duty Evasion
Score Score Response
Poor technology adoption 2.92 3 fairly agree
Political disturbance 3.33 3 fairly agree
Difficulties in Managing open border 3.64 4 Agree
Poor human resource base 3.37 3 fairly agree
Ambiguous customs policy 3.44 3 fairly agree
Poor infrastructure and inconvenient location 3.42 3 fairly agree
Lengthy customs clearance procedure 3.30 3 fairly agree
Average 3.35 3 fairly agree
Source: Author’s calculation from Survey 2015

As presented in Table 7, mean scores of government officials are computed and ranked
in order of seriousness. The responses of the government officials shows that issues on
‘difficulties in managing open border’ covers 15.45 percent of total mean scores and has
been ranked first, then, ‘ambiguous customs policy’ (14.69%) and ‘poor infrastructure and
38 NJMSR V. 3 Issue 2 (2019)
 Customs Duty Evasion Issues in Nepal

inconvenient location’ (14.60%) ranked second and third respectively while ‘poor technology
adoption’ which covered only 12.49 percent which has been ranked as the least serious issue
of the customs duty evasion among the seven issues. As government officials’ point of views,
‘difficulties in managing open border’, ‘ambiguous customs policy’ and ‘poor infrastructure
and inconvenient location’ are the major issues for customs duty evasion among seven issues.
Table 7
Rank of Various Issues on Customs Duty Evasion in the Views of Government Officials

Issues of Customs Duty Evasion Mean Score % Rank

Poor technology adoption 2.92 12.49 7
Political disturbance 3.33 14.23 5
Difficulties in Managing open border 3.64 15.54 1
Poor human resource base 3.37 14.37 4
Ambiguous customs policy 3.44 14.69 2
Poor infrastructure and inconvenient location 3.42 14.60 3
Lengthy customs clearance procedure 3.30 14.08 6
Total 23.43 100
Source: Author’s calculation from Survey 2015

4.6 Seriousness of Overall Respondents on the Issues of Customs

Duty Evasion
From the point of view of overall respondents on the issues related to customs duty evasion,
order of seriousness has been presented in Table 8 by ranking the mean scores of seven
different issues. The table shows that the mean score of the ‘poor technology adoption’ is
nearly 3. According to distribution of scale, response at 3 is ‘fairly agree’ scale of response.
However, each of all other issues related to customs duty evasion is nearly 4 scale of response.
The scale of response at 4 indicates ‘agree’. However, the average of the total mean score is
3.57 (ie., nearly 4). This result also reports that the perception of total respondents is eyeballed
as ‘agree’ on the issues of customs duty evasion.
Table 8
Perception of Total Respondents on the issues of Customs Duty Evasion with Scale of Responses

Rounding Scale of
Issues on Customs Duty Evasion Mean Score
Scores Response
Poor technology adoption 3.28 3 fairly agree
Political disturbance 3.54 4 Agree
Difficulties in Managing open border 3.71 4 Agree
Poor human resource base 3.58 4 Agree
Ambiguous customs policy 3.67 4 Agree
Poor infrastructure and inconvenient location 3.65 4 Agree
Lengthy customs clearance procedure 3.57 4 Agree
Average 3.57 4 Agree
Source: Author’s calculation from Survey 2015

NJMSR V. 3 Issue 2 (2019) 39

Customs Duty Evasion Issues in Nepal

As presented in Table 9, average scores are computed and ranked in order of seriousness.
According to seriousness of the total respondents on each of the issues, ‘difficulties in managing
open border’ (14.85%), ‘ambiguous customs policy’ (14.66%) and ‘poor infrastructure and
inconvenient location’ (14.60%) have been ranked first, second and third respectively, while
‘poor technology adoption’ (13.11%) has been ranked seventh as the least serious issue of the
customs duty evasion. So, the average views of total respondents points out that ‘difficulties in
managing open border’, ‘ambiguous customs policy’ and ‘poor infrastructure and inconvenient
location’ are the more influencing factors for the customs duty evasion.
Table 9
Rank of Various Issues on Customs Duty Evasion in the Views of Total Respondents

Issues on Customs Duty Evasion Mean Score % Rank

Poor technology adoption 3.28 13.11 7
Political disturbance 3.54 14.16 6
Difficulties in Managing open border 3.71 14.85 1
Poor human resource base 3.58 14.32 4
Ambiguous customs policy 3.67 14.66 2
Poor infrastructure and inconvenient location 3.65 14.60 3
Lengthy customs clearance procedure 3.57 14.30 5
Total 25.00 100
Source: Author’s calculation from Survey 2015
The result shows that “difficulties in managing open border” is the most important issue on
customs duty evasion. This result is similar to the outcome derived by Paudel and Devkota
(2018). They also showed the open border causes tax-evasion. Similarly, the outcome of the
result also revealed that “ambiguous customs policy” is another important factor of customs
duty evasion. This result is also similar to that of Mishra, Subramanian and Topalova (2007).
They also found that customs tax policy has had significant impact on customs duty
evasion. Poor infrastructure and inconvenient location is also important in this study. The
result indicates similarity with the study of Edirisinghe (2013). However, the issue on “poor
technology adoption” is less important in this study. Growing use of technology might have
affected seriousness in the issue.

5. Conclusion
From the compare mean test, it is concluded that the views of both groups (business communities
and government officials) on different issues related to customs duty evasion are significantly
different. From the average views of total respondents on the issues related to customs duty
evasion, the average scores lies in “agree” scale of response whereas average views of business
communities lies “agree” and views of government official lies ‘fairly agree’. These scale of
responses evaluated that most respondents consented with the statements under each issue
related to customs duty evasion. It was also observed that issues on ‘difficulties in managing
open border’, ‘ambiguous customs policy’ and ‘poor infrastructure and inconvenient location’
are seen to be the major issues in customs duty evasion, but respondents are observed to be less
serious in the issue of ‘poor technology adoption’ among the seven issues related to customs
duty evasion. However, above result attempts to prove the seriousness of stakeholders on the
40 NJMSR V. 3 Issue 2 (2019)
 Customs Duty Evasion Issues in Nepal

issues related to customs duty evasion.

From the result, it is observed that the most serious issue is ‘difficulties in managing open
border’. In order to improve this serious issue, the border management agencies should work
together and integrate their respective information seamlessly within the requirements of data
protection and privacy legislation. They should develop a common vision and an inter-agency
approach for implementation of the service delivery. However, the concerned department of
government sector, policy maker and planner should pay attention to these major issues to
make a good decision for the control in customs duty evasion.
In case of tax administration, if it is efficient and honest, its dealing with taxpayer would be
fair. Instead, if it is inefficient and corrupt, it will create unnecessary complexity to taxpayer
and affects tax reporting and tax collection as well.
The study also recommends for the valuation systems, legal provision, infrastructure,
coordination between government agencies, coordination between Nepalese and Indian
customs officials, and unanimous use of an 8-digit HS code between government revenue
agencies for controlling customs duty evasion.

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NJMSR V. 3 Issue 2 (2019) 43

Productivity and Efficiency of Banking Sector in Nepal

Productivity and Efficiency of Banking Sector

in Nepal
Kishor Hakuduwal, PhD *
[email protected]

Abstract
The paper aims to analyze the productivity and efficiency of banking sector in Nepal. Using
systematic random sampling, 20 banks including both commercial and development are
selected. The 180 observations of nine year’s panel data from FY 2006/07 to FY 2014/15 has
been used. Stochastic Frontier Approach is used taking three input variables i.e. capital, deposit
and human resource cost, and one output variable i.e. loans and advance of sampled banks
for analysis. The study found that the productivity of human resource, deposit and capital
is significant. The joint venture banks are the most efficient than private and Government
owned banks. The commercial banks are more efficient than development banks. The study
has important implications for the policy makers to take corrective actions for improving the
productivity and efficiency of banking sector in Nepal.

Keywords: Productivity, Efficiency, Stochastic frontier approach, Panel data, Banking sector

1. Introduction
The banking sector plays a vital role in the economic development of a country through the
efficient intermediation of funds. The efficient intermediation of funds from savers to users
enables the application of available resources to their most productive uses. A strong banking
sector effectively channels funds and financial products in such a way as to strengthen the
financial and economic system of any nation (Sharma, Sharma & Barua, 2012). Therefore,
the sound performance of the banking sector has always been a key issue for ensuring
development of nation.
The performance of banking sector is measured by financial ratios, but this approach has a
major demerit in terms of its subjectivity and reliance on benchmarking ratios (Yeh, 1996).
Sherman and Gold (1985) initiated the frontier analysis approach to bank performance
assessment and they argued for the application of frontier analysis techniques in bank
performance evaluation instead of financial ratios and other traditional financial measures.
The frontier analysis technique handles multiple inputs-outputs.
The formal banking system was started in Nepal with the establishment of Nepal Bank
Limited. in 1937/11/15 A.D. After its establishment other various types like commercial
banks, development banks, finance companies and micro finance limited with the various

* Lecturer, Bhaktapur Multiple Campus Faculty of Management, Tribhuvan University.

44 NJMSR V. 3 Issue 2 (2019)

 Productivity and Efficiency of Banking Sector in Nepal

ownership status all over Nepal operating at various levels of business and various levels of
profit.
Nepalese banking sector has delivered a significant role in facilitating for economic growth
of Nepal. There is an increasing concern to know the productivity and efficiency of banks
in Nepal. Therefore, the present study aims to analyse the productivity and efficiency with
the inclusion of the commercial as well as development banks including government, joint
venture, and other banks established at different places and times in Nepal applying frontier
analysis.

2. Literature Review
Wei and Wang (2000) studied the technical efficiency of the commercial banks in China
and found that on an average, the newly established banks were relatively more technically
efficient than the state-owned commercial banks. Yao et al. (2007) found that Chinese joint-
stock banks were more efficient than their state-owned counterparts.
Athanasoglou, Georgiou and Staikouras (2008) assessed the productivity in the Greek
banking industry for the period 1990-2006 using the estimation of productivity (partial and
total factor) on the index number method (Tornqvist index). They found that the bank output
and labor productivity increased considerably during the period under examination, outpacing
the respective GDP growth and labor productivity of the Greek economy. Capital productivity
and TFP of the Greek banking industry also improved remarkably mainly since 1999, as a
result of the structural changes that took place within the industry, capital investments (mainly
in IT equipment) as well as improvement in the quality of human capital.
Tahir and Haron (2008) examined the technical efficiency of the Malaysian commercial banks
over the period of 2000-2006, using the stochastic frontier approach (SFA). They showed that
the average overall efficiency of Malaysian commercial banks was 81 percent implying an
input waste of 19 percent. They also found that the level of efficiency increased during the
period of study and domestic banks were found to be more efficient relative to foreign banks.
Using the stochastic frontier production function model and the time invariant cross-sectional
data, Samad (2009) examined inefficiencies of Bangladesh banking industry. The measure
of technical efficiency indicates that the efficiency of Bangladesh commercial banks lies
between 12.7 and 94.7 percent; the industry average rated at 69.5 percent. He also found that
about 30 percent of the commercial banks in Bangladesh fell below the industry average.
Baten and Kamil (2010) investigated the online bank specific deposits efficiency using
stochastic frontier technique to determine factors affecting the efficiency level of banks for
the period 2001 - 2007. They used a panel of 20 banks divided into four groups namely,
NBs (National Banks), ISBs (Islamic Banks), FBs (Foreign Banks), and PBs (Private Banks)
in Bangladesh. They showed that the estimated year-wise average online banks deposits
efficiency was 73.8% while group-wise average deposits efficiency was 77.7%. At the bank
group level, Nationalized Commercial Banks (NBs) and Islamic Banks (ISBS) were more
efficient by 90.9% and 86.8% respectively, followed by Private Banks (PBs) which had 63.4%
and Foreign Banks (FBs), 62.7%. They also observed that the foreign banks were less efficient
in producing deposits. The most efficient bank was found to be Islami Bank Ltd. and the most
inefficient bank was Pubali Bank with efficiency scores of 0.96 and 0.52 respectively.

NJMSR V. 3 Issue 2 (2019) 45

Productivity and Efficiency of Banking Sector in Nepal

Gajurel (2010) reported that there was a considerable level of cost inefficiency due to technical
inefficiency and there existed comparatively low level of external (particularly regulatory)
influences on input mix as indicated by a very low level of allocative inefficiency. The study
reported growth of productivity to be negative mostly resulting from lack of technological
progress. The study also found that State-owned banks appeared with less cost efficiency than
private banks (domestic and foreign). The study also showed consistently inverse impact of
size of the firm on cost efficiency; banks with higher financial capital, larger loan ratio and
higher profit tended to be more cost efficient, however banks with higher credit risk tended to
be less cost efficient.
Sanyal and Shankar (2011) estimated the productivity of Indian banks. Taking loans plus
deposits as output and labor (number of employees), capital (fixed capital) and an intermediate
input (expenditures on communication) as an input they found that the total factor productivity
(TFP) of the old Indian private banks showed 52.6 percent higher than the foreign banks.
However, on the productivity growth side the new Indian private banks led to the change of
their productivity growth to 6 percent higher than that of their foreign counter parts. They also
found the Indian private bank’s productivity demonstrated a growing trend in the post-1998
period than the public and foreign banks. They also showed both old and new Indian private
banks with better performance than their foreign counterparts, the latter might close the gap
in the future. However, public bank productivity stills lagged far behind than that of private
banks.
Kamau (2011) examined the trends in efficiency and productivity changes of the banking
industry during the post liberalization period in Kenya. Efficiency scores and total factor
productivity growth were estimated using the output oriented DEA model. Three inputs and
two outputs specifications were made to represent efficiency and productivity gains in the
intermediation process. A general remarkable observation on estimated commercial banks
efficiency scores was that banks in Kenya performed fairly well during the period. The
commercial banks’ efficiency score was not less than 40 percent at any one point. In terms
of foreign and local banks, foreign banks were found to be more efficient than local banks.
And in the local category local private banks were found to be more efficient than local public
banks. Large sized banks appeared to be more efficient than medium and small banks might
be due to economies of scale.
Using the total deposits, interest expenses, and other operating expenses as inputs while total
loans, interest income, and other operating revenues as output, Suzuki and Sastrosuwito (2011)
found that the efficiency of the Indonesian banking sector during the period of 1994-2008 was
relatively high, with the mean of overall industry 0.866. They also found that the government
owned banks were most efficient than joint venture and foreign owned bank, private owned
banks. Bhattacharyya and Pal (2011) estimated technical efficiency of Indian commercial
banks from 1989-2009 using a multiple-output generalized stochastic production frontier. The
study showed 64% efficiency on an average during the sample period, and that efficiency
declined in both public and private banks during most parts of the post-reform period.
Rajan, Reddy and Pandit (2011) measured productivity and thereby efficiency of Indian
scheduled commercial banks for the period 1979 through 2008 using the asset approach. The
study found that the public sector banks (PSB) i.e. the nationalized banks (NB) and state bank
of India were more efficient compared to domestic private banks and foreign banks. Taking
46 NJMSR V. 3 Issue 2 (2019)
 Productivity and Efficiency of Banking Sector in Nepal

the loans, investments as outputs and deposits, labour and capital as inputs, they also found
the foreign banks performed with higher efficiency compared to the domestic private banks.
Hasan et al. (2012) examined the technical efficiency of the Malaysian domestic banks listed in
the Kuala Lumpur Stock Exchange (KLSE) market over the period 2005–2010. A parametric
approach, Stochastic Frontier Approach (SFA), was used in this analysis. They found that
Malaysian domestic banks exhibited an average overall efficiency of 94 percent, implying
that sample banks wasted an average of 6 percent of their inputs. Among the banks, RHBCAP
was found to be highly efficient with a score of 0.986 and PBBANK with the lowest efficiency
score of 0.918. They also showed that the level of efficiency increased during the period of
study, and that the technical efficiency effect fluctuated considerably over time.
Jha and Hui (2012) compared the financial performance of different ownership structured
eighteen commercial banks in Nepal for the period 2005 to 2010 using econometric
model (Multivariate regression analysis). They showed that the public sector banks were
significantly less efficient than their counterpart are; however domestic private banks were
equally efficient to foreign-owned (joint venture) banks. Furthermore, the estimation results
revealed that return on assets was significantly influenced by capital adequacy ratio, interest
expenses to total loan and net interest margin, while capital adequacy ratio had considerable
effect on return on equity.
Poudel and Hovey (2013) investigated the impact of corporate governance on efficiency of
29 Nepalese commercial banks from the 2005-2011 time spans. Using the non-performing
loan as variable for bank’s efficiency, they found that bigger board and audit committee
size and lower frequency of board meeting and lower proportion of institutional ownership
led to better efficiency in the commercial banks. Thagunna and Poudel (2013), using Data
Envelopment Analysis (DEA), studied on Measuring Bank Performance of Nepali Banks: A
Data Envelopment Analysis (DEA) perspective during 2007-08 to 2010-11. They revealed
that efficiency level was reported relatively stable and increased on overall. They also found
no significant relationship with efficiency level and ownership structure of banks and there
were no notable differences in the efficiency levels of banks according to their asset size.
Neupane (2013) studied the change in efficiency and productivity of banking industry during
the period of 2007/08 to 2011/12 and analyzed the effects of various indicators on the efficiency
of the twenty-two commercial banks in Nepal. Malmquist Index was used to measure the
efficiency and productivity whereas Tobit regression was used to analyze the determinants of
efficiency. He showed that the productivity changes of commercial banks in Nepal improved
over the sample period and that the increase in productivity change in Nepalese commercial
banks was due to the technical progress rather than efficiency components. He also reported
that the decline in efficiency change was due to decline in both pure efficiency change and
scale efficiency change. With the use of Tobit regression model the study found positive
relationship between debt to equity ratio and efficiency as well as between capital adequacy
and efficiency. Further, profitable banks with lower leverage and higher capital adequacy
ratio were found to be more efficient and bank loans seemed to be more highly valued than
alternative bank outputs i.e., investments and securities.
Gayval and Bajaj (2015) estimated the efficiency of 19 nationalized Indian commercial banks
using DEA and stochastic production frontier. They found moderate consistency between

NJMSR V. 3 Issue 2 (2019) 47

Productivity and Efficiency of Banking Sector in Nepal

parametric and nonparametric frontier methods in efficiency scores rankings, identification of

best and worst performing banks, the stability of efficiency scores over time and correlation
between frontier efficiency and accounting based performance measures.
Panta and Bedari (2015) examined the level of cost efficiency of 18 “A” class commercial
banks during the period of 2005/06 to 2011/12 by using stochastic frontier analysis. Their
result indicated that the level of cost efficiency increased substantially over the period of time
with small size banks exhibiting a higher cost efficiency as compared to the medium size ones.
Similarly, the result also showed that change in the regulation after 2008 even though it was
positively related with the cost, was not statistically significant.
Garamu (2016) evaluated the relative technical efficiency and productivity change of Ethiopian
commercial banks during the period 2007 to 2011. Using Intermediation approach two input
variables - fixed asset and labor, and two output variables- total deposits and net loans &
advances were selected. The study adopted DEA to measure effici3ency of banks and MPI to
measure the productivity gains of banks over time. Using a panel data of ten commercial banks
operating in Ethiopia from 2007 – 2011, they found that, on average, Ethiopian commercial
banks were relatively technically inefficient. Scale inefficiency takes the leading contribution
for source of inefficiency. The study also revealed that the average TFP change is 0.965 during
the study period.
Luintel, Selim and Bajracharya (2017) found that financial liberalization has made Nepalese
bankers more effort oriented – evidence shows a clear rise in the level of bankers’ efforts
following liberalization. Nepalese bankers’ optimal level of effort has increased considerably
(by 43% during the period under analysis) and appears on an upward trajectory, albeit at a
slower pace. Likewise, the banking sector’s effort (incentive) driven productivity has also
risen by 1% a year, on an average, post-liberalization (2003–2012). The association between
the optimal levels of effort and optimal productivity seemed very close in the early years of
liberalization but appeared somewhat opaque in later years. They also found that effort-driven
productivity accounts for slightly over 40% of banking sector TFP (measured by Solow
Residuals) in Nepal. Remarkably, the overall proportion of performing loans to total loans has
increased from 76% in 2003 to over 96% in 2012. Nepalese banks earned an average bank
spread (profit per unit of bank output) of 3.25 percent points during the sample period but this
has slightly declined in recent years (3.17 percent points), perhaps reflecting the competitive
pressure.
Hada, Zhu and Tamang (2017) studied the frontier analysis of operational efficiency (including
technical, pure technical and scale efficiencies) between Nepalese and Chinese commercial
banks over the period of 2012 and 2013 using data envelopment analysis (DEA) approach.
The study showed that the mean operational efficiency score of Chinese banking industry
is higher than that of Nepalese banking industry except pure technical efficiency score in
2013. In terms of technical and pure technical efficiencies, the performance of China’s 5
state-owned banks was better than that of Nepal’s 3 state-owned banks, and China’s other
banks, respectively; however, in term of scale efficiency, the performance of China’s 5 state-
owned banks were worse than that of Nepal’s 3 state owned banks, and China’s other banks,
respectively.
Osuagwu, Isola and Nwaogwugwu (2018) estimated technical efficiency and total factor

48 NJMSR V. 3 Issue 2 (2019)

 Productivity and Efficiency of Banking Sector in Nepal

productivity change in the Nigerian banking sector for the period 2005–14. They applied
both non‐parametric Data Envelopment Analysis (DEA) and parametric Stochastic Frontier
Approach (SFA), using the Malmquist Productivity Index, and error component production
function respectively, to ascertain if any significant variation in efficiency exists on a
sample of 12 banks covering over 80 percent of total bank assets in Nigeria. The theoretical
intermediation approach was applied for selection of input and output variables. The input
variables considered were total deposits, total equity and operating expenses including staff
costs, and output variables were loans and operating income, which accounts for off‐balance‐
sheet items such as non‐interest or fee‐based income. They revealed that the mean technical
efficiency under SFA and total factor productivity change in DEA decreases as bank output
moves toward non‐interest or fee‐based income. Although the magnitude differs, both SFA and
DEA follow a similar direction for technical efficiency and total factor productivity change.
Grmanova and Ivanova (2018) measured the efficiency of banks in the Slovak Republic in
2009 and 2013 using DEA. The study found that the largest banks in the Slovak national
banking market were more efficient than other banks.
Shah, Wu and Korotkov (2019) evaluated the performance and productivity of sustainable
banks. A two-stage performance evaluation was employed with the integration of data
envelopment analysis (DEA) and Malmquist productivity index (MPI) to evaluate sustainable
bank performance and productivity for 9 years (2010–2018) in comparison with non-
sustainable banks. DEA was used to define dynamic benchmarking, and MPI builds on time-
series analysis. The study revealed that sustainable banks are more efficient and productive.
The productivity of sustainable banks and non-sustainable banks was influenced by external
and internal factors, respectively.
Fatema, Siddik, and Ibrahim (2019) investigated the relative technical efficiency and
productivity change of Bangladeshi commercial banks during the period 2013 to 2017.
They utilized the Data Envelopment Analysis (DEA) technique to evaluate the efficiency
of sample banks and The Malmquist productivity index (MPI) to assess the productivity
expands of banks over time. The study found that listed commercial banks in Bangladesh
were technically inefficient. They also revealed that there are only six banks which have been
technically efficient and rests were classified as technically inefficient. The study also found
that only 3 among the 19 banks employed in the study were displayed an overall improvement
in productivity and sixteen banks presented an overall decline in productivity.

3. Research Methodology
3.1 Research Design
The basic framework involves measuring input output, their relation and testing various
hypotheses relating to productivity and efficiency. The population of banks includes both
commercial and development banks established before 2005 A.D. The systematic random
sampling has been used for the selection of banks. To test and analyze the hypothesis, human
resource cost, deposit, capital considered as independent (input) variables and loans and
advances has been considered dependent (output) variable. The stochastic production frontier
model has been used as tools for analysis. The 180 observations of nine year’s panel data from
FY 2006/07 to FY 2014/15 has been used and data were collected from the audited annual
reports of sampled banks.

NJMSR V. 3 Issue 2 (2019) 49

Productivity and Efficiency of Banking Sector in Nepal

3.2 Population and Sample size

The commercial and development banks established before 2005 A.D. has been considered
as the population of the study. Out of twenty seven commercial banks, only 15 banks have
recorded their establishment before 2005 A.D. Similarly, out of twenty four development
banks, only 10 banks have found their establishment before 2005 A.D. So, the population of
the study constituted 25 banks scattered in different places of the country.
In determining the sample size, there is no clear explanatory variable that reflect the banking
characteristics and situations. Therefore, the growth of banks till 2005 A.D. is considered as
a basis for determining sample size. The growth rate of bank from 1937 A.D. to 2005 A.D.
comes 5.65%. Assuming the probability, p = 0.0565, the expected growth, q = 1-p within
a couple of year is 0.9435, the reason for taking growth rate is that even if there is sharp
fluctuation in the bank establishment it does not affect in the sample size determined.
Setting confidence level (Za/2) at 95% and precision also at 95%, the sample size as per
(Za)2 * p * q
2
n= comes 81. As the finite population is 25, it requires adjustment for correcting
d2
n
the population. Therefore, using the correcting factor as per s = n the sample size is
1+
determined at 20 banks. N

In the process of preparing the sampling frame of banks, Nepal Rastra Bank source which
provides a list of all commercial and development banks was tapped to select the banks with
systematic random sampling. After obtaining a list of commercial banks and development
banks with their establishment date, a sampling frame was prepared in the order of the date
of establishment. After the process, a systematic random sampling was used to pick up the
banks for study. First, a sample unit was selected using the lottery technique and after the
first selection, a sample interval was used to select other sample units. The sample interval is
calculated with N/s where, N is population and S represents the sample size.

3.3 Model Specification

Model Specification for Measuring Productivity
The regression equation for productivity taking loans and advance as output variable and
capital, deposit and human resource cost as input variables can be expressed as follows:
Yit = β0+ β1X1it + β2X 2it + β3X3it +…………… + uit
Where;
β0 = Intercept
Yit = Natural logarithm of Loans and advances for sample banks i at time t
X1it = Natural logarithm of Capital for sample banks i at time t
X2it = Natural logarithm of Deposit for sample banks i at time t
X3it = Natural logarithm of Human Resource Cost for sample banks i at time t
i = 1 to 20 banks
t = 2006/07 A.D. to 2014/15 A.D.
uit = Error term.
β1, β2, β3 are coefficients of X1, X2 and X3 respectively.
50 NJMSR V. 3 Issue 2 (2019)
 Productivity and Efficiency of Banking Sector in Nepal

3.4 Model Specification for Efficiency Measurement

Stochastic Frontier Approach (a parametric approach) was used to compute the technical
efficiency of sampled banks. For a parametric approach, technical efficiency is derived from a
frontier production function which considers production possibility. The production function
describes the relationship between the output variable with quantities of input variables plus
the inefficiency and random error (Mokhtar, Abdullah & Habshi, 2006).
Technical efficiency (TE) has two types of measure. If it is an output-oriented measure, TE
is a bank’s ability to achieve maximum output given its sets of inputs. An input-oriented TE
measure, however, reflects the degree to which a bank could minimize its inputs used in
the production of given outputs. A value of 1 indicates full efficiency and operations on the
production frontier. A value of less than 1 reflects operations below the frontier. The wedge
between 1 and the value observed measures the technical efficiency (Mokhtar, Abdullah &
Habshi, 2006).
The production function which was proposed by Aigner, Lovell and Schmidt (1977) and
Meeusen and Broeck (1977) can be written in a natural logarithm form as follows:
Iny = f(x) + In Ut – In Vt
Where ln y represents observed outputs, f denotes some functional form, x is the vectors
of inputs, is the inefficiency error term and is the random error term which accounts for
measurement error or other errors such as effect of weather, strike or luck on the value of
output.
For a parametric technique, the inefficiency and random error components of the composite
error term are disentangled by making explicit assumptions about their distribution. Following
Aigner, Lovell and Schmidt (1977), this study assumes the distribution of the error term or
statistical noise, , to be a two-sided normal distribution while the inefficiency term, is assumed
to be one sided (half normal distribution).
This study used the truncated normal distribution for estimating inefficiency which was also
used by Cebenoyan, Cooperman, Register and Hudgins (1993) and Berger and DeYoung
(1997). This study also used the translog functional form as described by Mester (1993);
Bauer et al. (1998). It does not impose any restrictions on the first and second order effects
(Kaparakis et al., 1994). This flexibility serves as an advantage for banking efficiency studies
because it is difficult to identify exactly the functional form that fit the production function
(Kaparakis et al., 1994). The translog model allows homogeneity of degree one by simply
imposing restrictions on the translog model parameter (McAllisster & McManus, 1993). The
translog functional form of technical efficiency can be written as follows:
n
ln yi = ao + ai ln xi + Ei
i=1
where yi is the output variable for the production function, Xi is the vector of quantities of i
variable inputs, Yi is the vector of quantities of variable outputs, Ei is the stochastic error term
where Et = Ut – Vt is for the production function.

NJMSR V. 3 Issue 2 (2019) 51

Productivity and Efficiency of Banking Sector in Nepal

Variables Used
To analyze the productivity and efficiency of Nepalese banking sector, three input variables
i.e. capital, deposit and human resource cost, and one output variable i.e. loans and advance of
sampled banks were specified for the model. Brief descriptions of the variables are as follows:
• Capital: It is the fixed asset which includes all tangible long term assets such as land,
buildings, furniture and equipment. Capital is here considered as an input following Tahir
& Haron (2008), Baten & Kamil (2010).
• Deposit: It includes total deposits collected by bank through different type’s depositors
including interest bearing and non-interest bearing accounts like fixed deposits, savings
deposits and call deposits as well as current accounts from individuals and corporations.
Deposits are considered as an input following Mester (1993), Grmanova and Ivanova
(2018), Osuagwu, Isola and Nwaogwugwu (2018).
• Human resource costs: Human resource costs include various expenses made for the
betterment of employees of the banks such as salary, allowance, contribution to provident
fund, training expenses, uniform expenses, medical expenses, pension and gratuity, staff
bonus and other staff expenses. Labour (human resource) expenses are commonly used
in the literature as the inputs (Kenjegalieva, et al., 2009, Luo, 2003) for obtaining output.
• Loans and advance: It includes the loans and advances provided by sample banks to
their customers in various sectors. Loans and advance are considered here as an output
following Sealey & Lindley (1977), Rajan, Reddy and Pandit (2011), Tahir & Haron
(2008), Samad (2009).

3.5 Productivity and Efficiency

Productivity of Capital, Deposit and Human Resource Cost
The productivity of capital, deposit and human resource cost of sampled banks were determined
using time-invariant inefficiency model in STATA (Statistics/Data Analysis) program. To
run the stochastic frontier model for panel data in STATA (Statistics/Data Analysis) version
12, natural logarithm of loans and advance, capital, deposit and human resource cost were
included in the model. Bank was taken as Panel ID variable and year as time variable for data
set. Panel data of 20 groups (banks) of 9 years with 180 observations from excel sheet was
imported in STATA software. After iteration 9, the value of log likelihood is -98.601465 and
wald 𝜒2(3) is 1271.19 (𝜒 2(3) > 0.0000) which indicates that the model is fitted (see table 2).
The relationship between inputs and output (Kumbhakar, Wang and Horncastle, 2015) in this
study can be expressed as:
y = f(x)
Where y represents the output i.e. loans and advance and f(x) represents the inputs i.e. capital,
deposit and human resource cost. Therefore, loans and advance is the function of capital,
deposit and human resource cost. Theoretically, capital, deposit and human resource cost
are positively related with loans and advance (output). The regression result also confirms
the relationship as it was expected. The computed wald 𝜒2(3) is 1271.19 is higher than table
value indicating an evidence of presence of regression. The coefficients of all variables are

52 NJMSR V. 3 Issue 2 (2019)

 Productivity and Efficiency of Banking Sector in Nepal

jointly simultaneously not equal to zero. The coefficient of all the variables included as
independent variables are positively affecting the output. Therefore, it can be concluded that
the productivity of human resource cost, capital and deposit are significant.
Other things remaining the same, 1 percent change in capital leads to the increment of 0.16
percent in loans and advance (see table 2). The z value of capital is 2.57 and p value is 0.006
which indicates that the capital is positively significant at 5 percent level of significance.
Similarly, other things remaining the same, 1 percent change in deposit, leads to the increment
of 0.54 percent in loans and advance. The deposit is also positively significant at 5 percent
level of significance (P > ǀzǀ i.e. 9.69 > 0.000). In the case of human resource cost, 1 percent
raise in human resource cost leads to 0.24 percent increase in loans and advance. The z value
and p value of human resource cost is 4.56 and 0.000 respectively i.e. P > ǀzǀ which indicates
that the human resource cost is confirmed with positive relation of significant at 5 percent
level. Therefore, the alternative hypothesis is accepted all variable inputs capital, deposit and
human resource cost have significant impact on loans and advance of Nepalese banking sector.

3.6 Efficiency of Banks in Individual and Various Group Level

The technical efficiency of all banks have been measured by using stochastic production
frontier. The average technical efficiency of sampled banks is 73.95 percent. The highest
efficient bank is Everest bank limited with technical efficiency score 93.99 percent and the
least efficient bank is NIDC development bank limited with technical efficiency score 32.11
percent (see table 3).
The average technical efficiency of commercial banks and development banks is 78.14
percent and 68.82 percent respectively (see table 4). Two government owned banks i.e. Nepal
bank limited and Rastriya Banijya bank limited are running at only 58 percent efficiency level
while Everest bank limited and Laxmi bank limited are running at 93.99 percent and 92.73
percent efficiency level (see table 3). Likewise, the Siddhartha development bank and Excel
development bank are running at 90 percent efficiency level and NIDC development bank
and Gorkha development bank (Nepal) limited are running at only near about 33 percent
efficiency level. All the government owned banks’ technical efficiency is less than the average
efficiency of Nepalese banking sector. Among the joint venture banks, the efficiency score of
Standard Chartered bank Nepal limited and Nepal Bangaladesh bank limited is less than the
average efficiency.
Based on ownership structure, joint venture banks are more efficient than other groups of
banks. The average technical efficiency of joint venture banks is the highest i.e. 82.98 percent
and followed by Nepalese private banks (76.22 percent) and government owned banks (54.71
percent) that indicates most of the joint venture banks are running more efficiently (see table
4). Agriculture development bank limited (69.80 percent technical efficiency), Everest bank
limited (93.99 percent technical efficiency) and Laxmi bank limited (92.73 percent technical
efficiency) are the banks with higher efficiency in their respective ownership structure.

4. Discussion and Conclusion

The capital, deposit and human resource cost as independent variables are positively affecting
the output variable i.e. loans and advances. The productivity of human resource cost, capital
and deposit are satisfactory as their coefficients are statistically significant. The loans and

NJMSR V. 3 Issue 2 (2019) 53

Productivity and Efficiency of Banking Sector in Nepal

advance is influenced by deposits (0.54) followed by human resource cost (0.25) and capital
(0.16) which indicates that the human resource cost is more productive than capital but less
productive than deposits. Productivity of deposits explains the productivity of loans and
advances most in Nepalese setting with a score of 0.54 as is to be expected because efficient
collection and use of deposits will lead to loans and advances in a banking system. This
factor has come out strongly in Nepalese perspective too that banks should accord the highest
attention to deposit mobilization and utilization in the form of loan to enhance the overall
productivity and the efficiency of the banking sector. The impact of human resource cost on
productivity is moderate because the main source of loans and advance of banking sector is
their deposit collection from different types of accounts and their utilization. But the influence
of human resource cost is particularly important as the value is above that of capital indicating
the ‘used to focus on human resource management of the banks’.
The average technical efficiency of sampled banks is 73.95 percent which indicates the
Nepalese banking sector is running at near about 74 percent level of efficiency. This level of
efficiency is lower than the study results of Suzuki and Sastrosuwito (2011), but higher than
the study results of Yao et al. (2007). However, the variables and methodology used in their
study is different from the present study.
The average technical efficiency of commercial banks and development banks is 78.14 percent
and 68.82 percent respectively which indicates that commercial banks are more efficient than
development banks in Nepal. Similarly, the average technical efficiency of joint venture banks
is the highest 82.98 percent as against 70.08 percent of non-joint venture bank which in the
case of category by ownership, it is 54.71 percent in government owned banks as against
76.22 percent in other type of ownership. This indicates that the joint venture banks and other
category of Nepalese banks are more efficient than government owned banks. Similar results
found in the study of Yao et al. (2007), but opposite with the results of Tahir and Haron (2008),
Sanyal and Shankar (2008), Baten and kamil (2010), Suzuki and Sastrosuwito (2011), Rajan,
Reddy and Pandit (2011) who found domestic banks are more efficient than foreign banks.
The average technical efficiency by nature of banks provide commercial banks as the more
efficient than and development banks. It is also confirmed by the previous studies indicates that
the commercial banks have utilized their resources more effectively than development banks
because most of the employees of banking sector starts their career in development banks
shift their job in commercial banks after gaining skills and knowledge of banking job. Besides
this, the fresh, capable and talented persons’ put the first priority to join the commercial bank
which helps in getting more capable and talented human resources as employees of banks.

4.1 Limitations
The study has included altogether 25 banks established before 2005 A.D. as a population of
the study. The study employed stochastic production frontier analysis.The study has included
financial data of the audited balance sheets of the banks starting from the fiscal year 2006/2007
A.D. to 2014/2015 A.D.

4.2 Implications
The central bank of Nepal (Nepal Rastra Bank) should take corrective actions to improve
productivity and efficiency of Nepalese banking sector with respect to policy regarding

54 NJMSR V. 3 Issue 2 (2019)

 Productivity and Efficiency of Banking Sector in Nepal

resources mobilization of banks. The government owned banks should be improved in terms
of productivity and efficiency in order for them to be able to sustain, compete and grow in the
market.

4.3 Further Research

This study is conducted to analyze productivity and efficiency in the Nepalese banking sector
using stochastic frontier model taking loans and advance as output variable and human
resource cost, deposit and capital as input variables. Further study can be done taking other
variables such as operating expenses, investment, operating income, operating profit, interest
income, interest expenses etc.

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Annex

Table 1
List of Sampled Commercial and Development Banks
Nature of Banks
Commercial Banks Development Banks
Nepal Bank Limited NIDC Development Bank Limited
Rastriya Banijya Bank Limited Siddhartha Development Bank Limited
Agriculture Development Bank Limited Gorkha Develpoment Bank (Nepal) Limited
Nabil Bank Limited Sahayogi Bikas Bank Limited
Standard Chartered Bank Nepal Limited Karnali Bikash Bank Limited
Himalayan Bank Limited Shubhechchha Bikas Bank Limited
Nepal SBI Bank Limited Gandaki Development Bank Limited
Nepal Bangladesh Bank Limited Excel Development Bank Limited
Everest Bank Limited Western Development Bank Limited
Nepal Credit and Commerce Bank Limited
Laxmi Bank Limited

Table 2
Regression Results
Time-invariant inefficiency model Number of obs = 180
Group variable: Bank Number of groups = 20
Dependent Variable: Obs per group: min = 9
avg = 9
max = 9
Wald chi2(3) = 1271.19
log likelihood = -98.601465 Prob > chi2 = 0.0000
Coeff. Std. Err. z P > ǀzǀ [95% conf. Interval]
Ln(Capital) 0.1623582 0.0591 2.75 0.006 0.046524 0.278192
Ln(Deposit) 0.5412514 0.0558526 9.69 0.000 0.431782 0.650721
Ln(Human Re-
source Cost) 0.2493491 0.0546877 4.56 0.000 0.142163 0.356535
Constant 2.444654 0.6195048 3.95 0.000 1.230447 3.658861
/mu -2.687842 13.31202 -0.20 0.840 -28.7789 23.40323
/lnsigma2 0.2595042 3.473647 0.07 0.940 -6.54872 7.067726
/ilgtgamma 2.078621 3.906866 0.53 0.595 -5.5787 9.735938
Sigma2 1.296287 4.502844 0.001432 1173.477
Gamma 0.888079 0.3861095 0.003763 0.999941
Sigma_u2 1.15215 4.502438 -7.67247 9.976767
Sigma_v2 0.1441369 0.0162161 0.112354 0.17592

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Productivity and Efficiency of Banking Sector in Nepal

Table 3
Efficiency of Individual Bank
Name of Banks Technical Efficiency in percentage
Nepal Bank Limited 58.21
NIDC Development Bank Limited 32.11
Rastriya Banijya Bank Limited 58.74
Agriculture Development Bank Limited 69.8
Nabil Bank Limited 86.95
Standard Chartered Bank Nepal Limited 69.19
Himalayan Bank Limited 89.03
Nepal SBI Bank Limited 88.11
Nepal Bangladesh Bank Limited 70.62
Everest Bank Limited 93.99
Nepal Credit and Commerce Bank Limited 82.16
Siddhartha Development Bank Limited 90.97
Laxmi Bank Limited. 92.73
Sahayogi Bikas Bank Limited 76.03
Karnali Bikash Bank Limited 60.49
Shubhechchha Bikas Bank Limited 83.59
Gorkha Develpoment Bank (Nepal) Limited 33.57
Gandaki Development Bank Limited 85.46
Excel Development Bank Limited 90.88
Western Development Bank Limited 66.31
Average of Sampled Banks 73.95

Table 4
Efficiency of Various Groups of Banks
Bases of bank categorization Average TE in %
Commercial Banks 78.14
Nature of Banks
Development Banks 68.82
Government Banks 54.71
Ownership Structure Joint Venture Banks 82.98
Other Groups of Banks* 76.22
*Includes the banks which do not come under government and joint venture banks.

60 NJMSR V. 3 Issue 2 (2019)

 International Experience in Business Processes Improving on the Base of Architectural Approach

International Experience in Business

Processes Improving on the Base of
Architectural Approach
Luigi Fici

Pavel Malyzhenkov *
[email protected]

Maurizio Masi

Fabrizio Rossi

Abstract
Standardization is the pinnacle of the quality management instruments, which is vital for
satisfying customer needs and ensuring sustainable development of business. The ISO
9001:2015 (Quality Management Systems, QMS) standard requires organizations to use
the process approach. This paper proposes to use architectural approach for analysis and
improvement of business processes for implementation of the ISO 9001:2015 standard.

Keywords: Business process, Enterprise architecture, Architectural approach, ISO 9001:2015,

Quality management system, Standardization

1. Introduction
Modern trends in the development of industrial enterprises are characterized by changes in
factors affecting their functioning: innovations and new technologies, increasing competition,
changing customer requirements for product quality (the concept of product quality from the
perspective of its compliance with customer requirements has developed in market economy).
Satisfying the needs of customers is the main objective of any enterprise. Product quality is
one of the most important customer requirements, therefore, in order to ensure the successful
development of an enterprise, it is necessary to manage the product quality, to evaluate and
analyze relevant targets and predict the processes affecting it.

* Research Fellow, Department of Economics, Enterprise, Engineering and Social Sciences, University of
Tuscia, Viterbo, Italy.

NJMSR V. 3 Issue 2 (2019) 61

International Experience in Business Processes Improving on the Base of Architectural Approach
Thus, the issue of quality management is of vital importance in this context. Quality management
is an operational activity carried out by the managers and personnel of the enterprise,
influencing the process of creating products in order to ensure its quality by performing the
functions of quality planning and quality control, communication (information), developing
and implementing measures and making decisions on quality.
There are various ways to solve this problem, one of which is standardization. This instrument
represents the pinnacle of the evolution of quality management, therefore quality management
is largely based on standardization in modern conditions. In other words, it’s impossible to
improve a process unless it isn’t standardized [Imai, 1986].
Through formalization of business processes, development and implementation of norms and
rules an enterprise can streamline its operations for the benefit and with participation of all
stakeholders. The ISO 9000 standards are one of the most common and a special place among
them is occupied by the ISO 9001:2015 “Quality Management Systems. Requirements”
standard concerning the process of creation and implementation of the quality management
systems. The use of this standard can be a strategic decision that allows to effectively manage
the quality and get the following benefits from it [ISO, 2015]:
− to provide products that meet the customer requirements and create opportunities to
improve customer satisfaction;
− to ensure sustainable development of an enterprise;
− to implement technological development of an enterprise in the framework of improving
the business processes by focusing on modern information technologies;
− to eliminate inconsistencies and errors quickly;
− to provide products of better quality and reduce losses from inconsistencies;
− to take involvement of employees to a new level, which contributes to the improvement of
internal business processes of an enterprise;
− to improve brand image and customers loyalty.

2. The Architectural Methodological Approach and its Application

to QMS Field
The need to represent a holistic view of the enterprise is fulfilled by a concept of Enterprise
Architecture (EA) which is defined as a set of models and definitions describing the structure
of an enterprise, its subsystems and the relationships between them, terminology to employ
and guiding principles for design and future evolution [Alaeddini M. et. al., 2016]. EA
development is a continuous iterative process which may be approached using EA frameworks
including tools, techniques, process model, artefacts descriptions and guidance for EA design.
EA frameworks implicitly ensure the achievement of a specific IT-business alignment
level. However, they do not distinguish between different alignment perspectives: most of
approaches claim that EA development must start with the business strategy and structure
definition followed by supporting IT infrastructure and application portfolio design. Whereas
diverse misalignment situations require different design approaches. And IT may and should
be used in an innovative way as an enabler for renewed or even completely new business
strategies, products and services, organization forms and processes.
62 NJMSR V. 3 Issue 2 (2019)
 International Experience in Business Processes Improving on the Base of Architectural Approach
The purpose of enterprise architecture is to optimize across the enterprise the often fragmented
legacy of processes (both manual and automated) into an integrated environment that is
responsive to change and supportive of the delivery of the business strategy.
Today’s CEOs know that the effective management and exploitation of information through
IT is a key factor to business success, and an indispensable means to achieving competitive
advantage. An enterprise architecture addresses this need, by providing a strategic context for
the evolution of the IT system in response to the constantly changing needs of the business
environment [Tan F.B., Gallupe R.B., 2006].
Furthermore, a good enterprise architecture enables to achieve the right balance between
IT efficiency and business innovation. It allows individual business units to innovate safely
in their pursuit of competitive advantage. At the same time, it ensures the needs of the
organization for an integrated IT strategy are met, permitting the closest possible synergy
across the extended enterprise.
The quality management system is both an instrument for improving the quality of an
enterprise, a way of organizing business processes that ensures achievement of the planned
goals through customers’ satisfaction, and a specific model described in the ISO 9001:2015
standard. The introduction of a quality management system in accordance with the ISO
9001:2015 standard implies documented business architecture of an enterprise.
One of the examples of EA methodological frameworks is represented by a high-level
approach The Open Group Architecture Framework (TOGAF) [The Open Group Architecture
Framework (TOGAF Version 9.1)] to design an enterprise architecture. It provides an approach
for designing, planning, implementing, and governing an enterprise information technology
architecture in according to its business goals.
Business architecture is one of the elements of the EA – a comprehensive description
(model) of all key elements and relationships between them (including business processes,
technologies and information systems), as well as the process of supporting changes in the
business processes of an enterprise on the part of information technology (Fig. 1).

Business

Data

Application

Technology

Figure 1. Enterprise Architecture according to TOGAF framework [TOGAF].

The objects of the enterprise architecture are the existing business processes and their
supporting organizational, administrative and technical systems utilizing IT-technology.
Thus, business processes are a central element of building both an enterprise architecture and
quality management system, which allows us to conclude that the architectural approach to
the problem under investigation is applicable [Kononov Yu., 2017].

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International Experience in Business Processes Improving on the Base of Architectural Approach

The modeling of the enterprise architecture and the integration of the quality management
system in it is aimed at improving business processes, which will ensure the quality of
the enterprise as a whole – reliability, sustainability, technological leadership, investment
attractiveness, innovation, employee satisfaction, financial stability. It shows a comprehensive
description of the key elements and inter-elements relations.
Development of a quality management system demonstrates the importance of using the
architectural approach (describing business architecture of the enterprise) as management
instrument for a production enterprise [Peskov E., 2016]. The architectural approach implies
clear objectives: company’s goals, the specification of the organizational structure, the
description and optimization of business processes, the development and distribution of
documentation, the automation of processes and the implementation of a quality management
system (Fig. 2).
Business
Process Map
LEVEL 1

Business
Process Map
LEVEL 2 QUALITY
MANAGE-
BUSINESS MENT
ARCHITEC- Business Business
Process Process
Procedures and
Data Flow
SYSTEM
TURE Classification Detalization
Regulations

DOCUMEN-
BUSINESS PROCESSES TATION

Figure 2. Business architecture and QMS.

Rationally organized and documented enterprise architecture allows to ensure compliance with
the requirements of the international standard ISO 9001:2015 in the field of business processes
identification and documentation. And vice versa, the need for a quality management system
can direct attention to the initialization of the enterprise architecture development, paying
attention to those processes and resources that are crucial for enterprise quality management.
Thus, quality management and enterprise architecture form a natural combination: the first
is devoted to the development, documentation, control, measurement and improvement of
business processes, and the latter determines how these processes will be organized and
implemented.

3. Business Case Description: «AS-IS» Architectural State

Let us analyze how the architectural approach was implemented for transition to the standard
ISO 9001:2015 on the example of an enterprise functioning in the field of manufacturing.
The key goal is to describe the initial (AS-IS) and desired (TO-BE) states of the enterprise,
conduct the gap-analysis and determine the scope of work that is required to make a transition
to the desired state of the enterprise.
In the view of the increasing production plan and the expansion of the product range, it
becomes necessary to introduce a new approach to quality management. Thus, the company’s
management decided to implement the ISO 9001:2015 standard and get certified (conformity
assessment).
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 International Experience in Business Processes Improving on the Base of Architectural Approach

ISO 9001:2015 is an international standard [ISO 9001:2015, Quality management systems

– Requirements, 2015] that establishes requirements for quality management. Standard
summarizes a global experience in the field of quality management and is applicable
absolutely to any enterprise, regardless of the scope and size. According to the standard, the
quality management system of an enterprise should be based on seven principles of quality
management (Fig. 3).

Figure 3. Quality management principles [ISO].

The structure of ISO 9001:2015 can be displayed in a schematic representation of the process
approach [ISO 9001:2015, Quality management systems – Requirements, 2015]. Such a
representation shows the interconnection of all sections of the standard (Fig. 4).

Quality management system (4)

Context of the
organization (4) Support and
Operation
(7, 8)
Customer
PLAN DO satisfaction

Customer Planning (6) Leadership Performance QMS results

requirements (5) evaluation (9)

ACT CHECK
Products and
Improvement services
Needs and (10)
expectations of
interested
parties

Figure 4. The ISO 9001:2015 structure [ISO].

The ISO 9001:2015 standard is a set of requirements that are necessary for the implementation
and successful operation of the quality management system:
NJMSR V. 3 Issue 2 (2019) 65
International Experience in Business Processes Improving on the Base of Architectural Approach

− adherence to the quality management principles established by the standard;

− use of the process approach (allows an enterprise to manage its processes and ensure their
interaction);
− risk-oriented thinking (allows to identify risks that can lead to deviation from the planned
results of processes and quality management system, develop and implement risk
management measures to prevent and minimize the likelihood of risk realization);
− documenting processes and procedures, as well as managing documented information;
− conducting internal audits (allows to determine the compliance of the quality management
system with the requirements of the standard and to analyze the effectiveness of its
functioning).
The table below shows the initial state of the enterprise (AS-IS) at the level of the business
architecture taking into account the analysis of the requirements of ISO 9001:2015 (Tab. 1):

Table 1
The Initial State of the Enterprise Business Architecture (AS-IS)
Architecture
Scope The initial state of the enterprise (AS-IS)
level
The company has set annual goals, which include the
achievement of the following targets: volume of production,
Goals
product quality, percentage of productivity of production
personnel)
It was decided to implement the ISO 9001:2015 standard in
order to perform quality management (implementation of a
Strategy
quality management system and certification for compliance
with the ISO 9001:2015 standard)
Implementation of ISO 9001:2015
There is no documented first-level information necessary for
the implementation and functioning of the quality management
QMS
system (quality policy, quality objectives, quality manual).
Documenta-tion
Existing documentation can be further developed for use in
the quality management system.
Business Risk management process is developed insufficiently (there
architecture Risk is no documented procedure for risk management, there is
management no documented information on risks and measures for their
management)
The implementation of the internal audit system is at an early
Internal stage. There is no documented procedure for conducting
audits internal audits and developing and implementing corrective
measures. There are no trained internal auditors
Situational (as problems are identified) approach to the
Business development and description of business processes.
processes Development of process management is at an early stage.
Process performance targets are not defined
Organizational
Organizational structure is defined
structure
Allocation of
Every department has its responsibility distribution matrixe
responsibilities

Characteristics of the initial state of the enterprise (AS-IS) at the level of the information
systems architecture (Tab. 2):
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 International Experience in Business Processes Improving on the Base of Architectural Approach

Table 2
The Initial State of the Enterprise Information Systems Architecture (AS-IS)
Architecture
Scope The initial state of the enterprise (AS-IS)
level
ERP-system, used to manage enterprise
Infor LN ERP
Information resources
Application EDMS, used to manage electronic
systems DIRECTUM
architecture documentation
architecture Flowcharts and diagrams editor, used to
MS Visio
detail business processes

4. “TO-BE” Architectural State Description: Migration Plan

The desired state of the enterprise (TO-BE) is an enterprise with an effectively functioning
quality management system meeting the requirements of ISO 9001:2015 standard (Tab. 3, 4).

Table 3
The Desired State of the Enterprise Business Architecture (TO-BE):
Architecture
Scope The desired state of the enterprise (TO-BE)
level
Business The company has set quality goals in the framework of the
Goals
architecture quality management system

The quality management system is implemented and

Strategy successfully functioning. The certificate of conformity to
standard ISO 9001: 2015 is received
Implementation of ISO 9001:2015

The first-level documentation for introduction and successful

operation of the quality management system (quality policy,
QMS quality objectives, quality manual) has been developed.
Documenta- The second-level documentation has also been developed
tion (procedures on document flow, regulatory documentation, risk
analysis, supplier evaluation, management of non-conforming
products, internal audits, corrective measures).

A risk management procedure has been developed, a risk

Risk register has been created (contains information on existing
management risks, their significance, responsibility distribution and risk
management measures)

Training of internal auditors was carried out. A system of internal

Internal audits has been implemented: procedure for conducting internal
audits, developing and implementing corrective measures has
audits been developed. Internal audits of all business processes were
conducted.

Process management s implemented – business processes of the

enterprise are considered as interrelated elements of the system:
Business
there is a map of the first level processes, a map of the second
processes
level processes, business processes were detailed. The targets
and performance criteria of business processes are determined.

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International Experience in Business Processes Improving on the Base of Architectural Approach

Table 4
The Desired State of the Enterprise Information Systems Architecture (TO-BE)
Architecture
Scope The desired state of the enterprise (TO-BE)
level
ERP-system, used to manage enterprise
Infor LN ERP
resources
Information
Application EDMS, used to manage electronic
systems DIRECTUM
architecture documentation
architecture
Instrument for modeling, analysis and
BPMS iGrafx
management of business processes
To determine the scope of work required for the transformation of the enterprise (AS-IS à TO-
BE), management has appointed responsible employees and set up a working group. The next
step was to create a work structure of the ISO 9001:2015 standard implementation (Fig. 5), as
well as a project implementation plan (Tab. 5).

Figure 5. Structure of work.

Table 5
Project Implementation Plan
2017 2018
Stage Description
WW4-34 WW35 WW36-45 WW43-51 WW3-4 WW5-9 WW10 WW10-12 WW13
1. Employees training

1.1. Working group training (ISO 9001:2015)

Training "Business processes of the quality management
1.2.
system"
1.3. Internal audits training

1.4. Training for production masters (corrective measures)

2. ISO 9001:2015 Implementation. Developing business processes and documentation

2.1. Analysis of the requirements of the ISO 9001:2015 standard

2.2. Analysis of existing documentation

Analysis of existing process model and regulatory
2.3. documentation, use of quality management system in existing
process documentation
Discussing the QMS business processes and documentation.
2.4.
Conducting the gap-analysis

Creating documentation development plan. Developing the

2.5.
documentation according to the plan
Creating business processes development plan. Developing
2.6.
business processes
3. Preparing for internal audits. Conducting internal audits

3.1. Conducting internal audits

Preparing audit reports. Developing and implementing

3.2.
corrective measures

4. The QMS performance analysis

4.1. Conducting the QMS analysis

Preparing a performance report. Conducting management
4.2.
review
5. Preparing for certification. Certification audit

5.1. Preparing for the first stage of certification audit

5.2. Certification audit. Stage 1

Developing and implementing corrective measures according to
5.3.
the results of the certification audit (stage 1)
Conducting an internal audit. Developing and implementing
5.4.
corrective measures (if necessary)

5.5. Certification audit. Stage 2

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 International Experience in Business Processes Improving on the Base of Architectural Approach

The key areas of work are the development of quality management system documentation and
the introduction of a process approach. In accordance with the requirements of the standard,
documented information of the first and second levels is developed (Fig. 6):

Policy,
objectives First level
Quality
management
Quality
manual
Documentation, regulatory
procedures: procedures, instructions, Second level
business processes
Confirmation of
compliance Conformity documentation Third level

Quality Legal documentation

planning Organizational documentation
and
assurance Incoming and outgoing documented Basic level
information
External policy documents

Figure 6. Documented information structure.

The introduction of process management within the framework of implementing the quality
management system implies the consideration of all types of enterprise activities as a
managed system of processes that is aimed at achieving its targets and meets the requirements
of customers and other interested parties. All processes of the system are interrelated [Lapshin
V., Yamashkin Y., 2015].

Figure 7. Business process map (level 1).

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International Experience in Business Processes Improving on the Base of Architectural Approach

To implement the process approach, it is necessary to develop a complete model of the

processes that create value for customers. This model can be represented as a top-level process
map (Fig. 7). The second level of the process map and a plan for detailing business processes
are also created. For each business process we defined:
− process owner;
− process boundaries and process goals;
− inputs and outputs;
− targets and performance criteria of the process.

To implement the principles of the process approach, the company implements the iGrafx
BPM system. The system allows to model and analyze business processes, as well as manage
them. The introduction of iGrafx helps to accelerate the creation of a graphical representation
of processes (process detailing is carried out in BPMN notation) and to manage the life cycle
of business processes. Let us take a look at the the main process “Serial production” (Tab. 6).
It includes three second-level processes, which have their subprocesses (detailing).

Table 6
Serial Production Process
Level 1 Level 2 Detailing
Code Title Code Title Code Title
Planning of details
CP4_1_1
CP4_1_2 Production of details
Planning
CP4_1 and CP4_1_3 Planning of assembly groups
production CP4_1_4 Production of assembly groups
CP4_1_5 Painting
Management of techonogical
CP4_2_1
documentation
CP4_2_2 Changing route time
Ensuring
Serial the CP4_2_3 Management of techonogical process
CP4 CP4_2
production production
process Confirmation of orders and changes
CP4_2_4
in delivery dates
Ensuring the safety of materials,
CP4_2_5
parts and products
Management of technological
CP4_3_1
equipment
Replacement and repair of broken
CP4_3_2
Production instruments
CP4_3
equipment
CP4_3_3 Replacement of consumables

CP4_3_4 Metrological support of production

5. Results and Discussion

The paper addresses the issue of quality management system development on the base of
enterprise architecture approach. It was proposed as an attempt to align a practical business
case with the requirements of ISO standard. When estimating the required investments in the
70 NJMSR V. 3 Issue 2 (2019)
 International Experience in Business Processes Improving on the Base of Architectural Approach

quality management system implementation (achieving compliance with the ISO 9001:2015
standard), several types of costs are defined - implementation costs and operating costs. The
first type of costs can be divided into two groups: the costs of direct implementation and
the cost of certification. Operating costs are understood as costs for maintaining the quality
management system and its improvement. The cost model for the implementation of the
management system is shown in Fig. 8:

Costs of
implementation
ISO9001:2015

Costs of the actual Operating costs

implementation

Consulting Certification Certification

comapny center center

Consulting
Employees Consulting services for the Surveillance
training services for QMS Certification audit Re-certification
enterprise analysis implementation
and planning of
the QMS
implementation

Figure 8. Cost model of the implementation of the QMS.

Another important task is to assess the benefits of implementing the ISO 9001:2015 standard.
Advantages can be quantifiable and non-quantifiable, the model is shown in Fig. 9:

Benefits of
implementation
ISO9001:2015

Process QMS Reduced

management Documentation loses from
(approach) inconsistencies

Business process Business process Effective Differentiation of Increased level of

optimization identification and interaction areas of Reduced quantity delivery of
(improvement) detailing between responsibility of reclamations products from the
departments 1st presentation

Business Business process Business process

process map regulation detailing
(level 1 and 2)

architectural approach

Figure 9. Benefits of implementing the ISO 9001:2015.

Fig. 10 reflects the quantifiable effect of the implementation of the quality management
system - the statistics on received complaints (reclamations) from customers (the introduction
of the management system started in May 2017):

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International Experience in Business Processes Improving on the Base of Architectural Approach

Figure 10. Reclamations.

As a result of the formation of the business process architecture based on the international
standard ISO 9001:2015, and the analysis of the results obtained, it is possible to draw a
conclusion on the effectiveness of applying the architectural approach to improving business
processes of the enterprise. The architectural approach provides continuous management at the
interface of single processes within the system, as well as their combination and interaction.
Understanding the cause-and-effect relationships between system factors, processes and
results allows us to find levers for managing business processes, i.e. develop, manage and
improve business processes in order to create added value for customers and other interested
parties.
Further research activities follow but are not limited to the following branches:
1. extending the research onto the usage of other architectural approaches and tools
(Archimate, BPMN etc.);
2. a deeper specification of each TOGAF phase for different QMS adoption steps;
3. formalization of the model for the resulting EA evaluation;
4. practical application of the proposed framework taking into account such business
factors as industry sector, organizational size and type of strategic positioning.

References
Alaeddini, M., Asgari, H., Gharibi, A., & Rashidi Rad, M. (2016). Leveraging business-IT
alignment through enterprise architecture – an empirical study to estimate the extents.
Information Technology and Management, 18, 55-82.
Imai, M. (1986). Kaizen: The key to Japan’s competitive success. McGraw-Hill Education,
New York.

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ISO International Organization for Standardization. http://www.iso.org.

ISO 9001:2015 (en) Quality management systems — Requirements (2015). https://www.iso.
org/obp/ui/#iso:std:iso:9001:ed-5:v1:en.
Kononov, Yu. M. (2017). Principles and approaches to improvement the business process
management system of an industrial enterprise. Available via eLibrary. https://elibrary.
ru/item.asp?id=29384277.
Lapshin, V.,S., & Yamashkin Y.,V. (2015). Business Process Management Based on Architerctual
Approach. Available via eLibrary. https://elibrary.ru/item.asp?id=25035882.
Peskov, E.V. (2016). Business Processes and Business Architecture in Modern Business
World. Available via eLibrary. https://elibrary.ru/item.asp?id=26128180.
Reich, B.H., & Benbasat, I. (1996). Measuring the linkage between business and information
technology objectives, MIS Quarterly, 20, (1) 55-81.
Reich, B.H., Benbasat, I. (2000). Factors that influence the social dimension of alignment
between business and IT objectives, MIS Quarterly, 24(1) 81-113.
Sabherwal, R., & Chan, Y.E. (2001). Alignment between business and IS strategies: A study
of prospectors, analyzers and defenders. Information Systems Research, 12(1), 11-33.
Sabherwal, R., & King, W. (1991). Towards a theory of strategic use of information resources,
Information and Management, 20, 191-212.
Schmidt, R., Möhring, M., Härting, R.C., Reichstein, C., Zimmermann, A., & Luceri, S.
(2015). Benefits of enterprise architecture management – Insights from European
Experts, Proceedings of Practice of Enterprise Modelling (PoEM) i.e. 235, 223-236.
Tan, F.B., & Gallupe, R.B. (2006). Aligning business and information systems thinking: A
cognitive approach, IEEE Transactions on Engineering Management, 52(2), 223-237.
The Global IT Trends Survey (2016). Retrieved from http://www.globaliim.com/.
The Open Group Architecture Framework (TOGAF Version 9.1). Retrieved from http:/www.
opengroup.org/
Venkatraman, N., Henderson, J.C., & Oldach, S. (1993). Continuous strategic alignment:
Exploiting information technology capabilities for competitive success, European
Management Journal, 11 (2), 139-149.
Wang, X., Zhou, X., & Jiang, L. (2008). A method of business and IT alignment based on
enterprise architecture, Proceedings of IEEE International Conference on Service
Operations, Logistics and Informatics, Vol.1, pp. 740-745.

NJMSR V. 3 Issue 2 (2019) 73

E-leadership in Social Change: A New Paradigm in Bangladesh

E-leadership in Social Change:

A New Paradigm in Bangladesh
Maliha Tabassum *
[email protected]
Priyanka Kundu *
[email protected]

Abstract
We are living in a technology driven world where this society, is the most interconnected
society ever. Bangladesh, despite having low income, little access to internet and literacy
rates, is one of the heaviest social media user countries. According to Global Digital Statshot
of Q2 report of 2017, Dhaka, the capital city of Bangladesh, became second Facebook using
prone city where youth are the main user. This has made a shift in traditional leadership
style where digital platform brought up fresh opportunity to create an effective leadership
genre, E-leadership. E-leadership is using digital platform especially social media as leaders
virtually influence and instruct followers to achieve a common goal. Despite having significant
influence among city youths, insufficient attention was given to this newly emerged leadership
style in social media research. Considering this research gap, this study aims to investigate
how social media is used as a platform by E-leaders to practice their leadership and how
E-leaders perceive the media for social change. The study would analyze two E-leadership
based initiatives, 1) Ten Minutes’ School (YouTube) and 2) Youth Opportunities Bangladesh
(Facebook) where selected contents will be analyzed alongside in depth interviewing of two
E-leaders who are the entrepreneurs of two initiatives. Transformational leadership theory
is considered as the framework for conceptualizing the context of this study and analyzing
collected data.

Keywords: E-leadership, Social change, Bangladesh, E-leaders, Influence.

1. Introduction
“Yes! I am an e-leader and am working to bring out more and more leaders using social media”,
Mr. Osama, the founder of Youth Opportunities Bangladesh defined him as an e-leader as he
in contributing to change the society through information and communication technology. Not
only Mr. Osama, there are significant number of social change makers evolving as e-leaders
in current Bangladesh who are incorporating online and social media for reaching bigger
audience and putting greater influence over them.

Initially e-leadership term was used only in organizational setting ensuring fast, effective
and limitless communication inside a company or an organization. But with the rise of social

* Lecturer, Department of Mass Communication and Journalism, Bangladesh University of Professionals.

* Scholar, Department of Mass Communication and Journalism, Bangladesh University of Professionals.

74 NJMSR V. 3 Issue 2 (2019)

 E-leadership in Social Change: A New Paradigm in Bangladesh
media and increased interactivity among social media users, E- leaders are working on a
virtual platform for bigger and better goals beyond organizational business and profit. The
term has evolved for making the work field different by using social media, so as their work
and responsibilities.

For most of the E-leaders the target prosumer is youth. In fact, study found most of the
youtubers making online video content are young by themselves and youths are following
them because of their relativity (they can relate themselves with the youtuber) and attainability
(they can achieve the same) (Sarah, 2016). That is why e-leaders can attract and engage youths
(especially the teenagers) with their activities and thus have an impact on social behavior
(Westenberg, 2016). The situation is equally appropriate for current Bangladesh.

To find out the relevance and new paradigm of social change making and influencing the
community, in the study two different cases- Youth Opportunities Bangladesh and 10 Minutes
School, are examined, to find out how the two e-leadership platform are bringing change in
the society. The two leaders and founders of the above enterprises- Mr. Osama and Mr. Sadiq,
were interviewed to know their aims and objectives to be realized through their platforms.
Contents of their Facebook and YouTube page of the month September 2019 were also
analyzed to understand the pattern of their subjects.

Following the transformational leadership theory and KAP-Gap concept, the data were
analyzed. It is found that e-leadership and e-leaders of Bangladesh are continuously coming
with new and innovative ideas, using social media to reach audiences, working to put
something positive for the community. Although in a country like Bangladesh, there always
remains some technical challenges such as- internet connection, education and others.

1.1 Definition of Terms: What is E-leadership and who are the

E-leaders?
The concept of E-leadership has evolved time to time, with different names. It was Marshall
McLuhan who first coined the word ‘Global Village’ to describe a new era of communication
where the world will be interconnected by technological breakthrough (McLuhan, 1963).
This breakthrough was apparent in this time, no doubt; but not like today. Today we have
the most interconnected society ever which has given birth to another new technologically
driven phenomenon ‘Virtual Team’ .The concept of ‘Virtual Team’ and ‘Virtual Leadership’
have already shifted the way we look at the term ‘Leadership’. Some researchers find it even
more challenging than the traditional one as the leaders have to cross the boundary of time,
space or even culture and also have to lead without any direct supervision or interaction
(Kerfoot, 2010). Gibson and Cohen gave emphasis on the effectiveness on creating shared
understanding in a virtual team as it makes the team members interdependent and sets a goal
to aim at (2003).
According to a survey of Human Resource Management in 2012, 46% of all organizations
were using virtual teams in their workplace (Lepsinger & DeRosa, 2015) which gave rise
a new terminology ‘Virtual Leadership.’ Kayworth and Leindner (2002) suggested some
characteristics of a successful team leader such as empathy, flexibility, regular communication
overall having all the traits of a guide/mentor than a stereotype leader. Malhotra, Majchrzak and
Rosen (2007) identified six leadership practices of a successful virtual team leader 1) establish
NJMSR V. 3 Issue 2 (2019) 75
E-leadership in Social Change: A New Paradigm in Bangladesh

and maintain trust through the use of communication technology; 2) ensuring distributed
diversity is understood and appreciated; 3) manage virtual work-life cycle (meetings); 4)
monitoring team progress using technology; 5) enhancing visibility of virtual members
within the team and outside in the organization; and 6) enabling individual members of the
virtual team to benefit from the team. This term defining leadership in online environments
then termed differently as ‘E-leadership’ by Avolio, Kahai and Dodge in 2001. The term has
evolved, making the work field different for E-leaders using social media, so as their work
and responsibilities.
As communication and information technologies are the core medium of virtual leadership,
the new term ‘E-leadership’ has made its way in many research works. Pulley and Sessa
(2001) defined E-leadership with three specific tasks: setting directions, facing challenge and
maintaining commitment which can occur in a multitude of options. According to them, it
(E-leadership) is enabled through net, where the individuals (both leader and followers) are
linked together into a web of information (Pulley & Sessa, 2001) and they saw it as a new
migration.
This study aims to understand this migration that leads to social change. It focuses specifically
on social media-based E-leadership to make this change happen. That is why it is important to
determine how E-leaders are working for this social change targeting the youth and how they
(E-leaders) perceive the social media by themselves.

2. Research Background and Questions

E-leadership is using the digital platform especially social media where E-leaders virtually
influence and instruct followers especially youths to achieve a common goal. In Bangladesh
it is also new but already managed to create a significant influence among the youth. It has
obviously made a shift from traditional leadership style to a brand-new genre of virtual
reality-based leadership. However, despite creating huge buzz, insufficient attention has been
given to this newly emerged leadership style in social media research. Taking this scenario in
consideration, the research questions are as following-
• As the concept of E-leadership is comparatively new in terms of social leadership, do
they (the founder of the both initiatives) consider them as E-leader?
• Do E-leaders are facing any challenge? How these newly emerged E-leaders are working
to overcome challenges to achieve their goals?
• What are their strategies and how are they perceiving their initiatives in bringing social
change among youth?

3. Research Objective
The primary objective of this research is to carry out a qualitative study to explore the nature
of social change via E-leadership in the context of Bangladesh. In understanding the influence
of newly emerged E-leaders the objectives of this research are as the following:
• To identify how social media is used as a platform by E-leaders to practice their leadership
across boundaries for bringing positive changes among the youth
• To determine how E-leaders perceive the social media for social change (from their pint
of view)
• To understand and evaluate their (E-leaders) strategies of youth engagement
76 NJMSR V. 3 Issue 2 (2019)
 E-leadership in Social Change: A New Paradigm in Bangladesh

4. Literature Review
4.1 Concepts and Challenges
Most of the prior researches done on E -leadership prioritize the use of ICT within an
organization to increase efficiency for both leaders and employees. Some studies show dynamic
relationship (Avolio & Kahai, 2003) between E leader and employees inside an organization
focusing on how to best manage and lead people when they are not having physical proximity
yet doing micro work. Jarvenpaa and Tanriverdi (2003) considered this relationship as dyadic
between a firm, its employees, customers and suppliers in a virtual knowledge network to
illustrate why the balancing act is so important for the bottom line of the firm.
One study (Cascio & Shurygailo, 2003) reveals some key challenges for the E-leaders of
virtual teams. As his/her team is heterogenous, diverse and scattered it is important for
him/her to establish and develop different norms and procedures in team’s formation and
development.
According to the study virtual teams magnifies the differences between good or bad projects,
organizations, teams and leaders. The nature of this team is little tolerance of ineffective
leadership which clearly shows one of the risk factors of becoming an E-leader. Establishing
proper boundary between home and work, effective communication strategies, encouraging
and inspiring emergent leaders within virtual teams and promoting oneness and close
cooperation between team members are very much crucial for a successful E-leader (Cascio
& Shurygailo, 2003).

4.2 E-leadership from educational Perspective

Gurr (2015) explores the concept of e-leadership and why it is relevant to educational
organizations. As education has been extremely ICT mediated, he assumed that this new
environment needs this new form of E-leadership for its own betterment. He analyzed
different studies in non-education settings and suggested to have more empirical research in
education settings to determine whether there are major differences between educational and
non-educational environments. He urged for more research work on using E-leadership in
educational contexts as according to him, E-leadership is still at an early stage.

4.3 Changing Leadership Styles

Another term very much relatable with E-leadership is ‘Change Leadership’. Change leadership
is the ability to influence and enthuse others through personal advocacy, vision and drive, and
to access resources to build a solid platform for change (Higgs & Rowland, 2000). As most
of the E-leaders of existing social media plays the similar kind of role, their contribution
can easily be relatable with ‘Change Leadership’ style using information and communication
technology. From the educational point of view, Ghasemi and Hussin (2014) gave emphasis
on relevant theories of change leadership which must be practiced in higher education settings.
As sustainability brings change, the application of change-oriented leadership style is a great
contribution to necessary transformation toward sustainability according to them.
Many researchers saw E-leadership as the other name of transformational leadership.
Kevin et al (2003) named it as ‘Remote Transformational Relationship’ where the leaders
have least physical proximity yet having positive and effective outcome. Citing previous
researches (Howell & Avolio, 1993) who denied the effectiveness of remote leadership for a
NJMSR V. 3 Issue 2 (2019) 77
E-leadership in Social Change: A New Paradigm in Bangladesh
transformational leader, claimed to have more involving followers working collectively with
shared vision of the future.
Again, some studies relate transformational leaders with the traits of E-leaders. Explaining
transformational leadership as a process in which “leaders and followers help each other
to advance to a higher level of morale and motivation” (Burns, 2002) According to him
it reshapes perceptions, create aspiration and gives motivation to followers. Relating this,
Purvanova and Bono (2009) suggest considerable variability in leaders’ behavior across face-
to-face and virtual teams. Further, transformational leadership behaviors are more strongly
linked to performance in virtual than in face-to-face teams. Leaders who increased their
transformational leadership behaviors with virtual teams achieved the highest level of overall
team performance, according to them.
There is an existing debate regarding the synonymy of two terms ‘Charismatic’ and
‘Transformational leadership’. Although defining this type of leaders Max Weber gave them
the title ‘superhuman’, many scholars (Podsakoff, 1994 ; Conger & Kanungo, 1998) have
found these two terms mutually inclusive to each other using terms like ‘minor’ or ‘modest’.
Again some (Bas & Avolio, 1994) saw it merely as a component of transformational leadership.
However, both these components are equally important for an E-leader even if they mean
nearly the same type of leadership style.
According to Ilies, Judge and Wagnersaid the purpose of charismatic/ transformational
leadership is to create influence by giving motivation. They proposed a model through which
the influence of leadership on employee motivation is realized which can happen though
affective and cognitive mechanisms. According to them transformational/ charismatic
leadership makes the work even more challenging to the followers by involving them tightly
with the task or job and thus the motivation is created.

4.4 Youth and Social Media

Previous researches have analyzed the impact of social media on youth. Studies (Shabir,
Hameed, Safdar, & Gilani, 2014; Ahn, 2011) found positive influences of social media on
youth as a medium of educational supplements and creating educational environment. Again,
some researchers (O’Keeffe & Clarke, 2011) blamed social media for offensive content,
sexting and Facebook depression.
The impact of E-leaders on youth especially the youtubers are immense. Westenberg (2016)
showed how youtubers change behavior, identification and awareness among teenagers. He
did a qualitative analysis by taking in-depth interview of selected teenagers and popular
youtubers.
This study found a huge teenager engagement with all these YouTube based E-leaders. They
try to follow them, including their clothing lifestyle and sometimes also their way of taking,
walking, gesture etc. Most importantly they want to be like them in future. Although huge
concerns have been shown for these teenagers because of uncensored contents and also less
parental monitoring.
Many researches have been done considering different perspectives and terminologies related
to and on the effect of E-leadership. But there are few researches relating ‘social media’ with
‘E-leadership’ with ‘Youth’ and ‘Social Change’. Somehow E-leaders and their new style of
leading the youth remain untouched in academic research arena. Considering this research
78 NJMSR V. 3 Issue 2 (2019)
 E-leadership in Social Change: A New Paradigm in Bangladesh
gap, our study will investigate how social media can be used as a platform for E-leadership
specially as a new paradigm in social change.

5. Theoretical Framework
This study has a theoretical framework built on the ‘KAP’ study concept. The ‘KAP’ concept
refers to the measurement of changes in Knowledge, Attitude and Perceptions (Kaliyaperumal,
2004) inside a community. Basically, this is a term related to diabetes and how patients, doctors
and others are perceiving the idea of this disease, facing and overcoming it. The concept is
totally based on medical term which can be applicable to other medical related issues as well
like Osteoporosis (Khan, Khan & Malhi, 2014).
To measure the ‘KAP’ among communities the most popular method in medical science is
survey method, which is popularly named as ‘The KAP Survey Model’ (Knowledge, Attitudes,
and Practices). It is a quantitative method that works both with quantitative and qualitative
data aiming to find out the obstacles in behavior change. It paves the way to measure the gap
inside the ‘KAP’ concept. Here the gap refers to the obstacles that hinder the knowledge,
attribute and perceptions to the ultimate behavior change of a community (Du Monde, 2016).
In this research, we have taken only the concept of ‘KAP’ gap, not the whole survey model.
To understand E-leadership in social change this study will try to see how E-leadership is
working with youths as focal point to change knowledge consumption behavior of social
media users. Analyzing two initiatives based on education and career development, this study
will explore the contents, nature and notion of both initiatives and how the E-leaders are using
social media to minimize the ‘KAP’ gap of web dependent youth community.
Again, we will consider transformational leadership as one of our conceptual frameworks
also. Transformational leadership has four dimensions, popularly known as four ‘I’s: idealized
influence, inspirational motivation, intellectual stimulation, and individualized consideration
(Bass, 1985). Based on the work of Elkhani, Soltani and Ahmad (2014) this four I’s have
these following attributes:

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E-leadership in Social Change: A New Paradigm in Bangladesh

As in literature review part, we saw the proven effectiveness of transformational leadership

and societal system in virtual environment, in this study we tried to explore all these attributes
in the context of E-leadership in social media. Analyzing selective contents of two initiatives,
we tried to come to a conclusion on the nature of E-leadership based on two frameworks
presented above.

6. Methodology
One of the main objectives of this research is to qualitatively explore the nature of social
change through E-leadership in social media. To achieve the objectives two initiatives were
taken in consideration 1) Ten Minute’ School (YouTube Based) and 2) Youth Opportunities
Bangladesh (Facebook Based). Both initiatives have their own official websites but
interacts more using social media. Ten minutes school is an online educational platform for
education development at secondary and higher secondary level along with professional skill
development courses. It was founded by internet entrepreneur Ayman Sadiq in the year of
2015. On the other hand, youth opportunities Bangladesh is the largest opportunity discovery
platform for youth. Believing in access to information this platform records all available
opportunities for youth around the world founded by internet entrepreneur Osama Bin Noor.
This study is conducted in two phrases. First of all, content analysis has been done on selective
contents of these two E-leadership based platforms. As both of the initiatives are web based,
we have taken the contents of the month of September 2019 as the most updated ones. From
the content analysis method, we have got the primary data for our research. Based on the
findings from primary data, on second phrase, we have taken in depth interviews of two
E-leaders (founder of both initiatives) Ayman Sadiq and Osama Bin Noor. From the findings
of the second phrase along with the conceptual framework we have come to conclusion on
how E-leaders are perceiving and using social media to bring out social change and how they
are engaging youths to make that change happen.

7. Findings
7.1 Short Introduction and Rate of Interaction of Youth
Opportunities (YO) Bangladesh and 10 Minute School:
Youth Opportunities basically works to disseminate the information of jobs, internships,
scholarships and other opportunities for youth population. It originated in Bangladesh but
now it is working throughout different countries. It has its own website and they use their
Facebook, YouTube and others social media pages to spread the circulars. Youth Opportunities
Bangladesh is a very vibrant page having 3,70,499 like and 50 thousand members. Osama Bin
Noor is the entrepreneur of the initiative, Youth Opportunity.
On the other hand, the ‘10 Minute School’ is a team of young universities students of Bangladesh
who re-designed learning and started on 2015 and started giving teaching through videos. There
the youth students make 10 minutes learning videos and release it in their channel. Ayman
Sadiq is the founder and the CEO of the e-school , 10 minute school(http;//10minuteschool.
com).The CEO of the online school, Ayman Sadiq a Dhaka University graduate who also won
the Queen’s Young Leaders Award 2018 and the best e-learning award from the Asia Pacific
ICT Alliance for his school. (Ayman Sadiq, 2019).

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7.2 Findings from Content Analysis

As stated earlier, this study analyzed selective contents of September 2019 for both initiatives
as they are the most recently uploaded ones. The findings of the content analysis are as follows:

7.2.1 Number of Posts:

In September 2019, the interaction and activity of the Facebook page ‘Youth Opportunities
Bangladesh’ was very high as similar with the other recent months. In total, they shared 65
posts regarding internship, jobs, volunteer opportunities, conferences and so many other
things where the highest number of posts was on competitions (18 posts), Event (7 posts),
international conferences (6 posts) and help (5 posts). Other than that, they share lots of other
issues as well. These posts are mainly collection of others’ contents, circular and call for
interests. But their own generated contents are very few.

Figure 1. Youth opportunity bangladesh’s highest number of Facebook posts.

On the other hand, 10 Minute School has a smaller number of posts comparing youth
opportunities. In the month of September, they posted six video contents (including
professional skills, English speaking, social awareness, software courses, preposition learning
and promotional videos) and 11 interactive posts. One of the notifiable distinctions between
two initiatives are Youth Opportunities do not produce contents, they do search and post. On
the other hand, in 10 Minute School, every content is produced by themselves. So, eventually
their contents are less compering the contents of Youth Opportunities Bangladesh.

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Figure 2. 10 minute school’s highest number of You Tube posts.

Although in September 2019, 10 Minute school posts more software courses, that does not at
all mean their inclination towards professional contents. 10-minutes school basically makes
academic contents targeting school, college and university students. Their inclination towards
professional courses in September 2019 shows their gradual expansion of horizon.

7.2.2 Using More than one platform

Both Youth Opportunities and 10 Minute school are using several platforms to increase their
reach. 10 Minute school have four official You Tube chanel,10 Minute School Live!10 Minute
School Skill Development Lab, 10 Minute School English Language Club, 10 Minute School
LIVE BBA, MBA, Recruitment Test Preparation. Then again in Facebook they have one
separate Facebook group and one page. For Youth Opportunities they have separate Facebook
pages, One Youth Opportunities original, others are country based. Till now, they have four
country-based Facebook pages for Bangladesh, Indonesia, Philippines and Nepal. Slowly
they are incorporating more countries to make the platform global.

7.2.3 Going Global vs Reaching Grassroot

As mentioned earlier, Youth Opportunities is going global by making networks with more
and more countries, their moto is breaking the boundaries where every opportunity counts
irrespective to country, gender and culture. Whereas the moto of 10-minute school is reaching
the grassroot level within Bangladesh, as they make content in Bangla, targeting Bangladeshi
youths.

7.2.4 Shifting Focus

Although both initiatives were started in social media, but now they are changing their plan.
Currently social media is not the focus for Youth Opportunities Bangladesh, they are giving
priority to their Website and App. Latest contents, uploads are mostly found in app and website
with an instant notification for the users. On the other side, 10 Minute school is focusing on
App but also trying to use Facebook more than the YouTube.
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7.3 Interview Analysis: E-leadership and Social Change

“We want to make them future leaders by preparing or facilitating their preparation to
face challenging positions by seizing opportunities”, Mr. Osama, the founder of the Youth
Opportunity Bangladesh quoted while he was asked about the aim of his initiative. To him, the
current world is too fast, and to make oneself prepared enough to cope up with the changing
dimension of new world, one must take the current challenges, especially the youth. Again,
according to him, Bangladesh is a country of huge population and demographic dividend,
youth should self-help themselves and they are, through their Youth Opportunity, facilitating
the youths.

Mr. Osama’s initiative is about the career, skill development and positioning of the current
students (school, college and university) in better places by informing them about possible
opportunities throughout the world. Whereas, the 10 Minute school is different in nature
than the Youth Opportunity. The 10 Minute school is basically a learning hub. It brought a
significant change in e-learning and distance knowledge sharing. Mr. Sadiq, the founder of
the online school, came up, while sharing his story of starting the innovative, “after getting
admission in University of Dhaka, I started taking classes in different coaching centers where
I found many rural students could not continue coaching classes for high range of fees. Then
I thought, why not I make video of my lessons and spread it over the country without any
cost.” This event motivated him to start his journey. Gradually he bought a huge contrast in
the existing traditional concept of static classroom and school by breaking the barriers of
geographical and time of it.

Analyzing the interviews, it can be said that both young leaders dreamt to change the society,
bring some positive changes using internet and within five or six years of their starting. They
got huge recognition, acceptance and it would not be an overstatement that they managed to
bring changes both in education and skill development in country’s youths. The number of
subscription and like in their page, interaction, sharing their contents vividly express about
their successes.

Both can be termed as the modern day’s leader who have the courage to take risk, think about the
existing problems. They want to bring changes, works for it relentlessly to make that happen.
As previously stated, according to the definition of E-leader, Malhotra, Majchrzak, and Rosen
(2007) identified six leadership practices of a successful virtual team leader 1) establish and
maintain trust through the use of communication technology; 2) ensuring distributed diversity
is understood and appreciated; 3) manage virtual work-life cycle (meetings); 4) monitoring
team progress using technology; 5) enhancing visibility of virtual members within the team
and outside in the organization; and 6) enabling individual members of the virtual team to
benefit from the team. These practices are more applicable for internal communication of any
corporate office but still it has relevance with the wider sense of e-leaders. In this structure,
both Mr. Osama and Mr. Sadiq are e-leaders in Bangladesh who are using internet as a tool and
communicating beyond the geographical, social, economic and information barriers. They bet
themselves reached over every corner of the country thanks to the internet and social media.

While Mr. Osama was asked whether he identified himself as an e-leader or not, he said “Yes!
I am an e-leader and is working to bring out more and more leaders using social media.”

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He also said, resources and opportunists are scattered over differences sources, their task
is to gather all of them and make a gateway of opportunities, connecting local and global
youths, and make resources available for everyone. To him, it is one kind of empowerment
to unlock the inner potential of youth throughout the globe. To make the idea possible, they
used social media, especially Facebook, as very an effective platform where the share then
circulars’ hyperlinks with very short descripting. After clicking the link, it directs the keen to
original circular. So, their Facebook pages mediates the connection between the youths and
their webpage, the clients and resources.

The founder of the 10 Minute School, Mr. Sadiq is preferred to introduce himself as a teacher
who teaches through online media. And to be a successful teacher, it is prerequisite to become
a good leader first. He wants to bring a revolution in teaching, classroom and knowledge
sharing, and he has done that through his 10 Minute school. He is facilitating e-learning,
expanding the lessons beyond the books, classroom, coaching centers and traditional
boundaries. That is where he is a successful E-leader and a teacher of E-lesson giving.

After starting his school, he got huge corporate support as well, as the school’s name is “Robi,
10 Minutes School”. He is also getting aligned with universities, schools and other educational
institutions over the countries for growing through offline as well. The interesting thing of the
online school is, consumers also can be the producers. Most of the videos are made for his
channels by the students of different educational institutions. For the demand of the users,
they made at least six channels for specific contents and most of the channels were active.

Both identified the less availability of internet over every corner of the country as a prime
challenge for expansion of their enterprises. To them, the frequent policy change of Facebook
and YouTube is also another kind of challenges to reach more people. According to Mr.
Osama, “Facebook is now more concern about profit making, the company always wants
to boost any programme to get more public reach so that if anyone like or follow our page
they may not get notification properly for the profit-making policy of Facebook.” Still, as
the people, especially youths are more dependent on social media, other than using social
media they, currently, do not have any short-term solution to reach people. Understanding the
challenges of social media, the duo is planning to entertain their own web site and application.

Other than creating positive vibration in the society, the e-leadership is another form of
entrepreneurship for ensuring self-help. Both E-leaders are well established through these
initiatives at the same time recruiting other youth in their companies. So, through the process,
it is possible to help the society as well as help themselves.

8. Discussion and Conclusion

In the data analysis and findings part, it was noticeable that both leaders are doing their
activity primarily using social media, internet and digital divines and they are trying
to change the existing the idea of skill development, knowledge sharing, influencing and
bringing social change. They took new media to reach out unknown people breaking the
boundaries. The theory, transformational leadership said a leader should manage to provide
charismatic influences, inspirational motivation, and intellectual motivation and should have
some individualized characteristics. These parameters are and partially relevant for the two

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 E-leadership in Social Change: A New Paradigm in Bangladesh
studied e-leaders of Bangladesh. Firstly, Mr. Osama does not always appear publicly, so his
charismatic influence is not possible to measure but on the other hand Mr. Sadiq is a very
prominent public figure amongst the youth for his charismatic influence through presence
on screen- TV and Newspapers- with his individual communication and his motivational
speeches. Secondly, both inspirationally motivates the youth- one for skill development and
the other for learning. So here, both of them fulfills the requirements to be influencers. Thirdly,
they also provide intellectual motivations as well through changing the mind-set of traditional
skill development, challenge taking and so one. Lastly, both leaders do empower others, listen
to their problems and interact virtually and directly as well. These can be considered under
the individualized characteristics.
Through their transformational e-leadership, the two leaders are helping to shrink the KAP-
Gap within the people. They are changing their knowledge level through the online contents,
having impact on youth attitude and practices.
So, to conclude, the findings suggested that the both initiatives are very much important for
E-leadership in Bangladesh, because they could be identified by their individual enterprises
which have greater social benefit and give birth to E-leaders who are currently working for
the social change.

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Factors Influencing the Consumers’ Perceptions towards Frozen and Ready-to-Cook Food Products in Bangladesh

Factors Influencing the Consumers’

Perceptions towards Frozen and Ready-to-
Cook Food Products in Bangladesh
Nazrul Islam, PhD *
[email protected]
&
Naziah Tahsin, Nowshin Tarrannum, Rumaisa Zahara Salihee, Sumaiya
Tarannum, Sujana, Jarin Tasneem Mishma **
[email protected]

Abstract

Recently in Bangladesh, frozen and ready-to-cook food industry is growing very fast due
to high demand of these products by the city dwellers. This study aims at identifying the
factors influencing the consumers’ perception about the frozen and ready-to-cook food
products on Bangladeshi people. A survey was conducted among 211 frozen and ready-to-
cook food consumers of Dhaka city with a structured questionnaire. Both descriptive and
inferential statistics were used to analyze the data. Factor analysis was conducted to identify
the influencing factors related to the consumers’ perception about frozen and ready-to-cook
food products. Regression analysis was accomplished to examine the impact of the factors on
the overall consumers’ preferences of the processed frozen and ready-to-cook food products.
Results show that the factors which influence the perception of the consumers about frozen
and ready-to-cook food products are concerned with saving time, helpful and economic, low
price, variety and good for health, brand image and quality, availability of the frozen foods,
taste of the food, and attractive packaging of the food. Individual factor relationships show
that the factors such as, saving time, the foods are helpful and economic, low price, variety
and good for health, brand image and quality, and availability of the foods are significant
and the factors such as, good taste of the food and attractive packaging of the food are not
significant in the this study. This study suggests that the policymakers of the processed frozen
and ready-to-cook food product manufacturers should give importance on these factors for
increasing the demand of the products among the city dwellers of Bangladesh.

Keywords: Consumers’ perception about fish, Meat and wheat-based frozen foods, Life style
and taste preferences, Income of the people, Availability of the products, Easy to cook.

* Professor at Canadian University of Bangladesh , Dhaka, Bangladesh

* Students at Bangladesh University of Professionals Dhaka, Bangladesh

88 NJMSR V. 3 Issue 2 (2019)

 Factors Influencing the Consumers’ Perceptions towards Frozen and Ready-to-Cook Food Products in Bangladesh

1. Background
Frozen food and ready-to-cook food market is expanding very fast among the city dwellers
of Bangladesh. Frozen and ready-to-cook food products are mainly related to fruits and
vegetables, fish and meat-based products, wheat-based food products, and snacks products.
Frozen fruits and vegetables related products are different fruits, Bean Seeds, Kakrol, Patol,
Ladies Finger, Jack Fruit Seeds, etc. while snacks foods include both meat and fish based
snacks like chicken nuggets, meat ball, strips, fish ball, fish cakes and vegetable based snacks
like Aloo Puri, Dal Puri, Samosa, Shingara and Spring Roll (Arifeen, 2012). Frozen Ready
to Cook Meat products include frosted whole chickens, lambs, mutton and beef. These are
currently available at super markets and order based by institutional buyers like restaurants
and fast food shops and fish products are Hilsha, Koi, Pabda, Keski, Mola, Foli, Baila, Batashi
and Ayer.

A rapidly growing consumer market is observed in Bangladesh in recent years. It is perceived

that this growth is due to a large population base that has increased demand for food products
in Bangladesh (Ferdous, & Hossain, 2015). The market and the product range have evolved
significantly over the last decade and many companies have entered the food business. Frozen
food and ready-to-cook foods market is also increasing in Bangladesh very fast. According
to some industry analysts, the food processing sector in Bangladesh is a 4.5 billion US Dollar
industry. In 2010, Bangladesh exported over $700 million worth of processed food and
beverages, over 60 percent of them were shrimp and fish products1.

The completion among the manufacturers in this sector is also severe. Golden Harvest and
Rich have a high assortment of products and are the largest players in food products market
in Bangladesh. However Aftab, BRAC and CP are also big players in the processed chicken
market of the country. Kazi has recently entered into the market and is trying to grab some
market share very fast. This sector is a promising sector of Bangladesh as the per capita
income, family structure (nuclear), taste and fashion are changing in the country1 (Figure
1). However, there is still some misconception about the frozen food and ready-to-cook foods
in Bangladesh. Saying goes that frozen foods are not very good for health and it has low
nutrition value. Hence, this study aims to identify the consumers’ perception about the frozen
food and ready-to-cook food products like fruits and vegetables, fish, meat and wheat-based
frozen food products in Bangladesh.

1 Any thing missing here?

https://www.google.com.bd/search?sxsrf=ACYBGNRP00t0z6Ovri0IECrudH7A4_
MD8A%3A1570531429727&lei=ZWicXZ3NK8n6vgTFjr_A

CQ&q=food%20industry%20in%20bangladesh%20018&ved=2ahUKEwjunKTBvYzlAh
VeinAKHRbyA4oQsKwBKAF6BAgAEAI&biw=122 4&bih = 745

1 https://www.lightcastlebd.com/insights/2015/07/14/market-insight-bangladesh-frozen-food-sector

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Others, 26% Golden Harvest, 25%

Bombay Foods, 2%
BRAC, 3%

Rich, 15%
CP, 5%

Aftab, 10%
Eurasia, 14%

Figure 1. Competitive situation of Bangladesh frozen foods market.

1.1 Objectives of the Study

The main objective of this study is to identify the factors related to the consumers’ perception
about the frozen food and ready-to-cook food products in Bangladesh. The specific objectives
are:
(i) to identify the factors that influence consumers’ perceptions about the frozen food and
ready-to-cook food products in Bangladesh;
(ii) to identify the significant factors which influence the selection of frozen foods in
Bangladesh.

2. Literature Review
Processed frozen and ready-to-cook foods are important part of the daily foods of the day to
day life of the people. This is also true in a developing country like Bangladesh. In this modern
lifestyle, people have very small amount of time to prepare their foods by themselves. According
to Becker, food preparation decisions are influenced by the worth of the homemaker’s time
(Becker 1965; Prochaska and Schrimper 1973). It’s vital to think about convenience in the
stages or methods of food consumption and to see the proportionate importance customers
give to the factors like time, energy use in acquisition, consumption and disposal (Brown and
McEnally, 1993). Therefore, convenience is outlined in terms of our time, physical energy
and mental effort savings associated with food preparation and consumption. Another analysis
shows that customers understand the Ready-made foods (RMFF) as nutrient, healthier and
delicious. Therefore, they are switching frozen processed food and willing to pay the premium
value. In the paper they investigated to understand the foremost moving factors that have an
effect on purchasers to get Ready-made food (Sen, S., Antara, N., & Sen, S. 2019).
Pre-packed, processed meals like boxed entrees and frozen dinners decreases the investment
of energy, time, or cookery skills required for food preparation (Capps O, Tedford J, Havlicek
J., 1985). However, qualitative analysis findings have found out that older people feel
conflicted about pre-packed, processed foods as they knew these foods weren’t as nourishing.
However, they valued time-saving advantages of frozen processed food. Other qualitative
findings recommend that saving time isn’t the exclusive reason for buying processed food
(Carrigan, Szmigin and Leek, 2006). A comparison is drawn to point that the biggest factor
tributary to purchasing behavior in grocery stores was the worth and convenience of frozen
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foods that were more popular over ancient types of grocery purchase. Even though the cost
of natural food was lower in those neighborhoods, individuals would tend to shop for frozen
foods for the benefit of cookery and handling of the product(Aamir, S., & Nawaz, A. 2019).
Income is one of the foremost relevant socio-demographic variables that mostly have an
effect on consumers’ food decisions, suggesting that the look of interventions geared toward
dynamical dietary patters ought to take into thought the characteristics of specific target
populations (Ares, G., Machín, L., Girona, A., Curutchet, M., & Giménez, A. 2019). Suvrasub
unit, enclosed some factors in his study that influence consumers to require ready-made
food(2019), he mentioned the influencing factors like expeditious, safety, easiness to cook,
favorability, price, brand, tasty, advertising, appearance, quality, availableness& packaging.
A.K.M Shakil Mahmud (2018) in his study referred an amount of robust investment in
technology, processes and regulation by which the frozen food sector has flourished and earned
itself a strong name with mercantilism partners. Exporters have earned quality and trait within
the international market and are committed to maintain a competitive advantage in product
quality. Another aspect of the processed food product is it’s perpetually making an attempt to
beat consumers’ negative perception concerning the health and well-being of frozen foods.
(Sirazum Munira, 2017). Food products provide compelling blessings over raw merchandise,
particularly once when it involves organic process price and flavor. Food products additionally
lock in vitamins and a natural contemporary style. Price, quality, availableness, taste and
freshness are a number of the factors influencing shoppers in consumption of frozen foods.
(Mahmudul Hasan, 2019).
Now in a Bangladesh based research of Syed Robayet Ferdous, he showed the prospects
and challenges of Bangladesh frozen food (2015). Challenges of Bangladesh frozen food
include infrastructure development, currency devaluation, price collapse, application of labor
law, finding foreign investors etc. He also mentioned ways to overcome these challenges
such as introducing new policy, new exporting destination, self and government monitoring
and many more. Consumers’ purchase decisions of semi processed frozen food products are
significantly affected by five factors such as quality, taste, price, availability, and competitive
superiority of the product over other substitute or competitive brands. The study also reveals
that the competitive superiority is also a great concern to the customers. (S.M. Monirul Islam
2018)
3. Methodology
This study was conducted to identify the factors related to the consumers’ perception about
the frozen foods in Bangladesh. Both primary and secondary data were used to conduct this
study. Primary data were collected from the different consumers of departmental and retail
stores located in Dhaka city. The secondary data were collected from the books, magazines,
and journals.
3.1 Sample Design and Determination of Sample Size
In Dhaka city of Bangladesh, there are about 10 million customers who buy frozen foods.
Hence, the sample size of this study was determined by using the following formula suggested
by Yamane (1967).

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Where, n is the sample size, N is the population size, and e is the level of precision. For this
study, level of precision is presumed as 0.07 and the population size is 10 million. Putting these
values in the above equation, the required number of sample size becomes approximately
204. This study interviewed 211 consumers from 10 departmental outlets under study. This
figure is well above the critical sample size of 204 for employing multivariate analysis (Hair
et al., 1998).

3.2 Questionnaire Design

Through literature review, the questionnaire related to the factors influencing the consumers’
perception about the frozen foods was developed. Responses to all the statements in the
questionnaire were measured on a five-point scale ranging from 1 to 5 with 1 indicating
strongly disagree and 5 indicating strongly agree. The collected data were statistically
processed subsequently to come to the useful findings.

3.3 Data Collection & Analysis

Primary data of this study were collected and used for the purpose of identifying the factors
which influence the consumers’ perception about the frozen foods in Bangladesh. The survey
was conducted among the 211 consumers from 10 outlets (Table 1).

Table 1
Distribution of the Respondent Frozen Foods Consumers

S. Name of Departmental Out- Number Percentage Cumulative

No. let(s) Consumers Percentage
Interviewed
1. Agora 23 10.90 10.90
2. Almas General Stores 18 08.53 19.43
3. Al-Amin 14 06.65 26.08
4. Golden Harvest 23 10.90 36.98
5. H.N.P. Family Mart 14 06.65 43.63
6. Shopno 27 12.79 56.42
7. Mina Bazar 16 07.58 64.00
8. Nahar Departmental Store 20 09.47 73.47
9. Pick & Pay Supermarket 30 14.21 87.68
10. Kazi Farms Kitchen 26 12.32 100
Total 211 100.00

The survey was conducted in 2019. The interviewers were properly trained on the items
included in the questionnaire for data collection before commencing the interview. Along

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with descriptive statistics1, inferential statistical2 techniques such as, Factor Analysis and
Multiple Regression Analysis were used to analyze the data. A Principal Component Analysis
(PCA) with an Orthogonal Rotation (Varimax)3 using the SPSS (Statistical Package for Social
Sciences) was performed on the survey data. Multiple Regression Analysis4 such as, Multiple
Regression was conducted by using SPSS to identify the relationships between the dependent
and independent variables and the significant factors.

4. Analysis and Interpretations

In the analysis part, descriptive and inferential statistics were used. Multivariate analysis like
factor analysis and multiple regression analysis were performed to identify the factors and
the relationships between the overall consumers’ perceptions and the factors that influence
the perception of the frozen foods consumers in Bangladesh. This study covered the factors
influencing the perceptions of the frozen foods consumers in Dhaka city.

4.1 Respondents Profiles

Table 2 shows that 46.20% of the respondents were male and 53.80% respondents were
female consumers of frozen foods.

Table 2
Gender Distribution of the Respondents
Frequency Percent Valid Percent Cumulative Percent
Valid Male 97 46.0 46.2 46.2
Female 113 53.6 53.8 100.0
Total 210 99.5 100.0
Missing System 1 .5
Total 211 100.0

Age distribution of the sample respondents shows that 88.10% respondents were at the age of
1824 years followed by 6.20% at the age of 25-30 years, 1.40% at the age of 31-37 years, and
4.30% at the age of above 38 years (Table 3).

1 Descriptive statistics includes statistical procedures that we use to describe the population we are
studying. The data could be collected from either a sample or a population, bu used to describe the group
that is being studying. That is, the results cannot be generalized to any larger group.t the results help us
organize and describe data. Descriptive statistics can only be
2 Inferential statistics is concerned with making predictions or inferences about a population from
observations and analyses of a sample. That is, we can take the results of an analysis using a sample and
can generalize it to the larger population that the sample represents.
3 Varimax rotation is an orthogonal rotation of the factor axes to maximize the variance of the squared
loadings of a factor (column) on all the variables (rows) in a factor matrix, which has the effect of
differentiating the original variables by extracted factor. Each factor will tend to have either large or small
loadings of any particular variable. A varimax solution yields results which make it as easy as p ossible
to identify each variable with a single factor. This is the most common rotation option.
4 In statistics, regression analysis is a statistical process for estimating the relationships among variables.
It includes many techniques for modeling and analyzing several variables, when the focus is on the
relationship between a dependent variable and one or more independent variables. More specifically,
regression analysis helps one understand how the typical value of the dependent variable (or ‘Criterion
Variable’) changes when any one of the independent variables is varied, while the other independent
variables are held fixed.
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Table 3
Age Distribution of the Respondents
Age of the Cumulative
Frequency Percent Valid Percent
Respondents Percent
Valid 18-24 185 87.7 88.1 88.1
25-30 13 6.2 6.2 94.3
31-37 3 1.4 1.4 95.7
Above 38 9 4.3 4.3 100.0
Total 210 99.5 100.0
Missing System 1 .5
Total 211 100.0

Table 4 shows that most of the respondents (73.80) have honors degree who prefer to go
departmental stores.

Table 4
Education Level of the Respondents
Frequency Percent Valid Percent Cumulative
Percent
Valid HSC/A levels 36 17.1 17.1 17.1
Honors 155 73.5 73.8 91.0
Masters 13 6.2 6.2 97.1
Others 6 2.8 2.9 100.0
Total 210 99.5 100.0
Missing System 1 .5
Total 211 100.0

Ninety one point nine percent of the respondents were unmarried and 8.10% were married
(Table 5).

Table 5
Marital Status of the Respondents
Frequency Percent Valid Percent Cumulative
Percent
Valid Unmarried 193 91.5 91.9 91.9
Married 17 8.1 8.1 100.0
Total 210 99.5 100.0
Missing System 1 .5
Total 211 100.0

Most of the consumers (85.60%) of frozen foods were housewives (Table 6).

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Table 6
Occupations of the Respondents
Frequency Percent Valid Percent Cumulative
Percent
Valid Private Job 13 6.2 6.2 6.2
Government Job 1 .5 .5 6.7
Entrepreneur 6 2.8 2.9 9.6
Housewife 179 84.8 85.6 95.2
Others 10 4.7 4.8 100.0
Total 209 99.1 100.0
Missing System 2 .9
Total 211 100.0

4.2 Buying Habits and Experiences of the Respondents

This study show that most of the consumers (36.20%) buy frozen food every month followed
by often (31%), Never (19.50%), once in a week (11.40%) and daily (1.90%) (Table 7).

Table 7
Buying Patterns of the Respondents
Frequency Percent Valid Cumulative
Percent Percent
Valid Daily 4 1.9 1.9 1.9
Often 65 30.8 31.0 32.9
Once in a week 24 11.4 11.4 44.3
Every Month 76 36.0 36.2 80.5
Never 41 19.4 19.5 100.0
Total 210 99.5 100.0
Missing System 1 .5
Total 211 100.0

Most of the respondents (83.80%) have previous experience to buy frozen foods from the
departmental stores (Table 8).

Table 8
Previous Experience of Buying
Frequency Percent Valid Percent Cumulative Percent
Valid Yes 176 83.4 83.8 83.8
No 34 16.1 16.2 100.0
Total 210 99.5 100.0
Missing System 1 .5
Total 211 100.0

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Most of the respondents (32.90%) would like to buy frozen ready meals followed by Frozen
Meat and Poultry (18.10%), Milk & Milk Products (12.90%), Frozen Desserts (11.40%) etc.
(Table 9).

Table 9
Preference to Buy Frozen Foods
Frequency Percent Valid Cumulative
Percent Percent
Valid Frozen Fruits and Vegetables 11 5.2 5.2 5.2
Frozen Meat and Poultry 38 18.0 18.1 23.3
Frozen Fish 6 2.8 2.9 26.2
Frozen Bakery Item 16 7.6 7.6 33.8
Frozen Seafood 11 5.2 5.2 39.0
Frozen Desserts 24 11.4 11.4 50.5
Frozen Ready Meals 69 32.7 32.9 83.3
Milk & Milk Products 27 12.8 12.9 96.2
Others 8 3.8 3.8 100.0
Total 210 99.5 100.0
Missing System 1 .5
Total 211 100.0

The highest number of respondents (34.30%) would like to buy frozen foods as natural food
followed by positive (2950%), moderate positive (22.90%), very positive (9%), and negative
4.30%) (Table 10).

Table 10
Perception towards Frozen Food
Frequency Percent Valid Cumulative
Percent Percent
Valid Negative 9 4.3 4.3 4.3
Neutral 72 34.1 34.3 38.6
Positive 62 29.4 29.5 68.1
Moderate Positive 48 22.7 22.9 91.0
Very Positive 19 9.0 9.0 100.0
Total 210 99.5 100.0
Missing System 1 .5
Total 211 100.0

4.3 Results of Factor Analysis

The results of factor analysis show that all the variables concerning the consumer perception
about the frozen foods have high communalities indicating the variables are important in this
study (Table 11).

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Table 11
Communalities of the Variables
Variables Extraction
1. I am a regular buyer of processed food .903
2. Frozen food saves time. .825
3. Frozen food is as nutritious as fresh food. .863
4. Those who buy frozen food are not wasting money. .875
5. Frozen food products are helpful for students/working women. .795
6. Frozen food is economic in use. .930
7. Frozen food is a convenient food product. .981
8. Frozen food has a long shelf life than fresh food. .932
9. The quality of frozen food is as good as fresh food. .933
10. Price of frozen food is relatively low .893
11. Packaging of frozen food is attractive .944
12. Advertisement attracts me to buy frozen food .981
13. Variety of the frozen food is available .777
14. It is good for health .739
15. Frozen food is safe for me .692
16. Frozen food is easy to cook .687
17. Brand image of the product is good .747
18. Quality of the frozen food is good .930
19. Price of the frozen food is low .981
20. The frozen food’s availability .932
21. Taste of the frozen food is good .933
22. I believe in quality information printed on product package for frozen goods .893
23. High price always ensures high quality of the food .944
24. Packaging is very important to attract consumer in frozen food .981
Extraction Method: Principal Component Analysis.

This study identified eight factors related to the consumers’ perception about the frozen
foods in Bangladesh. This eight together explained 87.87% of the variance of the data set.
The factors are: frozen foods save time, frozen foods are helpful and economic, low price
and good packaging, variety and good for health, brand image and quality, availability of the
food, good taste of the food and attractive packaging of the food (Table 12).

Table 12
Total Variance Explained
Initial Eigenvalues
Component / Factor % of Cumulative
Total
Variance %
1. Frozen Food Saves Time 5.263 21.929 21.929
2. Frozen Foods are Helpful and Economic 3.732 15.551 37.480

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3. Low Price and Good Packaging 3.053 12.721 50.201

4. Variety and Good for Health 2.546 10.607 60.808
5. Brand Image and Quality 2.386 9.941 70.748
6. Availability of the Food 1.665 6.937 77.685
7. Good Taste of the Food 1.415 5.898 83.583
8. Attractive Packaging of the Food 1.030 4.291 87.874
Extraction Method: Principal Component Analysis.
Table 13 shows the factor loadings of the variables constituted eight factors are very high.
It shows that the factor loadings of all the variables are high indicating that the variables
constituted the factor(s) have higher level of relationships with them.

Table 13
Rotated Component Matrixa
Component
Variables
1 2 3 4 5 6 7 8
Factor 1 Frozen Food Saves Time
I am a regular buyer of processed food .939
Frozen food saves time. .939
Factor 2 Frozen Foods are Helpful and Economic
Frozen food products are helpful for .919
students / working women.
Frozen food is economic in use. .919
Frozen food is a convenient food product. .643
Frozen food has a long shelf life than fresh .641
food.
The quality of frozen food is as good .558
as fresh food.
Frozen food is easy to cook .719
Factor 3 Low Price and Good Packaging
Price of frozen food is relatively low .951
Packaging of frozen food is attractive .951
Advertisement attracts me to buy frozen .643
food
Factor 4 Variety and Good for Health
Variety of the frozen food is available .743
It is good for health .743
Frozen food is safe for me .742
Frozen food is as nutritious as fresh food. .666
Factor 5 Brand Image and Quality
Brand image of the product is good .943
Quality of the frozen food is good .943

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High price always ensures high quality of .685

the food
Factor 6 Availability of the Food
The frozen food is available .984
Factor 7 Good Taste of the Food
Taste of the frozen food is good .964
Factor 8 Attractive Packaging of the Food
Packaging is very important to attract .545
consumer in frozen food
I believe in quality information printed on .964
product package for frozen goods
Extraction Method: Principal Component Analysis.
Rotation Method: Varimax with Kaiser Normalization.
a. Rotation converged in 7 iterations.

4.4 Results of Multiple Regression Analysis

Model summary shows that the R square value of the model is 0.531 (Table 14).

Table 14
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .729a .531 .512 .364
a. Predictors: (Constant), REGR factor score 8 for analysis 2, REGR factor score 7 for
analysis 2, REGR factor score 6 for analysis 2, REGR factor score 5 for analysis 2,
REGR factor score 4 for analysis 2, REGR factor score 3 for analysis 2, REGR factor
score 2 for analysis 2, REGR factor score 1 for analysis 2 ANOVA shows that the factors
together are significant as manpower planning techniques (Table 15).

Table 15
ANOVAb
Model Sum of Squares df Mean F Sig.
Square
1 Regression 30.238 8 3.780 28.586 .000b
Residual 26.710 202 .132
Total 56.948 210

a. Predictors: (Constant), REGR factor score 8 for analysis 2, REGR factor score 7 for
analysis 2, REGR factor score 6 for analysis 2, REGR factor score 5 for analysis 2,
REGR factor score 4 for analysis 2, REGR factor score 3 for analysis 2, REGR factor
score 2 for analysis 2, REGR factor score 1 for analysis 2
b. Dependent Variable: Considering all the factors mentioned above, Frozen foods are
helpful.

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This study identified eight factors related to the perception of the consumers regarding frozen
foods in Bangladesh such as, frozen food saves time, frozen foods are helpful and economic,
low price and good packaging, variety and good for health, brand image and quality,
availability of the food, good taste of the food and attractive packaging of the food. Individual
factor relationships show that the factor such as frozen food saves time, frozen foods are
helpful and economic, low price and good packaging, variety and good for health, brand
image and quality, and availability of the food are significant and factors named good taste of
the food and attractive packaging of the food are not significant in the this study (Table 16).

Table 16
Significance Test
Unstandardized Standardized
Model/Factor Coefficients Coefficients t Sig.
B Std. Error Beta
(Constant) 4.408 .025 176.069 .000
1. Frozen Food Saves Time .139 .025 .267 5.534 .000
2. Frozen Foods are Helpful and Economic .177 .025 .339 7.040 .000
3. Low Price and Good Packaging .110 .025 .212 4.390 .000
4. Variety and Good for Health .075 .025 .143 2.969 .003
5. Brand Image and Quality .237 .025 .455 9.447 .000
6. Availability of the Food .136 .025 .260 5.402 .000
7. Good Taste of the Food .035 .025 .066 1.379 .170
8. Attractive Packaging of the Food .007 .025 .013 .277 .782

a. Dependent Variable: Considering all the factors mentioned above, Frozen foods are helpful.

5. Conclusions and Recommendations

This study has been performed to identify the factors influencing the frozen and ready-to-cook
foods consumers’ perception in Dhaka city. It identified eight factors related to the perception
of the consumers regarding frozen and ready-to-cook foods in Bangladesh. The factors are:
frozen foods save time, frozen foods are helpful and economic, low price, variety and good for
health, brand image and quality, availability of the food, good taste of the food and attractive
packaging of the food. Individual factor relationships show that the factor such as frozen foods
save time, frozen foods are helpful and economic, low price, variety and good for health,
brand image and quality, and availability of the food are significant. This means if there is
a change in this area of the frozen foods there will be perceptual change in the consumers
of Bangladesh. The factors such as, good taste of the food and attractive packaging of the
frozen foods are not significant in this study. However, there is an ample scope to conduct
further study on the factors that influence the perception of the frozen and ready-to-cook foods
consumers in Dhaka city of Bangladesh by taking more samples in account which may lead
to better results in this sector of industry.

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References

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Ferdous, S. R., & Hossain, S. D. (2015). Prospect and challenge of Bangladesh frozen food:
A way to overcome. Online International Interdisciplinary Research Journal, 5, 2249-
9598.

Hasan, M. (2019). An Examination of consumer attitude towards frozen foods in Bangladesh.

Horning, M, L., Fulkerson, J, A., Friend, S, E., & Story, M. (2017). Reasons parents buy
prepackaged, processed meals: It is more complicated than “I don’t have time”. Journal
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Islam, S. M., Kalam, A., & Fahmida, A. (2018). Factors affecting customers’ brand choice
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Munira, S. (2017). Factors influencing Bangladeshi people to lean towards increased

consumption of frozen food products.

Osman, I., Osman, S., Mokhtar, I., Setapa, F., Shukor, S., A., M., & Temyati, Z. (2014). Family
food consumption: Desire towards convenient food products. Procedia – Social and
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Saifullah, A., Ahmad, N., Ahmed, R., & Khalid, B. (2014). Frozen food revolution:
Investigating how availability of frozen food affects consumer buying behavior.
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NJMSR V. 3 Issue 2 (2019) 101

Firm Specific Attributes and Stock Returns: A Case of Nepalese Insurance Companies

Firm Specific Attributes and Stock Returns:

A Case of Nepalese Insurance Companies
Purna Man Shrestha *
[email protected]

Abstract
This paper empirically evaluates the explanatory power of the firm specific attributes such as
size [Ln(ME], book-to-market equity [Ln(BE/ME)], and net worth per share [Ln(NWPS), on
stock return (Rj) of Nepalese insurance companies listed in Nepal Stock Exchange (NEPSE).
The study coverers the period of 2000/01 to 2017/18 with 12 insurance companies out of 22
listed insurance companies in NEPSE (Mid-July, 2018). The empirical analysis of this study
concludes that, size [Ln(ME], book-to-market equity [Ln(BE/ME)] and net worth per share
[Ln(NWPS) have explanatory power to explain the cross-section of stock return of Nepalese
insurance companies. Among these variables book-to-market equity [Ln(BE/ME)] has strong
explanatory power than other variables.

Keywords: Firm specific attributes, Insurance companies, Stock return, Nepal stock exchange,
explanatory power.

1. Introduction
Stock return is the one of the major factor for making investment decision in financial sector.
So many models, theories and empirical evidences concluded that stock return is affected by
various factors such as the single factor beta (β) the systematic risk, unidentified risk factors
such as interest rate, inflation rate, and firm specific variables such as size of the firm, the ratio
of book equity to market equity, earnings yield, cash flow yield, dividend yield etc.
Sharpe (1964), Lintner (1965) and Mossin (1966) introduced the capital asset pricing model
(CAPM). CAPM asserts that the expected returns on securities are positive linear function
of their market betas (βs), the systematic risk and market βs are sufficient to describe the
cross-section of expected return. Similarly, Ross (1976) formulated Arbitrage Pricing Theory
(APT). According to Ross, expected return of an asset depends on various unidentified risk
factors such as interest rate, inflation rate and so on.
In the context of developed capital market Banz (1981) concluded that market equity, ME
(a stock’s price times shares outstanding), adds to the explanation of the cross-section of
average returns provided by market βs, Bhandari (1988) found that leverage is important
for explaining expected return, Stattman (1980) and Rosenberg, Reid, and Lanstein (1985)
concluded that average returns are positively related to the ratio of a firm’s book value of
common equity, BE, to its market value, ME, Basu (1983) showed that earnings-price ratios

* PhD Scholar, Mid-Western University, Surkhet, Nepal.

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(E/P) help to explain the cross section of average returns. Furthermore, Barbee, Mukherji, and
Raines (1996) concluded that sales price ratio and debt equity ratio had greater explanatory
power for stock return than book to market ratio and size of the firm.
Similarly, in a comprehensive study by Fama and French (1992), the book-to-market value of
equity ratio (BE/ME) and firm size, measured by the market value of equity (ME), emerged as
the variables that have the strongest relations with the cross-section of average stock returns
during the 1963-90 period. Fama and French also showed that the BE/ME consistently has the
greatest power for explaining stock returns. In addition, they have found that a stock’s beta
does not have significant explanatory power and that the combination of the BE/ME and ME
absorbs the roles of leverage and the earnings-price ratio in explaining stock returns.
Moreover, in the context of emerging capital market Aveh and Vitor (2017) had conducted
a study using the data of listed company of Ghana stock exchange for the period of 2008
to 2014. The study of Aveh and Victor concluded that accounting information, specifically
earning per share, return on equity, book value and market capitalization of the firms, is
relevant for explaining stock prices. To determine the explanatory power of firm specific
variables on stock price in Indian context, Sharma (2011) had conducted a study. The study
of Sharma concluded that earning per share, dividend per share and book value per share has
significant impact on the market price of share.
In the context of Nepalese capital market Pradhan (1993) has conducted the study on “small
market behavior in a small capital market: a case of Nepal”. Pradhan examined the relationship
of market equity, market-to-book equity ratio, price-earnings ratio, and dividends with
liquidity, leverage, profitability, assets turnover, and interest coverage. The study of Pradhan
concluded that larger stocks have larger price earnings ratio, larger book-to-market equity
ratio, lower liquidity, lower profitability, and smaller dividend. However, price earnings ratios
and dividend ratios are more variable for smaller stocks whereas market value to book value
of equity is more variable for larger stocks.
Shrestha (2011) conducted a study to observe the relationship between company attributes
and common stock returns of the Nepalese stock market. Shrestha concluded that size (ME)
has significant positive impact on stock return and book-to-market equity (BE/ME) has
significant negative impact on stock return. Whereas the ratio of sales per share to stock price
(S/P ratio) showed the negative and statistically significant coefficient in regression analysis.
Finally, Bhattarai (2018) has analyzed the effect of firm specific variables and macroeconomic
variables on stock price of Nepalese commercial banks and insurance companies. Using the
data of seven commercial banks and six insurance companies for the period of 2009/10 to
2014/15, Bhattarai concluded that the major firm specific variables that affect share price are
ROE, ROA, EPS, DPS, P/E Ratio, size and major macroeconomic variables that affect share
price are MS, GDPR, ER and IR in Nepalese context.

1.1 Rationale of the study

The insurance industry is a fastest growing industry of Nepal. Since the liberalization of
1990, the government has taken a number of initiations in the area of financial sector reforms
including insurance. The first insurance company of Nepal is “Nepal Insurance and Transport
Company Ltd” (now named Nepal Insurance Co. Ltd since 1991) which was established in

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1947 Nepal Bank Limited (the first commercial Bank) (www.nepalinsurance.com.np). There
are 22 insurance companies are listed in Nepal stock exchange till Mid-July 2018 out of them,
one life insurance company (Rastriya Beema Sansthan) is life/ non-life, 7 companies are life
insurance and 14 companies are non-life insurance companies. Insurance Board is an apex
regulatory body of insurance companies in Nepal. Under the provisions of insurance Act and
Regulation, Insurance Board has adopted the policy of facilitating the insurance companies to
invest in the priority sectors.
The stocks of Nepalese insurance companies are preferred by majority of Nepalese
investors. Thus, the stocks of Nepalese insurance companies are trading frequently in Nepal
Stock Exchange. The market capitalization of insurance companies in mid-July 2018 was
Rs 223921.77 million out of the total market capitalization of NEPSE Rs 1435137.67
millions which is 15.60 percent of total market capitalization and it is the 2nd largest market
capitalization of NEPSE. Therefore, it is important to explore how different firm specific
fundamental variables explain the stock returns of Nepalese insurance companies. Since, the
main aim of this study is to evaluate the explanatory power of firm specific attributes on stock
return of Nepalese insurance companies; this study does not consider all the firm specific
attributes.

1.2 Objective of the study

The main objective of this study is to evaluate the explanatory power of firm specific attributes
for explaining the stock return of Nepalese insurance companies. The other specific objectives
are as follows:
• To identify the relationship between firm specific attributes and stock returns of Nepalese
insurance companies.
• To analyze the explanatory power of firm specific attributes for explaining stock return of
Nepalese insurance companies.
• To identify which firm specific variable has strong explanatory power for explaining
stock return of Nepalese insurance companies.

1.3 Research Questions

In this study some firm specific fundamental variables such as size (ME), book-to-market
equity (BE/ME), and net worth per share (NWPS) are taken as independent variable and stock
return of Nepalese insurance companies are taken as dependent variable. Thus, this study
deals with the following research questions:
• What kind of relationship exists between firm specific attributes and stock returns?
• Is there any explanatory power of firm specific attributes for explaining stock return of
Nepalese Insurance Companies bank?
• Which firm specific attributes has most significant influence on stock return of Nepalese
Insurance Companies?

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 Firm Specific Attributes and Stock Returns: A Case of Nepalese Insurance Companies

This paper empirically investigates the explanatory power of firm specific attributes on stock
returns of Nepalese insurance companies. The rest of the paper is organized as follows: Section
2 describes the nature and sources of data. Method of analysis is discussed in Section 3.
Similarly, variables and measures are described in Section 4. Furthermore, Section5 includes
presentation and analysis of data. Finally, summary and conclusion are presented in Section 6.

2. Nature and Sources of Data

This study is solely based on the secondary source of data. The required data for the study
are obtained from Nepal Stock Exchange (NEPSE), published annual reports of sample
firms, Security Board of Nepal (SEBON) etc. There are 196 Nepalese enterprises listed in
the NEPSE Ltd. by mid-July 2018, out of them there are 22 Insurance companies are listed.
Out of 22 listed insurance companies, one life insurance company (Rastriya Beema Sansthan)
is life/ non-life, 7 companies are life insurance and 14 companies are non-life insurance
companies are listed which is regarded as the size of the population for this study. The sample
has been selected from those 22 insurance companies which are listed by mid-July 2018. Out
of 22 insurance companies 12 insurance companies (5 life insurance companies and 7 non-
life insurance companies) has been selected as sample on the availability of the data. So, this
study is confined to 12 insurance companies which represent 55 percentage of the population.
The list of sample insurance companies are presented in appendix-I.

3. Method of Analysis
The basic objective of this study is to observe effect of firm specific fundamental variables
on stock returns of Nepalese insurance companies. This study has adopted descriptive
analysis correlation analysis and cross-sectional regression analysis. In descriptive analysis
the characteristics of the variables under the study has been described. Similarly, to analyze
the relationship between firm attributes and stock return of Nepalese insurance companies
correlation analysis has been used. In the correlation analysis section, the correlations between
the factors under study and stock returns are computed. In correlation analysis the correlation
coefficients are calculated for the aggregate cross-sectional data on firm specific variables size
[Ln(ME], book-to-market equity [Ln(BE/ME)], net worth per share [Ln(NWPS), and stock
return (Rj). To calculate the Correlation coefficient between two variables is computed using
equation 1.
Covrj
rij = s s (1)
i j

Where, rij is the correlation coefficient between two variables i and j, Covij is the covariance
between two variables σi and σj are the standard deviation of variable i and j.
Similarly, this study has adopted multivariate regression analysis to evaluate the explanatory
power of firm attributes on stock return of Nepalese insurance companies. In an attempt to
analyze explanatory power of firm attributes on stock return of Nepalese insurance companies,
the study has performed regression of stock returns on each of the firm specific attributes in
aggregate level, for life Insurance company only and for none-life insurance company only
through multivariate regression analysis.
The basic model of multivariate regression analysis is specified in equation (2).

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Firm Specific Attributes and Stock Returns: A Case of Nepalese Insurance Companies
Rit = α0 + α1 Ln(ME)it + α2Ln(BE/ME)it + α3Ln(NWPS)it + εit (2)
Where,
Rit = the rate of returns of the stock of i insurance company for time t,
αi = the coefficient of fundamental variable to be estimated,
Ln(ME)it = the log of the equity market capitalization of stock of i insurance company
for time t,
LnBE/MEit = the log the book-to-market equity ratio of stock of i insurance company for
time t,
Ln(NWPS)it = the log of the net worth per share of stock of i insurance company for time t,
εit = the residual error term.

4. Variables and Measures

In this study stock return of insurance company is used as dependent variable size, book-to-
market equity ratio, net worth per share is used as independent variable. The definition of
these dependent and independent variables are described in the following paragraphs.
Stock Returns (Rj)
In this study annual stock price data and annual dividend data is used to estimate the stock
return. Stock return is obtained as:

Pit – Pit–1 + Dit

Ri, t = (3)
Pit–1

Where, Ri,t is the annual return for stock i at year t, Pi, t is the price of security i at the end of
year t and Pi, t-1 is the price at the beginning of that year and Di,t is the dividend per share of
stock i at the end of year t.
Firm Size [Ln(ME)]
The firm size is the market capitalization of the stock. In this study equity market capitalization
of sampled insurance companies is taken as size of insurance companies. Equity market
capitalization is defined as number of share outstanding times closing price of the stock. In
this study the natural logarithm of market capitalization, Ln(ME) is used as a proxy for firm
size, in consideration of the size effect. Equity Market capitalization of firm i in year t is given
by:
ME i, t = (Pi, t) ( NSO i, t) (4)
Where, Pi, t is the stock price for firm i at the end of June of year t and NSO i, t is the number of
shares outstanding for firm i, at that point in time.
Book-to-Market Equity Ratio (BE/ME)
The book-to-market equity ratio (BE/ME) is the ratio of book value of equity and market
value of equity. It is used as another independent variable. The book-to-market ratio (BE/ME)
is obtained as:

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 Firm Specific Attributes and Stock Returns: A Case of Nepalese Insurance Companies

BEi, t–1
BE/ME i,t = (5)
MEi, t–1

Where, BE i, t – 1 is the book value of a firm’s equity at the end of year t-1 and MEi, t – 1 is the
market value of equity at the end of year t-1.
Net Worth per Share (NWPS)
Net worth per share (NWPS) is used as another independent variable in this study. Net worth
per share (NWPS) is obtained as:

BEt, t–1
NWPS i,t = (6)
MEt, t–1

Where, SE i, t – 1 is amount of shareholders equity of firm i at year t-1 and N i, t – 1 is the number
of share outstanding of firm i at the end of year t-1.

5. Presentation and Analysis of Data

In this section, the analysis of secondary data collected from Securities Board of Nepal
(SEBON), NEPSE, and annual report of the sample company is conducted. Book value of
equity, cash flows, and net income after taxes are extracted from the financial statements of
the sample companies. Similarly, information on market price per share, market capitalization,
and market return are collected from the annual report published by SEBON and NEPSE.

5.1 Descriptive Statistics

As this study has adopted descriptive research design, descriptive statistics has been used to
describe the characteristics of the variables under the study. The descriptive statistics (mean,
median, standard deviation, range, minimum and maximum values) of the sample insurance
company of the study for the period of 2000/01 to 2017/18 are presented in table 1.

Table 1
Descriptive Statistics for the period of 2000/01 to 2017/18
The table exhibits descriptive statistics (mean, median, standard deviation, range, minimum
and maximum values) of the variable under the studied period of 2000/01 to 2017/18 for the
12 insurance companies listed on NEPSE with 167 observations. Size (ME) is calculated for
a given year t by multiplying the number of shares outstanding with the stock price at the end
of June of year t and denominated in millions of Nepalese rupees. Book-to-market equity
ratio (BE/ME) is obtained by dividing the book value of equity of a company by the market
value of equity. Net worth per share (NWPS) is the book equity divided by number of share
outstanding, annual percentage stock return (Rj) is calculated by appreciation in price of stock
plus dividend divided by closing price of the stock. Ln(ME) is the natural logarithm of market
value of equity used as a proxy for firm size.

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SIZE Rs. in million NWPS (Rs) BE/ME Rj

Mean 4973.7034 182.5995 .6032 42.5656
Minimum 45.0000 75.0000 .0366 -73.0150
Maximum 86830.0500 427.7400 2.1880 413.6429
Range 86785.0500 352.7400 2.1514 486.6579
Std. Deviation 12099.7671 62.5205 .4936 85.5437
Skewness 4.0328 1.3154 .8358 1.8328
Kurtosis 18.6685 2.4344 -.1601 3.1387
The value of equity market capitalization of common stock (Size) of Nepalese insurance
companies ranges from minimum Rs 45 million to maximum Rs 86830.05 million with
average of Rs 86785.05 million. This wide range of minimum and maximum value of market
equity indicates that firms included in the sample vary significantly in terms of their size.
Similarly, the mean value of book-to-market equity ratio (BE/ME) is .6032, where as it’s
minimum and maximum values are .0366 and 2.1880 respectively. Furthermore, the mean,
minimum and maximum value of net worth per share is Rs 182.5995, Rs 75 and Rs 427.74.
Similarly, the stock return (Rj) ranges from minimum negative -73.0150% to maximum
413.6429 %, with average return of 486.6579%. Thus, the large rage of the stock return of
sampled insurance companies indicates that the firms included in the sample vary significantly
in terms of their stock return also. Furthermore, the statistics of Skewness showed that all
variables are positively skewed.

5.2 Correlation Analysis

The correlation coefficients between annual stock return (Rj) of Nepalese insurance companies
on size [Ln(ME)], net worth per share [Ln(NWPS)], and book-to-market equity ratio [Ln(BE/
ME)] have been calculated for the period of 2000/01 to 2017/18. Table 2 depicts the result of
correlation coefficient between the variables under study.
Table 2
Correlation Results
The Pearson correlation coefficients are calculated for earnings yield (E/P), cash flow yield
(C/P), size [Ln(ME)], net worth per share [Ln(NWPS), book-to-market equity ratio [Ln(BE/
ME)] and, annual returns. The variables for which correlation tests are conducted are defined
below.
Ln(ME) = Natural logarithm of market value of equity,
BE/ME = Book value of equity divided by the market value of equity,
Ln(NWPS) = Natural logarithm of the net worth per share of stock,
(Rj) = Change in stock price during a year plus dividend per share divided by the
stock price at the beginning
LnME LnNWPS LnBE/ME Rj
LnME 1
LnNWPS -.110 1
LnBE/ME -.927 **
.239 **
1
Rj .370 **
.086 -.435 **
1
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
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The result of correlation analysis shows that there positive and significant correlation between
rate of return (Rj) and equity market capitalization [Ln(ME)]. The correlation between Ln(ME)
and Rj is .370 which is significant at one percent level of significant.
Similarly, the correlation coefficient between Ln(NWPS) and Rj is .086 but insignificant.
Finally, the negative correlation between Ln(BE/ME) and Rj has been observed. The
correlation coefficient between these two variables found to be negative .435 which significant
at 1 percent level of significant.

5.3 Regression Analysis

The cross-sectional multivariate regression model is estimated using the annual returns of
individual firms as the dependent variable, and firm specific attributes as the explanatory
variables. Interpretations on the factors’ influence on stock return are based on t-values and p
values. Regression Model 1 is estimated for all sampled insurance company, regression Model
2 is estimated for life insurance company and Model 3 is estimated for non-life insurance
company using the basic model presented in equation 2.
Model I
Rit = -247.442** - 19.263 ** Ln(ME)it - 74.581*** Ln(BE/ME)it + 67.590*** Ln(NWPS)it
se = 98.245 8.357 16.091 19.571
t= (-2.519) (-2.305) (-4.635) (3.452)
p= .013 .022 .000 .001
Adjusted R2 = .238 F = 18.280 ** DW = 1.927 N = 167

(Note: *** significant at one percent, ** significant at five percent, * significant at ten
percent.)

Model 1 presents the result of cross-sectional multivariate regression of all sampled insurance
companies. The rate of return of Nepalese insurance companies (Rj) is dependent variable
and size [Ln(ME)], net worth per share [Ln(NWPS), book-to-market equity ratio [Ln(BE/
ME)] are independent variables. The F statistics of Model 1 is 18.280 which is significant at
1 percent level of significant which indicates that the model is best fit. Similarly, the adjusted
R2 of is 23.8% which indicates that the dependent variable is explained by 23.8 percent by
independent variables included under the study. The coefficient of Ln(ME) is negative 19.263
which is significant at 5 percent level of significant and the coefficient of Ln(BE/ME) is
negative -74.581 which is significant at 1 percent level of significant. Finally, the coefficient
of Ln(NWPS) is 67.590 which is significant at 1 percent level of significant. Furthermore,
DW statistics 1.927 indicates that there is no evidence of autocorrelation.

5.3.1 Multicollinearity Test of the Variables

To check the multicollinearity of the independent variable of model 1 variance influence
factor (VIF) is used. The result of VIF is presented in table 3. As per table 3 all independent
variables have VIF value less than 10 which is the evidence of no multicollinearity of
the independent variables. Thus, this model is free from the problem of multicollinearity.

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Table 3
Value of Variance Influence Factor (VIF) of Independent Variables
Variables VIF
LnME 7.868
LnBEME 8.244
LnNWPS 1.171
Model 2
Rit = -390.249** - 21.404 Ln(ME)it - 60.250** Ln(BE/ME)it + 104.318*** Ln(NWPS)it
se = 163.468 13.545 24.282 34.347
t= (-2.387) (-1.580) (-2.481) (3.037)
p= .021 .120 .016 .004
Adjusted R2 = .153 F = 4.361 ** DW = 1.99 N = 57
(Note: *** significant at one percent, ** significant at five percent, * significant at
ten percent.)
Model 2 presents the result of cross-sectional multivariate regression of life insurance
companies only. The F statistics of Model 2 is 4.361 which is significant at 5 percent level of
significant which indicates that the model is best fit. Similarly, the adjusted R2 of is 15.3%.
The coefficient of Ln(ME) is negative 21.404 and statistically insignificant. The coefficient of
Ln(BE/ME) is negative -60.250 which is significant at 5 percent level of significant. Finally,
the coefficient of Ln(NWPS) is 104.318 which is significant at 1 percent level of significant.
Moreover, DW statistics 1.99 indicates that there is no evidence of autocorrelation.

5.3.2 Multicollinearity Test of the Variables

Similarly, the multicollinearity of the independent variable of model 2 is examined
through variance influence factor (VIF). The result of VIF is presented in table 4. As
depicted in table 4 all independent variables have VIF value less than 10 which is the
evidence of no multicollinearity of the independent variables. Thus, this model is free
from the problem of multicollinearity.
Table 4
Value of Variance Influence Factor (VIF) of Independent Variables
Variables VIF
LnME 4.625
LnBEME 4.747
LnNWPS 1.209
Model 3
Rit = -79.924 - 21.807* Ln(ME)it - 93.950*** Ln(BE/ME)it + 36.676 Ln(NWPS)it
se = 125.857 11.213 21.330 25.473
t= (-.635) (-1.945) (-4.405) (1.440)
p= .527 .054 .000 .153
Adjusted R = .298
2
F = 16.407 *** DW = 1.926 N = 110
(Note: *** significant at one percent, ** significant at five percent, * significant at ten
percent.)
110 NJMSR V. 3 Issue 2 (2019)
 Firm Specific Attributes and Stock Returns: A Case of Nepalese Insurance Companies
Finally, result of cross-sectional multivariate regression of non-life insurance companies have
been presented in Model 3. The F statistics of Model 3 is 16.407 which is significant at 1
percent level of significant. Similarly, the adjusted R2 of is 29.8%. The coefficient of Ln(ME)
is negative 21.807 which is significant at 10 percent level of significant. The coefficient of
Ln(BE/ME) is negative -93.950 which is significant at 1 percent level of significant. Finally,
the coefficient of Ln(NWPS) 36.676 is found statistically insignificant. Moreover, DW
statistics 1.926 indicates that there is no evidence of autocorrelation.

5.3.3 Multicollinearity Test of the Variables

Finally, the multicollinearity of the independent variable of model 3 has been evaluated
through variance influence factor. The result of VIF is presented in table5. As depicted in
table 5 all independent variables have VIF value less than 10 which is the evidence of no
multicollinearity of the independent variables. Thus, this model is free from the problem
of multicollinearity.
Table 5
Value of Variance Influence Factor (VIF) of Independent Variables
Variables VIF
LnME 6.678
LnBEME 6.521
LnNWPS 1.133

6. Summary and Conclusion

This study has evaluated the explanatory power of firm-specific attributes including size
(ME), book-to-market equity (BE/ME), and net worth per share (NWPS), on average stock
returns of Nepalese insurance companies listed on Nepal Stock Exchange. For this purpose
of the study 12 insurance companies (5 life and 7 non-life) out of 22 insurance companies
listed on NEPSE (Mid-July, 2018) has been taken as sample of the study. The study covers the
period of 2000/01 to 2017/18 with 167 observations.
The results confirm some of the existing evidences of developed markets, but contradictory
findings are also brought to light. The result of this study concluded that the equity market
capitalization of the firm [Ln(ME)], the ratio book equity to market equity [Ln(BE/ME)] have
negative impact on stock return and net worth per share [Ln(NWPS)] have positive impact on
average stock return of Nepalese insurance companies. The coefficient of Ln(ME) has been
found to be negative and significant in Model 1 (all insurance companies) and in Model 3
(non-life insurance companies) but the significance of Ln(ME) has been loosed in Model 2
(life insurance companies). The finding of size effect is similar with the findings of in many
developed countries such as Banz (1981), Chan, Hamao, and Lakonishok (1991), and Fama
and French (1992) in U.S. and Japanese markets. Size is significant with the negative sign,
which indicates that small firms tend to outperform large firms.
Similarly, the coefficient of Ln(NWPS) has been found positive and significant in Model 1
(all insurance companies) and Model 2 (Life Insurance companies) but its significance has
been loosed in Model 3 (non-life insurance companies). Finally, the coefficient of Ln(BE/ME)
has been found to be negative and significant in all Models. This result is contradicts with the

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result of Stattman (1980) who found that firms with high BE/ME ratios outperformed firms
with low BE/ME equity and Rosenberg, Raid and Lastein (1985) who also documented a
significant positive relation between BE/ME and average return on U.S. stocks.
Since Ln(BE/ME) has sowed significant and negative coefficient in all models, this study,
therefore, concludes that book to market equity [Ln(BE/ME)] has strongest explanatory
power for explaining the stock return of Nepalese insurance companies listed on Nepal Stock
Exchange than other variables taken in this study i. e. Ln(ME) and Ln(NWPS).

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www.nepalinsurance.com.

Appendix: List of Sample insurance companies

Type No. of
S.No. Name of the Commercial Bank Sample Period
Observations
1 Asian Life Insurance Co. Ltd. Life 2010/11-2016-17 7
2 Everest Insurance Co. Ltd. Non-life 2009/07/-2017/18 12
3 Himalayan Gen. Insu. Co.Ltd. Non-life 2000/01-2017/18 18
4 Life Insurance Co. Nepal Life 2003/04-2017/18 15
5 Lumbini General Insurance Non-life 2008/09-2017/18 10
6 National Life Insurance Co. Ltd. Life 2004/05-2017/18 14
7 Neco Insurance Co. Non-life 2000/01-2017/18 18
8 Nepal Life Insurance Co. Ltd. Life 2003/04-2017/18 15
9 Premier Insurance co. Ltd. Non-life 2000/01-2017/18 18
10 Prime Life Insurance Co Ltd. Life 2010/11-2016/17 7
11 Sagarmatha Insurance Co. Ltd Non-life 2001/02-2016/17 15
12 United Insurance Co.(Nepal)Ltd. Non-life 2000/01-2017/18 18
Total 167

NJMSR V. 3 Issue 2 (2019) 113

Knowledge Management Enablers for Knowledge Creation Socialisation in Nepalese Hospitality Industry

Knowledge Management Enablers for

Knowledge Creation Socialisation in
Nepalese Hospitality Industry
Pushpa Maharjan *
[email protected]

Abstract
This paper examines the relationships between the knowledge management enablers and
knowledge creation socialisation in the hospitality industry such as hotel, travel and trekking
agencies in Nepal. The study is based on primary data with 382 responses. The self-administered
questionnaires were used to collect the perceptive opinions from the respondents. The study
concludes that the key knowledge management enablers such as collaboration, trust, learning,
and information technology do influence to the knowledge creation socialization positively.
Managers should promote collaboration, trust, learning, and information technology facilities
for employees to create knowledge in organization.

Keywords: Collaboration, Trust, Learning, Centralization, Formalization, IT support,

Knowledge creation socialisation, Hospitality industry.

1. Introduction
Knowledge management enablers are the mechanism for the organisation to develop its
knowledge and also stimulate the creation of knowledge within the organisation as well as the
sharing and protection of it (Theriou, Maditinos & Theriou, 2011). Enabler factors should be
clear in an organisation, because not only they create knowledge but also they prompt people
to share their knowledge and experiences with others (Yeh, Lai & Ho, 2006).
Socialisation (tacit to tacit knowledge) is a process of sharing experience (way of thinking or
technical gestures) however creating knowledge. It is to share tacit knowledge and experience
possessed by individuals with other group members, through practical exercise and physical
proximity. To achieve these results there are two distinct and key activities (Nonaka & Konno,
1998): capturing knowledge through interaction with external agents (clients and suppliers)
and internal (organisational members), from physical proximity or virtual interaction, and the
dissemination of knowledge, transferring individual knowledge to other person. Selfdirected
teams are very useful tools here (Nonaka, 1994; Nonaka & Takeuchi, 1995). Fattahi et al.
(2013) stated that socialisation is the process of converting tacit knowledge into tacit through
shared experiences. Since tacit knowledge cannot be expressed by spoken language, the
conversion has to take place through experiences, such as observation, imitation, and practice.

* Assistant professor at Public Youth Campus, Faculty of Management, Tribhuvan University.

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According to Nonaka and Takeuchi (1995), organisational knowledge creation processes start
from tacit knowledge distribution that communicates more or less with socialisation, because
compact and unexploited information residing within people is required for augmented
distribution in an organisation. Socialisation enables workers to construct communication
to liberally trade really personal or specialized knowledge (Li et al., 2009). Bolloju et al.
(2002) supported this idea by suggesting that through socialisation, executives can obtain
tacit knowledge by observation, imitation and practice. Therefore, socialisation among
project team members can benefit their performance in terms of the knowledge sharing of
expertise and skill sets, which could save time in investigating this particular knowledge
during the project lifecycle. According to Gold et al. (2001), organisations must carefully
transform aspects of tacit knowledge into explicit knowledge to avoid the loss of efficiencies
in production and innovation.
Theriou et al. (2011) proved that key enabler factors such as leadership, culture, strategy,
technology and people do influence positively knowledge management effectiveness.
However, their research indicated that only leadership and culture statistically supported
knowledge management effectiveness, but enablers such as technology, strategy, and people
are not significantly related to the knowledge management effectiveness. Choi and Lee
(2002) found that human strategy was more likely to be effective for socialisation however
system strategy was more likely to be effective for combination. Similarly, Hu et al. (2009)
found that members should help each other to foster knowledge sharing for knowledge
creation socialisation. In the context of Nepal, there is a need to study whether the impact
of knowledge management enablers on the knowledge creation socialisation is significant
or not. Therefore, this study seeks to examine whether knowledge creation socialisation,
in a Nepalese context, have been applied or not, and if applied, what the consequences of
them are. Nepalese hospitality industry is very competitive. Knowledge is a resource to gain
competitive advantage in this sector. It requires obtaining comprehensive information on how
knowledge is managed and utilised in hospitality industry. It is also necessary to examine the
organisational culture, structure and information technology that are essential in managing the
process in hospitality industry in order to make it more efficient.
The objective of the study is to evaluate the relationship between knowledge management
enablers and knowledge creation socialisation in the business enterprises of sectors such as
hotel, travel and trekking agencies. Remaining part of the paper has been divided in four
sections. Second section presents the literature review, third section reveals the research
method, fourth section reveals results and the final section presents the conclusion of the
study.

2. Review of Literature
The organisation culture determines not only what knowledge is valuable, but also what
knowledge must be maintained for sustainable innovative advantage (Long, 1997). It is also
important to note that for successful implementation of knowledge management practices,
major cultural change is often necessary. The traditional rewarding system based on individual
performance should be exchanged for a new system that esteems knowledge sharing (Jeng &
Dunk, 2013).
The organisation culture can be defined as both the set of values, philosophy and mission of

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the organisation, as well as the unspoken set of values that guide the employee’s actions and
perceptions in the organisation (McDermott & O’Dell, 2001). Knowledge culture in particular,
can be defined as the organisational lifestyle on enabling and motivating to create, share and
use knowledge towards its continuous success (Bock, 1999). Organisations should assess and
review their current cultural situation towards developing a knowledge culture; otherwise any
attempt to knowledge management is likely to fail (Davenport & Prusak, 1998). To create a
knowledge friendly culture, employees should treat knowledge capturing and sharing as a
daily and natural activity. Employees often consider knowledge as power and are unwilling
to share knowledge, as they feel they might lose this power (Rao, 2004). Thus, it is vital to
create trust and safety on employees, for them to feel comfortable and willing to share their
own knowledge. Furthermore, organisations should promote communication, collaboration
and teamwork among employees. These create a shared context where employees interact
with each other, and not only challenge existing premises but also gain new perspectives
(Sunassee & Sewry, 2002).
Collaboration can help people obtain a shared understanding about organisation’s external
and internal environments using supportive and reflective communication. Without
established shared understanding among staff, knowledge creation is negligible (Holsapple &
Singh, 2001). Hedlund (1994) believed that knowledge creation should be facilitated by the
availability of a shared understanding between people. Therefore, many scholars considered
collaboration as a key enabler for knowledge creation (Hansen et al., 1999; Graham & Pizzo,
1996; Caruana et al., 1998).
Goh (2002) highlighted that collaborative culture is significant for knowledge distribution
among individuals and groups. Collaboration has also been empirically proved an important
contributor to knowledge creation. Sveiby and Simons (2002) argued that collaborative
climate is one of the key factors that influence the effectiveness of knowledge management.
They suggested that effective knowledge management requires the creation of a supportive
and collaborative culture.
Trust is an anthropocentric notion, and as such inextricably linked to human beliefs, sentiments,
and intentionality. It can be defined as maintaining reciprocal faith in each other in terms of
intention and behaviors (Hurley & Hult, 1998). Trust can facilitate open, substantive, and
persuasive information exchange (Iansiti, 1993; Hansen et al., 1999). When trust is relatively
high in people’s interaction, they become more willing to exchange knowledge and participate
in social interactions (Hedlund, 1994). Employees look for advice from trusted colleagues to
increase their understanding of problems. The institutionalization of trust among employees
can be thought as a breakthrough in knowledge transfer (Iansiti, 1993). Accordingly, increasing
the knowledge transfer based on mutual trust results in knowledge creation.
The capacity of knowledge creation can be increased by various learning means such as
education, training, and mentoring. Krogh (1998) proposed training programs as a means of
knowledge creation. Swap et al., (2001) highlighted mentoring as a key means in creating
organisational knowledge. Intense mentoring enables professionals to obtain a higher level of
knowledge. For the organisations to be successful in knowledge creation, traditional training
and development activities may no longer suffice; they need to nurture an environment with
continuous and persisting learning (Lubit, 2001; Eppler & Sukowski, 2000).

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Centralisation refers to the locus of decision authority and control within an organisational
entity (Caruana, Morris, & Vella, 1998). The concentration of decision-making authority
inevitably reduces creative solutions while the dispersion of power facilitates spontaneity,
experimentation, and the freedom of expression, which are the lifeblood of knowledge
creation (Graham & Pizzo, 1996). Therefore, many researchers proposed that a centralised
organisational structure makes it harder to create knowledge (Teece, 2000). Moreover,
centralised structure hinders interdepartmental communication and frequent sharing of
ideas due to time-consuming communication channels (Bennett & Gabriel, 1999); it also
causes distortion and discontinuousness of ideas (Stonehouse & Pemberton, 1999). Without a
constant flow of communication and ideas, knowledge creation does not occur.
Migdadi (2005) stated that organisations should feel that it is feasible to establish a formal
system for codifying, organizing and storing knowledge resulting from both their informal
communication and from their less formal systems and procedures. When an organisation is
highly formalized, employees would then have little discretion over what is to be done, when
it is to be done and how they should do it, resulting in consistent and uniform output (Robbins
et al., 2001). Knowledge creation requires flexibility and less emphasis on work rules (Lusch,
Harvey & Speier, 1998). Lee and Choi (2003) defined formalisation as the degree to which
decisions and working relationships are governed by formal rules, standard policies, and
procedures.
Many researchers have introduced IT as a critical element for knowledge creation and
transfer (Ein-Dor & Segev, 1982; Davenport & Prusak, 1998; Madhavan & Grover, 1998;
Zaltman, 1986). It affects knowledge in different ways. First, it assists knowledge creation
and sharing process by facilitating rapid collection, storage, and exchange of data on a scale
which was not practical in the past (Ichijo et al., 1998) and helps employees to access the
required knowledge easily (Eppler & Sukowski, 2000). Second, it integrates fragmented
flows of information and knowledge into a single stream (Ein-Dor & Segev, 1982) which
can overcome communicational barriers in organisation departments. Third, IT fosters all
processes of knowledge creation and is not limited to just explicit knowledge transferring
(Jarvenpaa & Staples, 2000; Miller, 1996; Woodman et al., 1993). Among diverse variables of
technology, “information technology support” is the main variable for utilizing IT (Roberts,
2000). It is the degree to which knowledge management is upheld by the use of information
technologies (Ein-Dor & Segev, 1982).
Fattahi et al. (2013) stated that socialisation is the process of converting tacit knowledge
into tacit through shared experiences. Since tacit knowledge cannot be expressed by spoken
language, the conversion has to take place through experiences, such as observation, imitation,
and practice. Socialisation relies on people to share knowledge through more traditional
means such as direct person-to-person contacts, and fosters new tacit knowledge such as
shared mental models and technical skills. For example, if a manager reports a high level of
socialisation, this means that the manager believes that the organisation has many processes
in place to support socialisation.
Socialisation is the construction of new-fangled tacit knowledge through trusting in tacit
knowledge resources in the course of social communication (Vaccaro et al., 2009). Socialisation
changes innovative tacit knowledge like collective mind-mapping representations,
technological expertise plus know-how, generally taking place through training more
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willingly as compared to documentations (Choi & Lee, 2002). Thus, socialisation presents
a more subjective form of knowledge capture through the means of social communication,
experience sharing and guidance or apprenticeship.
Socialisation results in ‘sympathized knowledge’, such as common intellectual models and
technological expertise (Nonaka & Takeuchi, 1995). According to Lee and Choi (2003),
socialisation modifies tacit knowledge into new tacit knowledge through social relations with
members. Through socialisation, experiences are shared and in so doing tacit knowledge
is created (Salmador & Bueno, 2007). In brief, the progress in socialisation integrates tacit
knowledge into a more combined and comprehensive form of tacit knowledge as a result of
knowledge sharing among teams or communities from a more informal way of sharing.
Socialisation methods like group conferences, multifunctional teams as well as joint
workshops helps in connecting people together, by means of resultant patterns in intimate
communications generating networks in inter-reliant societal relations (Lawson et al.,
2009). Lawson et al. (2009) continued to explain that this improves common confidence
levels and value through new product development groups. These assertions are sensible
because new product development teams often consist of cross-functional team members,
which rely on knowledge sharing among different fields of experience in order to progress in
their projects (Lawson et al., 2009).

Knowledge Management Enablers for Knowledge Creation Socialisation

Knowledge Management
Enablers

Culture
• Collaboration (COL)
• Trust (TRU)
• Learning (LEA)
Knowledge
Structure Creation
• Centralization (CEN) Socialisation
• Formalisation (FOM) (KCS)

Information Technology
• IT-Support (ITS)

3. Research Method
To examine knowledge management enablers for knowledge creation socialisation in Nepalese
hospitality industry, the study used the descriptive research design based on the survey. The
quantitative research design is applied to develop an understanding of the research issue.
The study has used primary data collected from executives, managers, department heads, sales
officers, marketing officers, finance officers, guest relation officers, public relation officers and
human resource managers in the hospitality industry organisations. In the process of gathering

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information, a set of structured questionnaire was used as the main instrument. The primary
data were collected by ‘delivery and collection’ methods.
The total of 458 responses was collected from 97 firms. Due to incomplete data, 76 responses
were eliminated. Consequently, 382 responses from 97 firms were taken for further analysis.
The total response rate was 83 per cent. Self-administered questionnaires were used to collect
the perceptive opinions from the respondents.
Questionnaire items developed included a list of 59 items to measure the different constructs in
the study: collaboration, trust, learning, centralisation, formalisation, information technology
and knowledge creation socialisation. The development of the items was done by re-evaluating
intensively the literature review related to the concepts and constructs stated in the integrative
view. The aim of this empirical research is to test whether the dimensions proposed in the
above-mentioned integrative view support a significant distinction between different kinds of
knowledge management enablers.
To validate the proposed research model, this study conducted a pre-test. The pre-test was
conducted in the month of November, 2014. For the pre-test survey, this study developed
questionnaire and collected data from 36 potential respondents of the selected samples: both
hotels (20) and travel/trekking agencies of 16 respondents. Based on the findings of the pre-
test survey, research questionnaire was modified to improve reliability and validity of the
study. After the pre-test, the questionnaire was finalised and the main study was conducted.
The study used regression analysis to test the interrelationship of knowledge management
enablers (independent variables) similarly their impact on knowledge creation socialisation
(dependent variables). The application of regression analysis to the present study is desirable
as they significantly help researchers evaluate the causal effect of one variable on other
variables.

4. Results
4.1 Hypotheses
The study hypotheses were largely derived from theoretical statements made in the literature
on knowledge management. In the first hypothesis, the study analyzed the collaboration
dimension of knowledge management enabler. In the second and third hypotheses, the study
analyzed the trust and learning dimension. In the fourth, fifth and six hypotheses, the study
analyzed the centralisation, formalisation and information technology support dimension.
Hypothesis 1: Collaboration
The study proposes to analyse the collaboration for knowledge creation socialisation. The
following hypotheses have been formulated:
Null hypothesis, H0: Collaboration does not affect knowledge creation socialisation.
Alternative hypothesis, H1: Collaboration affects knowledge creation socialisation positively.
The acceptance of alternative hypothesis associated with hypothesis 1 implies that
collaboration will have positive effect on the knowledge creation socialisation and it points
to the effective role of collaboration on knowledge creation socialisation. On the other hand,
if the tests reject the alternative hypotheses and it may suggest that the collaboration is not
helpful for knowledge creation socialisation.
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Hypothesis 2: Trust
After determination of the collaboration for knowledge creation socialisation, the study
proposes to evaluate the trust dimension of knowledge creation socialisation. To test the trust
for knowledge creation socialisation, the testable hypotheses have been formulated:
Null hypothesis, H0: Trust does not affect knowledge creation socialisation.
Alternative hypothesis, H2: Trust affects knowledge creation socialisation positively.
The acceptance of alternative hypothesis associated with hypothesis 2 implies that trust will
have positive effect on the knowledge creation socialisation and it points to the effective
role of trust on knowledge creation socialisation. On the other hand if the tests reject the
alternative hypotheses and it may suggest that the trust does not play important role for
knowledge creation socialisation.
Hypothesis 3: Learning
After determination of the trust for knowledge creation socialisation, the study proposes to
evaluate the learning for knowledge creation socialisation. To test the learning for knowledge
creation socialisation, the testable hypotheses have been formulated:
Null hypothesis, H0: Learning does not affect knowledge creation socialisation.
Alternative hypothesis, H3: Learning affects knowledge creation socialisaiton positively.
The acceptance of alternative hypothesis associated with hypothesis 3 implies that learning
will have positive effect on the knowledge creation socialisation and it points to the effective
role of learning on knowledge creation socialisation. On the other hand if the tests reject the
alternative hypotheses and it may suggest that the learning does not play important role for
knowledge creation socialisation.

Hypothesis 4: Centralisation
After determination of the learning for knowledge creation socialisation, the study proposes
to evaluate the centralisation for knowledge creation socialisation. To test the centralisation
for knowledge creation socialisation, the testable hypotheses have been formulated:
Null hypothesis, H0: Centralisation does not affect knowledge creation socialisation..
Alternative hypothesis, H4: Centralisation affects knowledge creation socialisation negatively.
The acceptance of alternative hypothesis associated with hypothesis 4 implies that
centralisation will have negative effect on the knowledge creation socialisation and it points to
the negative effect of centralisation for knowledge creation socialisation. On the other hand,
if the tests reject the alternative hypotheses and it may suggest that the centralisation does not
play important role for knowledge creation socialisation.
Hypothesis 5: Formalisation
After determination of the centralisation for knowledge creation socialisation, the study
proposes to evaluate the formalisation for knowledge creation socialisation. To test the
formalisation for knowledge creation, the testable hypotheses have been formulated:
Null hypothesis, H0: Formalisation does not affect knowledge creation socialisation.
Alternative hypothesis, H5: Formalisation affects knowledge creation socialisation negatively.

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The acceptance of alternative hypothesis associated with hypothesis 5 implies that
formalisation will have negative effect on the knowledge creation socialisation and it points
to the negative effect of formalisation for knowledge creation socialisation. On the other hand,
if the tests reject the alternative hypotheses and it may suggest that the formalisation does not
play important role for knowledge creation socialisation.
Hypothesis 6: IT Support
After determination of the formalisation for knowledge creation socialisation, the study
proposes to evaluate the IT support for knowledge creation socialisation. To test the IT support
for knowledge creation socialisation, the testable hypotheses have been formulated:
Null hypothesis, H0: IT support does not affect knowledge creation socialisation.
Alternative hypothesis, H6: IT support affects knowledge creation socialisation positively.
The acceptance of alternative hypothesis associated with hypothesis 6 implies that IT support
will have positive effect on the knowledge creation socialisation and it points to the effective
role of IT support for knowledge creation socialisation. On the other hand, if the tests reject
the alternative hypotheses and it may suggest that the IT support does not play important role
for knowledge creation socialisation.

4.2 Regression Equation Model between KCS and KMEs

Regression equation between the knowledge creation socialisation and knowledge
management enablers as follows:
KCS = α + β1 COL + β2 TRU + β3 LEA + β4 CEN + β5 FOR + β6 ITS + E
Where,
KCS = knowledge creation socialization
α = constant number
β1 = change in knowledge creation socialization associated with unit change in
collaboration
β2 = change in knowledge creation socialization associated with unit change in trust
β3 = change in knowledge creation socialization associated with unit change in
learning
β4 = change in knowledge creation socialization associated with unit change in
centralisation
β5 = change in knowledge creation socialisation associated with unit change in
formalisation
β6 = change in knowledge creation socialisation associated with unit change in
information technology
COL = collaboration
TRU = trust
LEA = learning
CEN = centralisation
FOR = formalisation
ITS = information technology
E = prediction error (residual)

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Table Estimated Relationship between KCS and Fundamental Variables
The results are based on pooled cross-sectional data of 97 enterprises with 382 observations
by using linear regression model. The model is, KCS = α + β1 COL + β2 TRU + β3 LEA
+ β4 CEN + β5 FOR + β6 ITS + E. Where, KCS, COL, TRU, LEA, CEN, FOR and ITS are
knowledge creation socialisation, collaboration, trust, learning, centralisation, formalisation
and information technology respectively. Results for various subsets of independent variables
are presented as well.
Regression Coefficients of Adjusted
Models Intercept R2 R2 F DW
COL TRU LEA CEN FOR ITS
1 2.186 0.560 0.366 0.364 219.238 1.870
(000)* (000)* (000)*
2 2.791 0.447 0.251 0.249 127.497 1.771
(000)* (000)* (000)*
3 2.329 0.572 0.410 0.409 264.599 1.844
(000)* (000)* (000)*
4 4.970 0.030 0.002 000 0.896 1.490
(000)* (0.344) (0.344)
5 5.161 -0.025 0.002 -0.001 0.581 1.508
(000)* (0.446) (0.446)
6 2.557 0.515 0.365 0.363 218.228 1.667
(000)* (000)* (000)*
7 1.626 0.243 0.080 0.372 0.471 0.467 112.148 1.889
(000)* (000)* (0.095) (000)* (000)*
8 5.073 0.081 -0.080 0.011 0.006 2.133 1.507
(000)* (0.056) (0.067) (0.120)
9 1.319 0.128 0.064 0.321 0.001 -0.060 0.292 0.561 0.554 79.846 1.897
(000)* (0.016)** (0.142) (000)* (0.960) (0.041)** (000)* (000)*
Source : Questionnaire survey, 2015

Notes :
(1) Figures in parentheses are p-values.
(2) * and ** denote that the results are significant at 1 percent and 5 percent level of significance
respectively.
The regression results of knowledge creation socialisation on collaboration, trust, learning,
centralisation, formalisation, and information technology are presented in Models 1 to 6 include
various combinations of the fundamental variables. Model 7 includes various combinations of
fundamental cultural variables. Model 8 has various combinations of fundamental structural
variables and model 9 includes all the six fundamental variables simultaneously.
The knowledge creation socialisation is positively influenced by collaboration, trust,
learning and information technology, and not significantly influenced by centralisation and
formalisation. The overall results show the positive relationship of knowledge creation
socialisation with collaboration, trust, learning and information technology, and not with
centralisation and formalisation.

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5. Conclusion
The study has concluded that the key knowledge management enablers such as collaboration,
trust, learning, and information technology do influence to the knowledge creation
socialisation positively. This result is similar to Choi (2002), Lee and Choi (2000), Berraies
et al. (2014) and Migdadi (2005) from the collaboration viewpoint. This result is similar to
Choi (2002), Berraies et al. (2014), and Lee and Choi (2000), which found that trust is a
significant predictor of socialisation. The result is consistent with Choi (2002), Lee and Choi
(2000), Berraies et al. (2014) and Migdadi (2005) from the learning viewpoint. Enabler such
as structure is not significantly related to the knowledge creation socialisation. The result is
consistent with Migdadi (2005) from the centralisation viewpoint. Choi (2002) also found
that the formalisation has no effect on the knowledge creation socialisation. Similarly, Choi
(2002) also found that the formalisation has no effect on the knowledge creation socialisation.
In addition, the study results have revealed the culture as the most vital enabler of knowledge
creation socialisation. Thus, building and supporting a culture which rewards and encourages
employees for seeking, sharing, formalising and creating knowledge attributes will most
probably lead to the successful capture, absorb, creation and implementation of knowledge
management.

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Export Diversification of Nepal: Policy Context and Impacts

Export Diversification of Nepal: Policy

Context and Impacts
Raj Kumar KC *
[email protected]

Abstract

This study aims at examining the extent of diversification attained in trade relationships of
Nepal, identify factors responsible for the situation and come out at suggestive package to
foster more sustainable and contributing trading relationships to maximize the benefits for
the country.
Studies have revealed that insufficient export diversification has virtually dragged the economy
in total disarray due to defect in government policies. The developed world relies heavily on
the exchange of goods and services for faster and sustainable economic progress. Trade has
been a priority from the very beginning of the First Five- Year Plan in 1956, but it has failed to
move ahead owing to lack of technology, appropriate policy measures and sufficient priority
given to it.
The secondary analysis showed that the volume of trade has been continuously increasing
with economic liberalization in the aftermath of 1990. However, the volume of exports has
remained too meager to sustain Nepal’s imports. Therefore, the volume of trade deficit is ever
widening. Reforms to expedite exports that began in the late seventies have failed to yield a
positive outcome in the national economy.
The liberalization of eighties, nineties and membership of World Trade Organization (WTO)
have failed to ensure a sustained diversified trading structure both in terms of products and
services and trading partners. Growing dependency on India has been one of the major
challenges in the economy.

Keywords: Trade, Diversification, Comparative advantage, Competitive advantage, Exports

1. Background
If trade is the engine of economic growth, there are multiple factors that affect trade. One
of the most important components affecting import and export phenomenon is the policy.
No country can expect to achieve economic prosperity without selling its product to other
countries.
However, Nepal’s exports are heavily concentrated – both in terms of product and destination.
Total exports to India would have been even more staggering if informal trade across the

* Faculty at Nepal Open University (NOU) and associated with Shanker Dev Campus, Tribhuvan University.
This paper was presented in the First Global International Conference held in Kathmandu on December
13-14, 2019.
128 NJMSR V. 3 Issue 2 (2019)
 Export Diversification of Nepal: Policy Context and Impacts

porous Nepal- India border had been documented (Sthapit, 2016). This concentration of trade
has made Nepal’s trade virtually dependent with India.
Trade in general, and export diversification and competitiveness in particular, are
important for least-developed countries (LDCs) like Nepal for a number of reasons (Pant
and Pant, 2009). However, macro-economic policies particularly trade policy, taxation
policy, policies on tariff and non- tariff barriers, logistics and availability of resources
always play a vital role in expediting trade diversification (both import and export trade).
Considering Nepal’s involvement in bilateral, regional and multilateral trade agreements,
(Pant and Pant, 2009), it has not been able to expedite export diversification and gain
competiveness. Trade diversification is not the concern of developed countries alone, even
developing and least developed countries have accorded equal priority to both import and
export diversification.
According to Dutta, Mihov and Zandt (2008) South Korea during the 1970s was a net
importer of non-electrical machinery, with imports in this sector exceeding 15 percent of
total manufacturing imports while exports being less than two percent of total exports. In the
same year, the US was a net exporter of machines in this category. However, by 1999, South
Korea had become a leading exporter of machinery while the US became a net importer in this
category. Over the same period of time, the industrial structure as well as the trade structure
of South Korea changed rapidly. There was significant relocation of capital and labor across
sectors and more importantly, a parallel process of diversification of output and exports. Over
the past 20 years, this process of diversification was accompanied by a fivefold increase in
South Korea’s income per capita.
As far as Nepal’s case is concerned, Nepal used to export jute, rice, handicrafts and agricultural
products until the decade of 1970s, but owing to mainly trade policy and other policies affecting
Nepal’s export was heavily suffered. Policy issues relating to trade, industry, interest rate,
exchange rate and taxation can be blamed for poor diversification (Bajracharya, Manandhar
and Bajracharya, 2019).
Business persons and governments all over the world are very serious about the severe
results of currency appreciation and depreciation on different things such as imports, exports,
domestic products, etc. A number of researches in this sector have been conducted in order to
find out the impact of currency fluctuations on the import and export of the country as well.
A number of research works have concluded that G-7 countries’ exports and imports took the
effect due to currency fluctuations during the period of 1982-1999. Depreciation in exchange
rate increases the domestic currency value and decreases the value of our own currency as
well (Adhikari D, 2014).
Singapore, the United Arab Emirates (UAE) along with other Middle East and East Asian
countries are the examples of achieving economic prosperity through trade.
To understand the possible impact of the melting of the currencies of eleven countries into one
European currency, it is said that the impact on the different functions of money need to be
explored. Money is basically being used to facilitate trading transactions (it’s a lot easier than
bartering), to store value, but a currency serves as an underlying value to given other currency
trust and value too. This function used to be primarily fulfilled by gold. But now central banks

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Export Diversification of Nepal: Policy Context and Impacts

prefer the currency of another country’s central bank.

According to Adhikari, (2018) Nepal has been following a pegged exchange rate system with
Indian rupee (INR) with periodic exchange rate corrections through revaluation or devaluation
in the past. Nepal adopted different kind of exchange rate system for convertible currencies. In
line with the economic liberalization policy followed since the mid-1980s, Nepal introduced
current account convertibility in 1993, effectively pegging the Nepalese rupee (NPR) with
INR at NPR 160 for INR 100, at the rate which was also set in 1960 when exchange rate with
INR was pegged for the first time. Since 1993, exchange rate of NPR with other convertible
currencies has been market-determined in line with the exchange rate of INR with convertible
currencies.
Similarly, there has been an argument (Pant and Pant, 2009) that changes in the rate of foreign
exchange not necessarily impact the export diversification in Nepal’s context. However,
studies carried out by NRB (2005 - 2016) show that change in foreign exchange rate has
affected both import and export diversification.
Nepal pursued the open economic policies since the mid-1980s and further impetus was
given with the enactment of various legislations including Privatization Act, Industrial
Enterprise Act, Foreign Investment and Technology Transfer Act, Industrial Policy and Trade
Policy, among other. Nepal joined the world trade bandwagon acceded to the World Trade
Organization (WTO) and also become the member of two regional trading blocs in 2004
(Acharya, 2019)
Ever widening trade deficit is an undeniable fact of the Nepalese economy. Along with
export capacity, international competitiveness in terms of quality export items, frictionless
channels of delivery, real exchange rate, price stability, GDP and interest rate are also crucial
determinants of trade balance. In the world of quota-free trade and ever decreasing tariff
barriers, maintaining an appropriate exchange rate to reduce the widening gap between import
and export is important (Adhikari, 2018).

1.2 Statement of the Problem

Nepal is an agro-based country having comparative advantages in agricultural products. The
contribution of agriculture to the GDP is more than 40 percent. The industrial products are not
enough to meet the domestic demands and the industrialization is still at infant stage. Despite
being the members of the World Trade Organization (WTO), Nepal has not been able to reap
any benefits from exports so far. This is mainly due to lack of focus on expediting exports.
Trade policy along with other macro-economic policies is not export friendly (Sharma, 1999).
Policy plays a vital role to accelerate trade diversification. Policy here includes not only trade
policy (export and import), but also indicates other policies such as monetary policy, tax
policy and others.
Countries initially classified as rich countries were substantially more diversified than poor
countries in their exports in 1962 and remained so until about 1990. From 1990 onwards, the
growth-miracle countries had largely caught up in terms of their export diversification index
(Dutta et al., 2008).

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In comparison to the export trade, import trade has been more diversified. The position of
balance of trade is weak. The government policy on trade diversification has less emphasis on
export diversification. The volume of foreign trade has increased considerably, but the overall
the situation of balance of payment is perennially negative owing to decline in export and
increase of exports (Sharma, 1999).
According to Regmi (2010), trade policy contributes obliquely to overall growth performance
of a country through promoting through efficient allocation of existing resources, specialization
and consumption gains, attracting foreign direct investment (FDI) an accelerated accumulation
of physical and human capital, enhanced technological transmissions, forward and backward
linkages of export sectors, improvements in X- efficiency, economies of scale and existence
of externalities (spillovers). Trade Policy has had an impact on the growth rate of output from
the point of views of growth theories too.
Policies play a vital role in reaping benefits from trade. Apart from macro- economic policies
that incorporate trade policy has had a significant impact on trade diversification.
Assertion of Sharma (1999), Dutta et al. (2008) and Regmi (2010) further emphasized the
importance of macro-economic policy which largely determines the diversification of trade.
It is because macroeconomic policies such as export-import policies, tax policies, policy
relating to tariff and non- tariff barriers play a vital role in trade. There are many examples
across the world as how the government policy affects export and import trade. Russia in
2014 had suffered a huge loss in export of dairy products and fruits to European countries
owing to Russia’s intervention in Ukraine. Similarly, China suffered a huge set back in export
of readymade garments to the USA owing to the trade war between two countries (Bhurtel,
2017).
Hence, trade policy has been taken as one of the major determinants for the diversification of
trade. Trade policy as one of the components of macroeconomic policies will be taken as an
independent variable for the study.
Apart from macroeconomic policy, the other contributing factors that are highly likely to
affect trade diversification are - inflation, exchange rate, availability of financial services,
wage rate, interest rates and quality of goods, logistics, infrastructure, price of oil and trade
union (UNCTAD, 2013)
Based on the available literature and realizing the need for conducting study in the changed
political context, macroeconomic policies with special focus on trade policy and tax policy
will be taken as independent variables. It is the macroeconomic policy that determines the
trade diversification. Furthermore, trade policy in the context of federal system will have
more importance.

2. Review of Literature
Trade is an indispensable component of an economy. In the ‘Wealth of Nations’, Adam
Smith ridiculed the fear of trade by comparing nations to households. Smith argued that as
every household could find it worthwhile to produce only some of its needs and to buy others,
the same should apply to nations.

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‘If a foreign country can supply us with a commodity cheaper than we ourselves
can make it, better buy it of them with some part of the produce of our own
industry, employed in a way in which we have some advantage’ (Cannan E; ed.
2003).
Ricardo further argued that a nation could gain from foreign trade and specialization in
products with comparative advantage (Ed Piero Staffa; 1951). The neo-classical and
mainstream modern economists further modified and strengthened the idea of specialization.
Heckscher-Ohlin (H-O), the architect of modern theory of international trade, suggests that
countries’ export products use their abundant factors intensively.
“Commodities requiring for their production much of [abundant factors of production] and
little of [scarce factors] are exported in exchange for goods that call for factors in the opposite
proportions. Thus indirectly, factors in abundant supply are exported and factors in scanty
supply are imported” (Ohlin; 1933, as quoted by Kindleberger; 1987).

2.1 Impact of macroeconomic policies on export diversification

The idea that export diversification contributes to an acceleration of growth in developing
countries is a recurrent idea in development economics. In theory there are a number of
channels through which export diversification might positively affect growth. By increasing
the number of export sectors, horizontal export diversification can reduce the dependence on
a limited number of commodities that are subject to extreme price and volume fluctuations
(Herzer and Lheman, 2006).
Regmi, U.R (2010) states that trade policy contributes obliquely to overall growth performance
of a country through promoting through efficient allocation of existing resources, specialization
and consumption gains, attracting foreign direct investment (FDI) an accelerated accumulation
of physical and human capital, enhanced technological transmissions, forward and backward
linkages of export sectors, improvements in X- efficiency, economies of scale and existence
of externalities (spillovers). Trade Policy has had an impact on the growth rate of output
from the point of views of growth theories too.
However, Pant, B (2009) states that Nepal’s policy regime has not been very instrumental in
improving trade competitiveness. Although policy measures have been announced from time
to time to identify new exportable products and encourage diversification of export markets,
these have hardly been executed. The challenge for Nepal is complicated by the legacy of
the past. Hence, export diversification has been proposed in the literature and in the policy
debate as a key development strategy for developing countries. Most of the contributions,
however, acknowledge that giving factual content to this diversification strategy is not easy.
Policies play a vital role in reaping benefits from trade. Apart from macroeconomic policies
that incorporate trade policy has had a significant impact on trade diversification.
Based on the opinions of Piazza Sdralevich (2004), Pant and Pant (2009), Regmi, U (2010),
Sharma (1999) policy plays a vital role in determining trade diversification. Despite the
changes in policies, Nepal has not been able to expedite export. There are couples of reasons
behind poor diversification of export trade. One of the major components are trade policies,
tax policies, tariff barriers and non-tariff barriers. Apart from these policy issues there are other
macroeconomic components including monetary policy, interest rate policies and availability
of resources.
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 Export Diversification of Nepal: Policy Context and Impacts

2.2 Conceptual Framework

Based on the literature, we can draw a framework that the magnitude of trade diversification
which includes both export and import (mainly export trade) largely depends on policy
issues specially trade policy and tax policy which are taken as independent variables of trade
diversification.

Independent Variables Dependent Variables

Trade Policy Trade Diversification
Tax Policy (Both export and Import)

Intervening variables
Foreign Exchange Rate, Inflation Interest
rates, Availability of financial services,
Governance, Connectivity, Other logistics

The study assumes that export diversification as the dependent variable whereas macroeconomic
variables such as trade policy, tax policy, policies on tariff – non- tariff barriers shall be taken
as independent variables. It is assumed that any changes in macroeconomic variables would
impact export diversification. But at the same time, changes in diversification will also impact
macroeconomic variables. On the other hand, foreign exchange rate, inflation, interest rates
shall be taken as intervening variables.

3. Methodology
Some statistical instruments have been adopted to attain the research design with a time-series
data and coverage and selection process, data collection and the nature of sources of data.
Analysis procedures and the test statistics will be used in the study. The study is based on the
secondary data.

4. Current and Constant Prices

While converting the data series of current price (obtained from various issues of Economic
Survey, NRB and TEPC), the price 1974 (the data series from 1974/75 to 1983/84 was
converted into 1984/85) price by using deflator and again converted to 1994/95 and ultimately
to 2000/01 by using GDP deflator.
Hence, the all the data series were converted into the constant price (100=2000 AD) by using
GDP deflator. The GDP deflator was calculated by dividing the price of the base year by the
years and multiplied by 100.
For instance, the current price of 2000 was converted into constant price by dividing the
current price of 2000 by the price of base year and multiplied by 100. Hence, the constant
price of 1972 came to 9.99. Similarly, the constant price of 2000 is 100 and 2005 is 126.83
(based on the GDP Deflator 2000 = 100).

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Table 1
Growth Trend of Foreign Trade of Nepal (Rs in Million)

Year Exports Export Imports Imports Trade Bal- Total Trade Total
Growth Growth ance Trade
Rate Rate % Growth
% Rate %
1975/76 1185.80 --- 1,981.7 ----- (795.90) 3167.50 -----

1980/81 1608.70 35.66 4,428.2 123.45 (2819.50) 6036.90 90.59

1985/86 3078.00 91.33 9,341.2 110.95 (6263.20) 12419.20 105.72
1990/91 7387.50 140.01 23,226.5 148.65 (15839.00) 30614.00 146.51
1995/96 19881.10 169.12 74,454.5 220.56 (54573.40) 94335.60 208.15
2000/01 55654.10 179.93 115,687.2 55.38 (60,033.10) 171,341.30 81.63
2005/06 60,234.10 8.23 173,780.30 50.22 (113,546.20) 234,014.40 36.58
2010/11 64,338.50 6.81 396,175.50 127.97 (331,837.00) 460,514.00 96.79
2011/12 74,261.00 15.42 461,667.70 16.53 (387,406.70) 535,928.70 16.38
2012/13 76,917.17 3.58 556,740.30 20.59 (479,823.20) 633,657.30 18.24
2013/14 91,991.40 19.60 714,365.80 28.31 (622,374.40) 806,357.20 27.25
2014/15 85319.10 -7.25 774,684.20 8.44 (689,365.10) 860,003.30 6.25
2015/16 70,117.10 -17.82 773,599.10 -0.14 (703,482.00) 843,716.30 -1.89
2016/17 73,049.10 4.18 990,113.20 27.99 (917,064.10) 1063,162.30 26.01

Source- Economic Survey 201617

Table 2
Direction of Nepal’s Foreign Trade (Amount in Million)
Description 2011/12 2012/13 2013/14 2014/15 2015/16
Export 74,261.00 76,971.00 91,991.00 85,319.10 70,117.00
India 49,616.30 51,000.00 59,614.00 55,864.60 39,494.00
China ------ 2,086.00 2841.00 2,230.00 1682.00
Other countries 24,644.70 23,832.00 29,537.00 27,225.00 28,942.00
Import 461,667.70 556,740.00 714,366.00 774,684.20 773,599.00
India 299,389.60 367,031.00 477,947.00 491,659.90 477,213.00
China ---- 62,451.00 73,319.00 100,166.00 115,694.00
Other Countries 162,278.10 127,258.00 163,100.00 182,862.00 180,692.00

Source – Economic Survey 2016/17

4.2. Computation of Concentration Indices

Following Hirschman (1945) and Poudyal (1988) in Nepalese context, the present study
also computed the commodity and geographic concentration index of export and imports
by calculating Gini-Hisrchman Coefficient of Concentration for the period from 1974/75 to
2005/06. Thus the present study calculates the concentration coefficients as follows.

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 Export Diversification of Nepal: Policy Context and Impacts

n Xit 2
Cxt = 100 ×
i=1 Xt

22 Xit 2
Or, Cxt = 100 ×
i=1 Xt

Where, i = 1, 2, 3 year and n = number of year

Cxt = Concentration Coefficient for exports in Year t

Xit = Value of exports of commodity group in Year t
Xt = Total export in year t

The coefficient for imports is also defined in the same way.

n Iit 2
Cit = 100 ×
i=1 It

Cit = Concentration Coefficient for import in Year t

Iit = Value of Import of commodity group in year t
It = Total import in year t
The concentration coefficient of exports and imports with overseas countries and India were
calculated separately. On the basis of concentration, a general observation can be drawn that
higher the level of concentration, there is a higher possibility of decline in exports. Similarly,
higher concentration on imports from a particular country (say India) means lower level of
diversification of import from other countries. In other words, concentration and diversification
have a kind of inverse relation.
On the other hand, the geographic concentration of exports and imports denotes that which
country/ geographic region has higher degree of concentration. This index depicts the relations
of concentration on export and import and may suggest the possible measures and put forward
reasons as why export/import are concentrated on particular country.

n Xit 2
G = 100 ×
i=1 Xt
xt

Where, i = 1, 2, 3 years and n = number of years.

Gxt = Index of Geographic Concentration in year t
Xit = Value of exports with country I in year t
Xt = Total exports in year t

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Export Diversification of Nepal: Policy Context and Impacts

The formula for geographic concentration of import is the same as that for exports given
above. In this case also the highest possible value of index is also 100 when a country’s trade
is completely monopolized by another single particular country. The lower limit of the index
is 100
n where; n is the number of trading partners. At the extreme, the value may approximate
to zero when an infinite number of countries each possesses an infinitesimally small share in
the trade of the country.

4.3 Measuring Impact of Policy Changes

The regression model specified for measuring impact of policy changes involved the equation
of economic development as a dependent variable and export as independent variable. GDP
was considered as the proxy variable of economic development. The time series data included
in the model constituted from 1974/75 to 2016/17.
The regression of the whole and sub-periods facilitates to measure the impact of policy
changes.
Symbolically, the regression function is expressed as:
(RGDP)t = β0 + β1 (REx)t +…………..Ut……(I)
Where,
RGDP – represents for Real Gross Domestic Product at time t
REx – represents for Real Export at time‘t’ and
Ut – represents for Disturbance term
In log linear form-
Ln(RGDP)t = = β0 + log (REx)t +…………..Ut……(I)
The impact of policy changes was measured using the Chow Test. In order to undertake the
Chow test the data series were divided into two groups- one consisting the period between
1974/75 to 1989/90 and another series of data that consisted data after 1990/91.
The Chow Test (named after Gregory Chow – 1960, who first popularized it) has been used
to test whether there has been a structural change at time t = n1. The procedure is to divide the
sample of n observation into two periods – Period –1 consisting of the first n1 observations
and Period-2 consisting of the remaining n2 = n – n1 observations. Estimate the model (with k
regression coefficients) separately for each of the two sample periods and compute the sum of
squared residuals ESS1 and ESS2.
Similarly a regression is run for whole period beginning from n1 to the end of n2. The errors
sum of squares is estimated for all three different periods. The sum of errors of regression of
two groups is considered as unrestricted ESSUR, while the ESS of whole group is considered
as ESSR which is taken as restrictive ESSR This carries a chi-square distribution with d.f
(n1 – k) + (n2 – k) = n – 2k because estimation of the model separately implies that each
equation has k regression coefficients.
Next assume that the regression coefficients are the same before and after period n1 (which
gives rise to k restrictions). Estimate the model again, but with the pooled sample and obtain

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 Export Diversification of Nepal: Policy Context and Impacts

ESSR. The appropriate test statistic is now-

ESSR – (ESS1 – ESS2) ÷ k

FC =
(ESS1 + ESS2) ÷ (n1 + n2 – 2k)

Where, ESSR= estimated sum of squares (residuals)/ ESS1= estimated sum of square for the
first period and ESS2 = estimated sum of square for the second period, Fc = F distribution,
n1 = number of observation for the first period and n2 = number of observation for the second
period and k= regression.
The test procedure is to reject the null hypothesis that there is no structural change if Fc
exceeds Fk, n –2k, the point on the F distribution with k and n –2k d.f such that the area to the
right is equal to the level of significance. An important assumption behind this test is that the
error variances of the two samples are the same.

5. Conclusion
The overall trend of Nepal’s export trade has been undergoing through lots of turbidity owing
to change in the policy with the change of government. Political instability can be blamed
as one of the key reasons for policy volatility that have caused turbulence in Nepal’s export
trade.
If we look at the percentage of change in the volume of both export and import trade with India
and abroad, changes in export and import in the years of eighties, nineties can be witnessed
as the country had passed through lots of political instability and changes in the government.
Table -2 which shows the direction of Foreign Trade depicts that export with other countries
in comparison to India and China had suffered particularly in the early decades of 1990s
and 2000. Apart from policy, there are number of factors like connectivity, governance,
technical support and economic diplomacy which play a significant role in expanding trade
diversification. Definitely government policy (trade policy, monetary policy, interest rate
policy, tax policy) has major role in determining trade diversification. Nonetheless, supporting
factors like connectivity, distance, technology and trade governance equally play a dominant
role in smoothen trade diversification.

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Pant, B. (2015). Nepal’s trade sector: review, repercussions and recommendations. The
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Poudyal, S. R. (1988). Foreign trade aid and development in Nepal (1st ed.). New Delhi:
Commonwealth Publishers.

Poudyal, S. R. (1998). Causes of export instability in Nepal. Kathmandu: Quarterly Economic

Bulletin, NRB.

Regmi, U. (2010) Administration and management. Review, 22(1).

Sharma, G. (1999). Nepal missing elements in development thinking. New Delhi: Nirala
Publications.

Sthapit, A. (2017). International business: Text and cases (5th ed.). Kathmandu: Taleju
Prakashan, Publisher and Distributor.

Official Websites
http://www.nrb.org.np (Nepal Rastra Bank)
www.adb.org/nrm (Asian Development Bank - Nepal Country
www.fncci.org.np (Federation of Nepalese Chambers of Commerce and Industry)
www.ganasso.com (Garment Association Nepal)
www.mof.gov.np (Ministry of Finance)
www.moics.gov.np (Ministry of Industry Commerce and Supplies)
www.nepaleseeconomy.com via www.wb.com (World Bank)
www.npc.gov.np (National Planning Commission)
www.saarc.net.com (South Asian Association of Regional Cooperation)
www.tepc.org.np (Trade and Export Promotion Center Nepal)

138 NJMSR V. 3 Issue 2 (2019)

 Impact of Reinsurance on Performance of Nepalese Insurance Companies

Impact of Reinsurance on Performance of

Nepalese Insurance Companies
Rajendra Maharjan *
Midwestern University, Birendrangar, Shurkhet
[email protected]

Abstract
Reinsurance is considered as backbone of the insurance industry in developed and developing
countries as it indirectly injects capital and Nepalese insurance companies are no exception.
Thus, this study is aims to find out whether the use of reinsurance arrangement lead to positive
effect or not? Three portfolios have been formed life, nonlife and industry. The study used 11
years unbalanced cross sectional secondary data from 2007/08 to 2017/18. The sample of the
study consists of seven from life and nine from nonlife with 138 firm years’ observations. The
dependent variable performance is measured by profitability (ROA and ROE) and solvency
while reinsurance ceded as explanatory variable. Capital employed and size of the firm are
considered as control variables. The study employed descriptive cum causal comparative
research design. Regression analysis has been performed to see the effect of reinsurance on
firm performance.
The result depicts that reinsurance has a positive and significant impact on performance of
insurance companies. This finding indicates that reinsurance improves the cost efficiency
of primary insurers. Further, reinsurance is a complement for capital in order to enhance
solvency while negative relation indicating solvency of the insurers increases with the level
of used reinsurance, to the extent that reinsurance and capital can be substitutes of each other.
Thus, this study concludes that primary insurers can benefit from reinsurance as its relief on
capital, diversify risk and in turn helps to earn profitability by sharing the risk with reinsurers.

Keywords: Reinsurance, Profitability, Solvency, Capital, Premium

1. Introduction
Reinsurance is one of the major pillars of insurance industry providing the financial back up
by taking the excess risk beyond the company capacity. In other words, Insurance companies
purchase reinsurance to protect themselves against the risks of losses above certain thresholds.
According to Outreville (2002), reinsurance is a mechanism transferring the liability of the
primary insurer to the other company known as reinsurance company. The business placed
with a reinsurer is called a cession of an insurance company. According to Group of Thirty
(2006) reinsurance helps to diversify risk, reduce, volatility of income, increase underwriting
capacity, inject indirect capital, get technical advice and help to reduce threaten of financial
stability. Despite having some of the advantage’s reinsurance introduces several risks that

* Currently working in Beema Samiti (Insurance Regulatory Authority of Nepal) as an Assistant Director.

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Impact of Reinsurance on Performance of Nepalese Insurance Companies

could threaten financial stability such as increase credit risk, difficult to maintain account due
to different accounting year, increase cost, reduce profitability.
UNCTAD (2007) highlight the key role in fostering commercial and infrastructural
businesses. It promotes financial and social stability; mobilizes and channels savings;
supports trade, commerce and entrepreneurial activity and improves the quality of the lives
of individuals and the overall wellbeing in a country. The proper functioning of a financial
system is essential in facilitating economic activity of any country. It plays the crucial part in
the economic development of the country. Falling of financial system can severely affect in
the economy. Insurance as an intermediary help in channelizing the fund from savers to the
users for productive sector. Insurance is a mechanism to transfer the risk of human life and
property. Furthermore, insurers, can also contribute to efficient allocation of funds through
their investments in driving the economic to the prosperity. (Leyvelda, et. al., 2011).
Sharma (2018) defines reinsurance is an insurance of insurance and is one of the important
tools of risk management and is a worldwide practice both by developed and developing
country. There is no universally accepted and derived formula to determine the retention level
of the primary insurer; however, paid up capital, reserved fund, equity, reinsurance regulation
of the country and risk profile are some of the major factors that should be considered while
determining the retention level of the company.
The empirical evidence suggests that the purchase of reinsurance introduces substantial
changes to several characteristics of insurers, besides their risk profile. Previous several
empirical studies had focused and analyzed the purchase of reinsurance from the perspective
of risk management, focusing on reinsurance as a tool for risk mitigation. Among others,
see for example Doherty & Berger et al. (1992), Garven & Lamm-Tennant (2003), Cole &
McCullough (2006), Powell & Sommer (2007), Mankai & Belgacem (2016), and Surminski
(2018). Recent study by Altuntas et al. (2018) provides an interesting of overview on the
usage of reinsurance across countries, assessing the importance of country-level and firm-
level factors in explaining the purchase of reinsurance.
This article analyzes the effect of reinsurance on solvency and profitability of Nepalese
insurers. The interaction between reinsurance and solvency is discussed by Nissim (2010),
and Kuschel et al. (2011). In respect to the link with performance, for example Cole and
McCullough (2006), and Lee & Lee (2012) showed that the reinsurance is important and has
a positive and statistically significant impact on the profitability. In contrast, Choi (2010) &
Choi & Elyasiani (2011) document that reinsurance reduces growth and efficiency.
The study contributions to the existing literature. The majority of the previous articles
considers firm solvency and profitability in a separate way, whereas this study considers the
two aspects jointly. This allows making conclusions on whether reinsurance affects one aspect
more strongly than the others. De Haan & Kakes (2010) used data from about 350 Dutch
insurers during the period 1995-2005, with 700 firm year observations, Gaganis (2013), have
a sample made by 4,321 observations for life and non-life insurers during the period 2005-
2007, while this study uses only 16 firm with 138 firm year observation only. Even though
knowing the relatively huge sample could improve the robustness of the insights that the study
could draw out of the empirical outcomes but this study couldn’t able to incorporate all the
firm is one of the limitations of the study. The next limitation the study used unbalance panel

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 Impact of Reinsurance on Performance of Nepalese Insurance Companies

data filled with average value in missing place. Finally, the study points out important effects
arising from reinsurance that will deserve additional analyses and theoretical thoughts for
future research.
The history of the insurance industry is not long. The first general insurance company Nepal
insurance and transport company was established as a subsidiary company of Nepal bank in
1947 now known a Nepal insurance company. After wards, Rastirya Beema Company was
established in the year 1968 under Rastriya Beema Sansthan Act, 1968. In early 80’s one
life insurance company called national life insurance was established. With the liberalization
policy of the Nepal government insurance companies were flourish during 90s in alarming
rate and in 20s totaling 25 insurance company. Recently two years back 13 insurance
companies were added now total 40 insurance company that constitutes 19 life, 20 nonlife
and 1 reinsurance company (Annual Report, 2017/18).
The main objective of this article is to examine the impact of reinsurance on performance of
the insurance companies. The article proceeds as follows. Section 2 research methodology
and also introduces the sample and defines the main variables for the analysis. Section 3
formulates hypotheses that relate insurers’ solvency followed by testing of these hypotheses
on section 4 result and discussion. The last section of the study i.e. section 5 concludes the
study with implication of the study.

2. Research Methodology
This study employed descriptive cum causal comparative research design to see the cause
effect of independent variables on dependent. Three portfolios have been formed to see the
effect of reinsurance practices as life insurance company, nonlife insurance company and
insurance industry.

2.1 Sample and data

The study area of the study is the financial sector of Nepal with reference to the insurance
industry in particular. The population of the study is all insurance company operating in
Nepal. The study period for the study is 10 year starting from 2007/08 to 2017/18. Out of
19 life insurance company only 7 are selected as 10 of them were newly established, two
companies Metlife (ALICO) and Rastriya Beema Sansthan does not avail the data. Similarly,
in case of nonlife out of 20 nonlife, 9 were selected as 3 of them were newly established and
remaining firms were well represented by the sample firm. The study used unbalanced cross-
sectional data with 66 firm year observation from life, 72 from life resulting 138 firm year
observation in aggregate.

The study used the ordinary least square (OLS) model tested by Bressan (2018) after
confronting multi-collinearity test and heteroscedasticity for every firm i at time t, to analyze
the5f effect of reinsurance on firm-specific characteristics: The model has been tested for three
portfolio life, nonlife and industry.

Insurer characteristicsi,t = α + β * REINS_USED + θ * Controli,t + υ,i + τ,t + εi,t (1)

Where, the insurer-specific characteristics that the consider are profitability as represented
by ROA and ROE and solvency. θ is the vector of coefficients for the control variables of the

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regressions. In all models control for size effects with the inclusion of the logarithm of total
assets (LOG A SSETS). The regressions for the profitability and solvency indicators control
for capital levels. The analysis of the model has been carried on by the model tested by
Bressan, S. (2018) using cross-sectional unbalanced data. εi,t is an error term. Standard errors
are clustered at the firm level to control for within firm level.

2.2 Variables and its measurement

The study uses profitability and solvency as a dependent variable while reinsurance as
independent variable. Capital 1, Capital 2 and assets are used as a control variable. The
variable Reins_USED is an indicator for the reinsurance used by the company, as it normalizes
the reinsurers’ share of technical provisions over total assets. Technical provisions are the
amounts set aside to fulfill obligations to policyholders. Setting technical provisions implies
the estimation of loss reserves, and the attempt to give reliable insights into future claims
emergence by means of different actuarial technique. The variable CAPITAL 1 divides the
sum of equity capital and surplus by total assets. CAPITAL 2 captures the solvency of the
firm. Insurers with a high level of CAPITAL 2 would be relatively solvent, as they hold
sufficient resources to fully cover their obligations. For robustness, we test also the ratio of
equity capital over total earned premiums.
The widely used approach to measure the profitability is return on assets (ROA) and return on
equity (ROE). The variable ROA is measure by taking the ratio of net income to total assets.
In addition, we divide net income to total equity for the measurement of ROE. The detail is
presented in table 1 below. Table 1 shows the variables and their measurement that have been
used in the study.

Table 1
Variables and it’s Measurement
Dependent Profitability Return on Assets (ROA) Net Income to Total Assets
Variables Return on Equity (ROE) Net Income to Total Equity
Solvency Solvency Net Assets to Higher of Paid up Capital
or, 20 Percent of Net Premium or
Average Claim Outstanding over last 3
year
Independent Reinsurance REINS_USED Net reinsurance premium ceded to Total
Variables Ceded Assets
Capital CAPITAL1 Ratio of Net worth to Total Assets
Control Employed CAPITAL2 Ratio of Net worth to Earned Premium
Variables
Total Assets Log_TA Natural Logarithm of Total Assets
Source: Annual Reports of sample Companies

3. Working Hypothesis
In this section two working hypothesis are formulated that relate the insurer solvency and
profitability to the reinsurance utilized by the same firm. Beginning with first hypothesis;
reinsurance and profitability. The literature brought two contrasting view; the use of reinsurance
carries substantial cost, to the point that it leads to higher prices and/or lower profits in one

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 Impact of Reinsurance on Performance of Nepalese Insurance Companies

hand, on the other hand reinsurance provides financial backup, risk diversification, increase
underwriting service of the primary insurer (Group thirty, 2007). Choi (2010), Shilu (2011)
documented that excess use of reinsurance reduces growth and reduces the efficiency and
profitability of the insurer. Lee & Lee (2012) suggest primary insurer could perform better if
insurer don’t cede to the reinsurer at the point that the insurer can retain to the maximum. But
in reality, it is very interesting to identify the point where the firm could retain high due to the
unpredictable risk of different portfolios. In contrast, Choi & Weiss (2005) study reveal that
there is a link between reinsurance and profitability, however, reinsurance is not statistically
significant. The other empirical findings by MuCullough (2006), Lee & Lee (2012) suggest
that there is a positive and significant impact of reinsurance on profitability. Based on the
above discussion the study formulates the following hypothesis.

H0 : There is no significant impact of reinsurance on profitability of the insurance

company
H1 : There is significant impact of reinsurance on profitability of the insurance company
H12 : If reinsurance is expensive to the extent that it has an impact on cadent profitability;
then, negative effect of reinsurance on profitability
H11 : If reinsurance improves cost efficiency; then, there is a positive impact of reinsurance
on the profitability of the primary insurers.

The second aspect the study consider is solvency. The literature discusses whether the usage
of reinsurance carries substantial effect on solvency of the firm. The purpose of reinsurance is
primarily to transfer risk from cedant to reinsurer, therefore the ability of the cedant to remain
solvent should increase after sharing part of its risk with the reinsurer due to the increasing
credit risk (Adam et al., 2008). Moreover, high retention by Nepalese company is also not
possible due to low capital, high risk due to earthquake prone zone and frequent other natural
calamities. In general, capital ratios should serve as measures for the assessment of capital
adequacy. However, there is no clear evidence whether the usage of reinsurance would bring
changes to capital levels of insurers.
The correlation between reinsurance and solvency is negative if capital and reinsurance
act as substitutes for enhancing solvency, i.e. reinsurance allows achieving a given level of
insolvency risk with lower capitalization (Berger et al., 1992; Garven & Lamm-Tennant, 2003;
Powell & Sommer, 2007; De Haan & Kakes, 2010). In contrast, the correlation is positive if
reinsurance reduces the strain on regulatory capital both by reducing exposure and increasing
surplus Nissim (2010). For example, Kuschel et al. (2011) suggests that different reinsurance
programs end up to increase the solvency of European insurers, as supported by trends in the
regulatory capital requirements. To summarize, we develop the following hypothesis.

H0 : There is no significant impact of reinsurance on solvency of the insurance company

H1 : There is significant impact of reinsurance on solvency of the insurance company
H01 : If the solvency of insurers increases with the level of used reinsurance to the extent
that reinsurance and capital can be seen as substitutes then; a negative relation can
be observing effect of REINS USED on Solvency.
H02 : If reinsurance is a complement for capital in order to enhance solvency, the effect of
REINS USED on solvency should be positive

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4. Results and Discussion

4.1 Descriptive Statistics
In order to dig more deeply into the composition of the sample, Table 2 reports statistics by
segment of insurance. This decomposition reveals interesting differences. For example, non-
life insurers utilize reinsurance in a larger extent than the life insurers. This evidence confirms
the findings of Baur and Breutel-O’Donoghue (2004), documented the usage of reinsurance
is generally in higher by nonlife insurance company. Similar finding is observed by Nissim
(2010) emphasizing the reinsurance is used extensively in property and casualty insurance,
while it is less common in life. This is primarily due to the fact that reinsurance exhibits
significant limitations as a risk transfer mechanism in respect to longevity risk. This argument
is supported in Nepalese context as well. Table 3 confirm that mean reinsurance used by life
insurers is close to 2.6 percent while in nonlife insurers counts 67.8 percent, whereas overall
sample represent 73.1 percent. Profitability as measured by ROA averaging 7.9 percent,
while 14.3 percent in non-life insurers. Similarly, ROE for life and non-life insures is 20.1
percent and 17.2 percent producing 18.6 for the industry. Both the life and non-life insurance
company were enabling in maintaining the required solvency margin of 1.5. The results are
presented in table below.

Table 2
Descriptive Statistics
Life Nonlife Industry
Std.
Unit Mean Std. Dev Mean Mean Std. Dev
Dev

ROA Percent 0.079 0.422 0.143 1.349 0.125 1.067

ROE Percent 0.201 0.475 0.172 0.113 0.186 0.338

Solvency Times 2.611 0.934 2.518 1.158 2.563 1.054

REINS_USED Percent 0.026 0.053 0.6783 14.059 3.551 0.731

CAPTAL1 Percent 0.250 0.222 0.4723 7.241 2.584 5.677

CAPITAL2 Percent 0.922 1.197 0.5204 5.510 3.156 4.585

TA Rs. In Million 9,963.436 12,329.796 338.708 544.590 4,942.404 9,775.062

Log_TA 22.118 1.748 18.588 1.686 20.276 2.461

N 66 72 138
Source: Annual Reports of sample Companies

Note: ROA is Net Income to Total Assets, ROE is the Net Income to Total Equity, Solvency is
the Net Assets to Higher of Paid up Capital or, 20 Percent of Net Premium or Average Claim
Outstanding over last 3 years, REINS_USED is the Net reinsurance premium ceded to Total
Assets, CAPTAL1 is the Ratio of Net worth to Total Assets, CAPITAL2 is the Ratio of Net
worth to Earned Premium and Log_TA is the natural logarithm of total assets.

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4.2 Correlation Analysis

The correlation coefficient measures the degree of association between variables under study.
Table 3 displays results from the correlation coefficient between the dependent and independent
variables of the insurance industry. Reinsurance and capital are positively related with ROA
at 1 percent level of significant. In contrast, reinsurance and capital is negatively related with
ROE but insignificant. Similar result has been observed reinsurance with solvency. Total asset
is positively related with ROE and solvency and is negatively related with ROA, however the
result producing no significant.

Table 3
Correlations Coefficient Matrix
REINS_ CAP- CAPI-
ROA ROE Solvency TA Log_TA
USED TAL1 TAL2
ROA 1
ROE -0.011 1
Solvency -0.048 0.097 1
REINS_USED 0.827** -0.025 -0.043 1
CAPTAL1 0.837 **
-0.042 0.027 0.889** 1
CAPITAL2 0.386** -0.102 0.151 0.574** 0.782** 1
TA -0.189 *
0.213* 0.165 -0.167) -0.217*
-0.294** 1
Log_TA -0.485* 0.215* 0.082 -0.468** -0.499** -0.539* 0.672** 1

Source: Annual Reports of sample Companies

Note: ROA is Net Income to Total Assets, ROE is the Net Income to Total Equity, Solvency
is the Net Assets to Higher of Paid up Capital or, 20 Percent of Net Premium or Average
Claim Outstanding over last 3 years, REINS_USED is the Net reinsurance premium ceded
to Total Assets, CAPTAL1 is the Ratio of Net worth to Total Assets, CAPITAL2 is the Ratio
of Net worth to Earned Premium and Log_TA is the natural logarithm of total assets. Under
the null hypothesis. that the correlation coefficient is significant x2 . ***p<0.001, **p<0.01
& *p<0.05

4.3 Test of Multi-collinearity

A certain degree of endo-geneity may affect the outcomes of the result. In order to dig more
deeply in the issue of multi-collinearity, variance inflated factors (VIFs) for the equations of
Table 4 where the impact of REINS USED is statistically significant. In particular, this would
happen if the variable of interest REINS USED is strongly driven by the firm characteristics
included in the right-hand side of the equations. VIFs detects multi-collinearity in the
regression analysis (Tibshirani, 2017). Since, VIF is greater than one and tolerance level is
less than one indicating there is no problem of multi-collinearity, therefore, no further suspect
that multi-collinearity contaminates severely the quality of outcomes of the regression.

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Table 4
Variance Inflation factors (VIFs)
Life Nonlife Life and Nonlife
Tolerance VIF Tolerance VIF Tolerance VIF
REINS_USED 0.603 1.66 0.17 5.882 0.164 6.089
CAPTAL1 0.187 5.345 0.112 0.892 0.098 10.175
CAPITAL2 0.219 4.563 0.348 2.875 0.283 3.538
Log_TA 0.629 1.589 0.709 1.411 0.665 1.505
Source: Annual Reports of Sample Companies

Note: REINS_USED is the Net reinsurance premium ceded to Total Assets, CAPTAL1 is the
Ratio of Net worth to Total Assets, CAPITAL2 is the Ratio of Net worth to Earned Premium
and Log TA is the natural logarithm of total assets

4.4 Estimated OLS Regression of Reinsurance with Profitability

The regression estimates of equation (1) has been tested for all three portfolios with
dependent variable is profitability as measured by ROA and ROE. In light of Hypothesis
1, in life portfolio, the result depicts that reinsurance is positive effect in profitability,
however, result is significant with ROA only (p=0.035, <0.005). CAPITAL1 has a negative
impact on profitability and is significant with ROA only with highly level of significance
(p=0.000). CAPITAL2 is positive but not significant with profitability. Control variable
asset is positive and has a high significant impact with ROA. This result demonstrates that
alternative hypothesis is accepted i.e., reinsurance has a positive impact of reinsurance on the
profitability of the primary insurers meaning reinsurance improves cost efficiency of the life
insurance company in Nepal. Further, the model 1 is of best fit indicate by F value (F=55.71)
with R2=77.1 percent, indicating explanatory variable explaining high percent variations in
return on the profitability due to reinsurance in Nepalese insurance industry.
The regression estimates of equation (1) tested for nonlife insurance company with dependent
variable profitability. In regard to first hypothesis, the result show that reinsurance is negative
with ROA while positive with ROE but the result is not significant. This result indicating
reinsurance has a no significant impact on Nepalese nonlife insurance company. Capital1 has
a positive and highly significant impact (p=0.000) with ROA while it not such significant with
ROE. The next control variable CAPITAL2 has a negative relation with profitability. In regard
to next control variable asset has negative and significant impact with ROA at 5 percent level
of significant. While positive but insignificant impact on ROE. The overall model is best
fit with F value 854.72 and R square 98 percent indicating very high explanatory power of
intendent variable on profitability other than reinsurance factor.
The same OLS regression equation has been tested for industry the result effect in profitability.
Reinsurance has negative and significant impact on profitability as measured by ROA
(p=0.000) while it was positive but insignificant with ROE. The control variables CAPITAL1,
CAPITAL2 and asset has a positive and significant impact with ROA. The F value of the
model is 464.27 which is highly fit with 93.1 percent explaining power of only asset is

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 Impact of Reinsurance on Performance of Nepalese Insurance Companies

found to be positive and significant at 5 percent level (p=0.045, <0.005) on profitability as

measured by ROE in the insurance industry portfolio. From the analysis, the study concludes
reinsurance is positively related with profitability in life insurer, this result is consistent with
McCullough (2006), Grace (2007) and Lee & Lee (2012). The negative and significant impact
of reinsurance on profitability is observed in insurance industry indicating reinsurance reduces
growth. This result is consistent with the finding from choli (2010) and Shiu (2011).

Table 5
Estimated OLS Regression of Reinsurance with Profitability
Life Nonlife Industry
Dependent Variables
Model 1 Model 2 Model 3
Independent
ROA ROE ROA ROE ROA ROE
Variables
REINS_USED 0.673** 0.826 -0.007 0.003 - 0.012* 0.002
(5.116) (0.584) (1.830) (1.493) (2.098) (0.234)
CAPTAL1 -1.812*** - 0.538 0.275*** 0.002 0.275*** 0.005
(6.941) (.882) (29.367) (0.564) (20.43) (0.340)
CAPITAL2 0.083 0.045 -0.189*** -0.005 0.193*** -0.005
(1.867) (0.436) (26.918) (1.640) (19.663) (0.436)
-0.256*** 0.045 -0.037* 0.049*** 0.112*** 0.034*
Log_TA (14.140) (1.156) (2.308) (6.915) (9.639) (2.337)
Intercept 6.083*** -0.806 1.166*** -0.745*** 2.630*** -0.501
(14.419) (1.155) (3.752) (5.417) (10.347) (1.657)
F-ratios 55.705 1.242 854.72 14.687 464.272 1.927
R 2
0.771 0.015 0.98 0.435 0.931 0.026

Source: Annual Reports of sample Companies

Note: The dependent variables are ROA and ROE which is measured by Net Income to
Total Assets and Net Income to Equity. The independent variables. REINS_USED is the Net
reinsurance premium ceded to Total Assets, CAPTAL1 is the Ratio of Net worth to Total Assets,
CAPITAL2 is the Ratio of Net worth to Earned Premium and Log_TA is the natural logarithm
of total assets. Figures in the parenthesis are heteroscedasticity corrected t-values. Under
the null hypothesis. that the correlation coefficient is significant x2 . ***p<0.001, **p<0.01
& *p<0.05.

4.5 Estimated OLS Regression of Reinsurance with Solvency

The OLS regression for all three portfolios life, nonlife and industry is demonstrated in table
6 with dependent variable Solvency. In light of Hypothesis 2, the result depicts that, there
is positive effect of reinsurance in life and nonlife portfolio on solvency and is negatively
related with industry, however, however, result is not significant (p > 0.005). CAPITAL1 and
CAPITAL2 has a negative impact in all portfolio but significant with ROA only (p = 0.004,
< 0.005). Capital2 is positive and significant at 5 percent in all portfolio indicating capital
has positive impact on solvency. The other control variable asset has positive and significant
impact on industry.

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Impact of Reinsurance on Performance of Nepalese Insurance Companies

Based on the above discussion, hypothesis 2, reinsurance is a complement for capital in

order to enhance solvency in life and nonlife portfolio whereas negative impact on insurance
industry indicating solvency of insurers increases with the level of used reinsurance to the
extent that reinsurance and capital can be seen as substitutes. From the analysis the study
concludes there is no significant impact of reinsurance on solvency on Nepalese life insurer,
nonlife and in industry.
Table 6
Estimated OLS Regression of Reinsurance on Solvency
Independent Variables Life Nonlife Life and Nonlife
REINS_USED 1.111 (0.417) 0.006 (0.247) 0.007 (0.349)
CAPTAL1 3.437** (2.995) 0.020 (0.376) 0.021 (0.424)
CAPITAL2 0.489** (2.493) 0.094 **(2.312) 0.090 ** (2.488)
Log_TA 0.067 (0.842) 0.121 (1.296) 0.087** (1.983)
Intercept 4.469** (2.409) 0.086 (0.048) 0.597 (0.640)
F-ratios 20752 2.363 2.72
R2 0.097 0.071 0.048

Source: Annual Reports of Sample Companies

Note: The dependent variable Solvency is measured by Net Assets to Higher of Paid up
Capital or, 20 Percent of Net Premium or Average Claim Outstanding over last 3 years,
the independent variables REINS_USED is the Net reinsurance premium ceded to Total
Assets, CAPTAL1 is the Ratio of Net worth to Total Assets, CAPITAL2 is the Ratio of Net
worth to Earned Premium and Log_TA is the natural logarithm of total assets. Figures in
the parenthesis are heteroscedasticity corrected t-values. Under the null hypothesis. that the
correlation coefficient is significant x2 . ***p < 0.001, **p < 0.01 & * p < 0.05.

5. Finding and Discussion

Reinsurance is the backbone of the any developed and developing country. No doubt, it has
been playing a one of the key roles in the fostering Nepalese insurance industry from the
very beginning. The average reinsurance use is generally higher in nonlife than life. The
mean value of capital, solvency and profitability is litter higher side in life than nonlife
indicating Nepalese life insurance company need more capital, maintain higher solvency
and earn relatively higher return than nonlife insurance company. The OLS regression result
demonstrate that reinsurance has a positive and significant impact on profitability in life
insurance indicating reinsurance improves cost efficiency of the primary life insurers while
reinsurance has no significant role in nonlife insurance part. In contrast, reinsurance has a
significant negative impact on industry meaning, reinsurance is expensive to the extent that it
has an impact on cedent profitability.
Reinsurance is often taken as indirect capital inject to the insurance company as reissuance
help back increase the underwriting capacity of the primary insurer. Thus, increase solvency
indicating the firm is able to maintain strong financial status. The average solvency margin
requirement is 1.5 times, below 1 is red while above 1.5 is grey zone. Reinsurance is positive
but has no significant influence on solvency margin of both and nonlife insurance company,
148 NJMSR V. 3 Issue 2 (2019)
 Impact of Reinsurance on Performance of Nepalese Insurance Companies

and negative relation with industry. Since, the result is not significant, reinsurance has no any
key significant role in enabling to maintain the solvency margin of the primary insurer.

6. Conclusion
This article analyzes a sample of insurers from the Nepal and provides empirical evidence
for the effect of reinsurance on profitability and solvency insurers. The result reveals that
reinsurance has a positive and significant impact with profitability in life portfolio as measured
by ROA while it was negatively related in nonlife and industry. In Regard to ROE, reinsurance
has a positive but insignificant effect of reinsurance across all three portfolios. The result
reveals that reinsurance has a positive impact on profitability of a primary insures. This means
reinsurance improves the cost efficiency of insurers. In regard to solvency, the result deficit
that positive but insignificant relation of reinsurance on solvency in both life and nonlife of
the primary insurer while it was negatively related with the industry. The positive relation
indicates reinsurance is a complement for capital in order to enhance solvency while negative
relation indicating solvency of the insurers increases with the level of used reinsurance to the
extent that reinsurance and capital can be substitutes of each other.
Thus, the study concludes that the sharing the risk with reinsurers, primary insurers can benefit
from a relief on capital. Additional outcomes display an important relationship between
demand and supply of reinsurance at the firm level, growing in the used reinsurance; primary
insurers are more prone to providing reinsurance to other firms. In fact, the outcomes suggest
that insurers’ capital decreases in the amount of utilized reinsurance. Thus, a study concludes
in line with the hypothesis that reinsurance can substitute capital for improving the solvency
of insurers. In statistical terms, the impact of reinsurance is observed to be more important for
solvency, than for profitability.

7. Scope for future research

This article could be further enhance exploring changes in the regulation related to reinsurance
over time. Further, portfolio wise reinsurance practices and effect on performance also helps
to identify the real effect. Analyzing the treaties of the insurer and execution of treaties in
reality back up by data would also help to capture the real effect on firm performance are some
of the areas to improve in future research.
Finally, the researcher like to encourage additional theoretical research in this field that should
work to provide empirically more solid basis covering risk of reinsurance treaties. Also
comparing the reinsurance practices across the countries would help more insightful findings
which would be more helpful and create a strong foundation to the regulator to introduce new
reinsurance regulation.

Acknowledgment
The author acknowledges comments and suggestion from Prof. Dr. Pushkhar Bajacharya and
Prof. Dr. Fatta Bahadur K.C. Faculty of Tribuvan University. Researcher also like to give
sincere thanks to respected chairman of Beema Samit Mr. Chiranivi Chapagin for always
encouraging and supporting to carry out research of the insurance industry.

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Impact of Reinsurance on Performance of Nepalese Insurance Companies

Funding Information
This research paper has been prepared without any extern funding.

Author’s Contribution
Mr. Rajendra Maharjan: Prepared the manuscript, revised, finalized and approved by himself.

Conflict of Interest
The author declares that there is no any conflict of interest

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from the global reinsurance market. Risk Management and Insurance Review, 21(2),
211-242. https://doi.org/10.1111/ rmir.12107

Berger, L. A., Cummins, J. D., & Tennyson, S. (1992). Reinsurance and the liability insurance
crisis. Journal of Risk and Uncertainty, 5(3), 253-272. https://doi.org/10.1007/
BF00057882

Bressan, S. (2018). The impact of reinsurance for insurance companies. Risk Governance
and Control: Financial Market & Institution, 8(4), 22-20. http://doi.org/10.22495/
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Choi, B. P. (2010). The US property and liability insurance industry: Firm growth, size,
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org/10.1111/j.1540-6296.2010.01181.

Cole, C. R., & McCullough, K. A. (2006). A reexamination of the corporate demand for
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j.1539-6975.2006.00170.x

De Haan, L., & Kakes, J. (2010). Are non-risk based capital requirements for insurance
companies binding?. Journal of Banking & Finance, 34(7), 1618-1627. https://doi.
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Doherty, N. A., & Tinic, S. M. (1981). Reinsurance under conditions of capital market
equilibrium: A note. The Journal of Finance, 36(4), 949-953. https://doi.
org/10.2307/2327559

Garven, J. R., & Lamm-Tennant, J. (2002). Economic and financial perspectives on the
demand for reinsurance. Rational Reinsurance Buying, 163-186.

Group of Thirty. (2006). Reinsurance and International Financial Markets. Group of Thirty.

Kuschel, N., Mamykina, E., & Pavlis, R. (2011). Impact of reinsurance on risk capital - a
practical example based on QIS5. Munich Re Solvency Consulting Knowledge Series,
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Lee, H. H., & Lee, C. Y. (2012). An analysis of reinsurance and firm performance: Evidence
from the Taiwan property-liability insurance industry. The Geneva Papers on Risk and
Insurance-Issues and Practice, 37(3), 467-484. https://doi.org/10.1057/gpp.2012.9

van Lelyveld, I., Liedorp, F., & Kampman, M. (2011). An empirical assessment of reinsurance
risk. Journal of Financial Stability, 7(4), 191-203.

Mankaï, S., & Belgacem, A. (2016). Interactions between risk taking, capital, and reinsurance
for property–liability insurance firms. Journal of Risk and Insurance, 83(4), 1007-
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Nissim, D. (2010). Analysis and valuation of insurance companies. CE| ASA (Center for
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Outreville, J. F. (2002). Introduction to insurance and reinsurance coverage. Social

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Association of Customer Satisfaction with Store Environment

Association of Customer Satisfaction with

Store Environment
A Study on Bhat-Bhateni Super Market and Departmental Store

Sarita Maharjan *
[email protected]

Abstract
This paper aims at analysing the relationships between store environment and customer
satisfaction of Bhat-Bhateni Supermarket and Department Store. Descriptive and analytical
research designs were used in this study. Judgemental sampling technique was used to collect
opinion survey data through structured questionnaire. Out of 150 questionnaires distributed
to customers of Bhatbhateni Super Stores under Bhat-Bhateni Supermarket and Department
Store in Kathmandu valley, only 60.61 percent of them were found practical. Compare
mean test and Gamma test are used to analyse the association between customer satisfaction
and store environment at Bhabhateni Super Stores. Compare means test shows that only
customers’ perceptions on employees of Bhatbhateni Super Stores are different by gender.
Gamma coefficients show that customer satisfaction has a significant positive association with
music, lighting, assortment, interior design and employees except layout. Store environment
plays an important role in business. Friendly store environment could be a good factor for
supermarket to enhance customers’ satisfaction level.

Keywords: Store environment, Customer satisfaction, Supermarket

1. Introduction
Today’s competitive business environment cannot deny the facts that the effect of store
environment on customer behavior involving attraction, higher purchase rate and loyalty.
Store environment is the physical surroundings of a store that is made up of many elements,
including music, lighting, layout, directional signage and human elements. It is the image
or impression of a store in the minds of customers. The physical environment also leads to
customer satisfaction (Seo, Kim & Choi, 2015). Furthermore, Bitner (1992) stated that the
physical environment not only influences the customers’ pre-purchase decision but also the
post-purchase quality assessment and satisfaction in terms of the related goods and services.
Retailers often display unique behaviour in the physical environment of the store to influence
consumer behaviour. Unique characteristics can be, among others, store environment
elements which are communicated by in-store marketing, which includes the layout of the
store, presentation of the products and the allocation of the store space (Zentes, Morschett &
SchrammKlein, 2017).

* Faculty Member at Shanker Dev Campus, Tribhuvan University.

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 Association of Customer Satisfaction with Store Environment
Retailers pay more attention to the physical environment, in comparison to wholesalers and
manufactures, because this is the place where the final goods are bought (Kotler, 1973). The
place where a product is consumed or bought is an aspect of the total product. This aspect
can be very influential in the purchase decision of customers, which makes it an important
marketing tool for retailers (Kotler, 1973). The physical environment consists of different
store environment elements. These elements consist of background characteristics of the store
environment (Bitner, 1992), design factors and social factors (Baker, Grewal & Parasuraman,
1994). Store environment and the emotional state among others, are determining factors of
the customers’ purchase behaviour (Sherman, Mathur & Smith, 1997). In other words, the
number of purchase and the time and money spent in a store can be higher (than the customer
intended), following the pleasant shopping experience induced by the store environment
elements (Donovan, Rossiter, Marcoolyn & Nesdale, 1994).
Good overall impression of the nature in terms of products available in the store, the store itself
and the experience they expect when shopping at the store represent the store environment
(Dunne & Lunsch, 2005). So, it can be said that the store image is actually a reaction of the
overall customer to store environment.
Dunne and Lusch (2005) revealed that store environment is an important element in retailing
given that 70 percent of the purchase was an impulse buying or unplanned purchases.
Kotler (2006) was among the first researchers to acknowledge how the significance of store
atmospherics had emotional effects on consumers’ decisions. According to Duong (2016),
there are four factors namely, ambience, layout, lighting, temperature control, décor and
background music. Similarly, Cho and Hofacker (2008), consumers’ shopping decision and
store selection are systematic and not haphazard.
The retailing industry has played a vitally important role in meeting the needs of a modern
society. Research shows that aspects of the store environment such as ambience, design, and
social factors, have a strong influence on customer behaviors and perceptions (Baker et al.,
2002; Liao et al. 2012; Seock, 2009).
Some other researchers have identified some potential predictors of satisfaction like service/
products quality, service hospitality experiences design, perceived value, retail store image
and customer relationship benefits (Hong & Yang, 2009).
A departmental store is a big retailing outlet with a number of departments in specific product
line. Bhat-Bhateni Super Market and Department Store was established in 1984 A.D by Mr.
Min Bahadur Gurung, the company’s Owner and Chairman, as a ‘single shutter’ 120 sq. ft.
cold store. Since then, Mr. Gurung, who gave up a lucrative career in banking to dedicate
himself to the store, has overseen the company as it has grown from its humble beginning to
becoming a household name in the country. Today, Bhatbhateni has a combined 1,000,000
sq. ft. sales area across its 15 locations and employs 4,500 full-time employees 95 percent of
whom are women. With daily sales exceeding NPR 5.5 Crore (USD 550,000.00), Bhatbhateni
is also the largest taxpayer in the retail sector in Nepal.
Today, Bhat-Bhateni is Nepal’s leading supermarket and departmental store chain, spread out
in Kathmandu the capital city and economic hub and in all major cities around the country.
Bhatbhateni is one of Nepal’s most trusted brands and sees a daily footfall of over 100,000
patrons. It handles a wide variety of quality products to satisfy customer needs providing one-
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stop shopping. Bhatbhateni offers a full range of products from local and foreign suppliers,
including wide range of fruits, vegetables, groceries, liquor, toiletries, cosmetics, kitchenware,
readymade garments, leather products, stationaries, sports, toys, electronic products, jewelry
and many more products. Bhatbhateni stores offer unique and convenient experience for
customers, where they can save time and money.
Despite the initiatives taken by supermarkets to store environment factors, it remains unclear
as to what extent these factors contribute to Bhatbhateni Super Stores’ customer satisfaction
in Kathmandu valley. Therefore, this study examines the influence of store environment on
customer satisfaction in Bhatbhateni Super Stores, Kathmandu valley.

1.1 Statement of the problem

The success of the business largely depends upon its ability to satisfy the customers.
Customers’ choose a store as per their requirement and it is the responsibility of the store to
understand the behaviour and perception of customers in order to fulfil or satisfy their want
and desire. Store environment is one of the stimuli that can positively or negatively influence
customers. It refers to the efforts to create the congenial environment that can influence the
customers. Store environment must be design to attract customers and must understand what
their customers expect from their organization and consider all the factors that influence the
customer satisfaction. Therefore, this research is focused on influence of store environment on
customer satisfaction in Bhatbhateni Super Stores (BSS).
In this research, some questions have been made to analyse the association between customer
satisfaction and store environment. This research paper attempts to answer the following
questions:
• What is the perception of customers towards store environment?
• To what extent are the customers satisfied with BSS?
• What is the association between customer satisfaction and store environment at BSS?

1.2 Objectives of the study

• To analyse the level of satisfaction among customers towards BSS.
• To compare the perception of male and female customers of BSS.
• To analyse the association between customer satisfaction and store environment of
BSS.

1.3 Significance of the study

With increase in competition, retailers attempt to ensure that the stores are interesting to
target markets. Store environment plays an important role in a customers’ decision whether
or not to shop in the store. This study reveals how the store environment affects the customer
satisfaction. It will help organization to develop an advanced store environment that creates
a positive impression on customers. The study will also be a guideline for future researchers.
This study will provide insights as how store environment can influence the customer
satisfaction. It is important for entrepreneurs who want to start up the business in this sector.
This study encompasses useful information on various scopes of store environment. This
information is valuable to Nepalese business in service industry in identifying the existing
and new trends and the best possible use of store environment components in the work place.

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 Association of Customer Satisfaction with Store Environment

Independent Variables Dependent Variables

Store environment
• Music
• Lightening Customer
• Layout Satisfaction
• Assortment
• Interior Design
• Employees

Figure 1. Research framework of association between customer satisfaction and store

environment.

2. Research Hypothesis
Null hypothesis 1:
There is no significant association between customer satisfaction and store environment.
Null hypothesis 2:
There is no significant difference between male and female customers’ perception on store
environment

2.1 Variables Description

Music: Music is an element of the store environment that can be easily controlled, and can be
inexpensive to change (Wakefield & Baker, 1998).
Lightening: Lighting is used in stores to highlight certain products, create dramatic effects
and to let the store appear bright and inviting (Varley, 2014).
Layout: Bitner (1992) defines spatial layout as “the ways in which machinery, equipment,
and furnishings are arranged, the size and shape of those items, and the spatial relationships
among them.”, and functionality as “the ability of the same items to facilitate performance and
the accomplishment of goals.”
Customer Satisfaction: Customer satisfaction could be defined as an overall assessment of
the performance of different attributes and factors which are forming a product or a service
(Bartikowski & Llosa, 2004).
It has been found also that customer satisfaction is a part of business philosophy which creates
the value for customers, predicts guests’ expectations as well as it is able and responsible to
satisfy visitors’ needs. As a matter of fact, quality of service and customer satisfaction is the
critical factors for successful business (Gronoos 1990; Parasuraman et al., 1988).

3. Methodology
This study administers descriptive and analytical research design to analyse the customers’

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satisfaction on store environment [i.e., Music (5), Lighting (5), Layout (5), Assortment (4),
Interior Design (6), Employees (7)]. It covers only the customers of Bhat-Bhateni Super
Market and Department Store located in Kathmandu valley. Data were collected from
Bhatbhateni Super Stores located at Kathmandu Valley through questionnaires.
Considering the level of understanding, most of the questionnaires have been modified so
as to make the respondents clear about the questions and help them answer the questions.
Furthermore, the structure questionnaire contained multiple choice questions and rating
questions.
The respondents were requested to give their opinions in a 5 point Likert scale for various
statements. The scale of responses are numbered as 1 for ‘strongly disagree’, 2 for ‘disagree’,
3 for ‘fairly agree’, 4 for ‘agree’, and 5 for ‘strongly agree’. The opinion survey shows the
perception of customers on five different issues of store environment. Each of the issue
categories contains four to seven statements.
This research is conducted to identify the association between customer satisfaction and
store environment of Bhatbhateni Super Market and Department Store. Judgmental sampling
technique has been used to track the respondents in this study and Data were collected based
on opinion survey. A population is basically defined as the universe of units from which the
sample is to be selcted (Gauri & Gronhaung, 2005). The target population is all the customers
who go to shop at Bhatbhateni Super Stores in the Kathmandu valley. The total sample size
was taken for this study was only 91 respondents, out of the distribution of 150 questionnaires
to customers of Bhatbhateni Super Stores in Kathmandu valley.
One sample mean test is employed to confirm the satisfaction level of customers with given
variables. Compare means test is administered to examine the customers’ perception on
employees of Bhatbhateni by gender. Gamma test is used to identify the association between
customers’ satisfaction and store environment of Bhatbhateni Super Stores, such as music,
lighting, layout, assortment, interior design, and employees.
In case of analytical tools, the study has used only reliability test, compare mean test and
Gamma test to examine the influence of store environment on customer satisfaction in
Bhatbhateni Super Stores. Collected data were only based on primary source. The study
results could have some limitations due to the limited analytical tools used.

4. Study Results and Discussion

The five point Likert-based scales for questionnaires were administered to the respondents.
To test the reliability of answers of the questionnaires, reliability analysis is used in the study.
Cronbach’s alpha (α) is a measure of reliability that is most widely used (George & Mallery,
2009). They described a rule of thumb that α > 0.9 – excellent, α > 0.8 – good, α > 0.7 –
acceptable, α > 0.6 – questionable, α > 0.5 – poor, and α < 0.5 – unacceptable.
As opinion survey, the reliability of perception of customers on their satisfaction and store
environment are tested with four to seven scale items. Table 1 presents that the Cronbach’s
alpha values are more than 0.5 for each of the variables. So, the reliabilities of each variable
are okay (George & Mallery, 2009).

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 Association of Customer Satisfaction with Store Environment
Table 1
Reliability Analysis
Variable No. of Item Cronbach‘s Alpha
Music 5 0.748
Lighting 5 0.559
Layout 5 0.666
Assortment 4 0.684
Interior Design 6 0.831
Employees 7 0.897
Customer Satisfaction 6 0.837

4.1 Perception of Customer on Store Environment

Table 2 shows that average means score of perception of customers towards store environment
and their satisfaction level. It is observed that the mean scores of all variables are greater than
3 (i.e., fairly agree). Computing t-statistic, one sample mean test is used to test the significant
level of all variables taking test value 3. Since the corresponding p-value of t-statistics of all
variables are less than 0.05 each (i.e., 0.000 < 0.05), all variables are significant at 5 percent
level. This means that perception of customers towards store environment such as music,
lighting, layout, assortment, interior design, employees positively significant. The result
shows that customers of the Bhatbhateni Super Stores are satisfied.

Table 2
One - Sample Test
Test Value = 3
95% Confidence
Mean Interval
Variables Mean t-statistic df p-value
Difference
Lower Upper
Music 3.243 18.427 90 0.000 0.243* 0.217 0.269
Lighting 3.471 885.915 90 0.000 0.471* 0.470 0.473
Layout 3.437 231.826 90 0.000 0.437* 0.433 0.441
Assortment 3.552 388.903 90 0.000 0.552* 0.549 0.555
Interior Design 3.412 199.541 90 0.000 0.412* 0.408 0.416
Employees 3.139 7.621 90 0.000 0.139* 0.103 0.175
Customer
Satisfaction 3.384 46.253 90 0.000 0.384* 0.368 0.401

(*) indicates that the value is significant at 1 percent level.

4.2 Equality of Variance Test

Levene’s F statistic is used to test the equality of variance in two groups (ie., male and female).
Table 3 depicts that corresponding p-values of all Levene’s F statistics are more than 0.10
(10%) for each of the variables. Since the p-values are more than 0.10, the differences in mean
deviations are not significant. So, the variances between male and female groups are equal in
all variables. Thus, equal variance is assumed for compare mean analysis using t-test.
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Table 3
Levene’s Test for Equality of Variances
Mean Levene‘s Test
Variables Gender N Diff
Deviation df F-Stat. p-value
Male 50 0.573
Music 0.002 1, 89 0.000 0.984
Female 41 0.571
Male 50 0.531 0.155
Lighting 0.109 1, 89 2.058
Female 41 0.422
Male 50 0.520
Layout -0.030 1, 89 0.178 0.674
Female 41 0.549
Male 50 0.573
Assortment 0.074 1, 89 0.921 0.340
Female 41 0.499
Male 50 0.557
Interior Design 0.098 1, 89 1.355 0.248
Female 41 0.459
Male 50 0.596
Employees -0.030 1, 89 0.104 0.748
Female 41 0.626
Customer Satis- Male 50 0.509
0.011 1, 89 0.020 0.888
faction Female 41 0.498

4.3 Gender-wise Perception on Store Environment

Table 4 presents that number of male and female customers of Bhatbhateni Super Stores
are 50 and 41 respectively. From the individual t-test, p-value of all issues are more than
0.10 (ie., p-value > 0.10) which are not significant at 10 percent level of significance except
‘employees’. The corresponding p-value of ‘employees’ is 0.032 (ie., 0.032 < 0.05) that is less
than 0.05 (5%). This result reveals that there is a significant different perception between male
customers and female customers on employees of Bhatbhateni Super Stores. As shown in
Table 3, the mean score of perceptions of male customers and female customers on employees
are 3.295 and 2.948 respectively. The t-test reveals that male customers are more satisfied than
female on employees of Bhatbhateni Super Stores (ie., 3.295 > 2.948).

Table 4
Compare Mean Test
t-Test
Variables Gender N Mean Diff.
df t-Stat. p-value
Male 50 3.356
Music 0.251 89 1.606 0.112
Female 41 3.105
Male 50 3.476
Lighting 0.01 89 0.079 0.937
Female 41 3.466
Male 50 3.453
Layout 0.036 89 0.269 0.788
Female 41 3.417
Male 50 3.540
Assortment -0.027 89 -0.195 0.846
Female 41 3.567
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Male 50 3.430
Interior Design 0.04 89 0.284 0.777
Female 41 3.390
Male 50 3.295
Employees 0.347** 89 2.173 0.032
Female 41 2.948
Customer Satisfac- Male 50 3.455
0.158 89 1.187 0.238
tion Female 41 3.297

(*) indicates that the value is significant at 1 percent level.

4.4 Gamma Test

The value of Gamma in Table 5 is calculated from the cross tabulation of 5-points scale
(ie., one for ‘strongly disagree’ to five for ‘strongly agree’) obtaining from the summary of
total scores of various statements under “customer satisfaction” and summary of total scores
of various statements under ‘music’, ‘lighting’, ‘layout’, ‘assortment’, ‘interior design’, and
‘employees’ respectively. The “Customer satisfaction” being dependent variable and other
variables as independent variables are cross tabulated in matrix each. It also presents the
frequency and percentage distribution of respondents in each of the cell of 5-points scale as
well as Gamma which shows the extent of relationship between each of two groups.
Processing the 5-points scale matrix of “customer satisfaction” with each of ‘music’, ‘lighting,
‘assortment’, ‘interior design’, and ‘employees’, Table 4 shows that the value of Gamma are
significant at 1 percent level (p-values < 0.01) except layout. The corresponding p-value of
layout is more that 0.1 (ie., 0.106 >0.1). So, it is not significant at 10 percent level. This means
that customer satisfaction is affected to the extent of 46.5 percent, 59.7 percent, 68.7 percent,
63.4 percent and 75.7 percent by ‘music’, ‘lighting’, ‘assortment’, ‘interior design’, and
‘employees’ respectively but there is no significant association between customer satisfaction
and layout.

Table 5
Association of Customer Satisfaction with Different Variables
Variables Gamma Coefficient p-value
Music 0.465* 0.002
Lighting 0.597* 0.000
Layout 0.274 0.106
Assortment 0.687* 0.000
Interior Design 0.634* 0.000
Employees 0.757* 0.000

(*) indicates that the value is significant at 1 percent level.

From the result, it is found that there is a significant association of customer satisfaction
with music, lighting, assortment, interior design and employees. Baker et al. (2002) in their
research also reveals that music and lighting have a significant influence on store environment.
Similarly, interior design has also a significant impact on consumers’ perception in Liao et
al. (2012). Music has a significant influence on customers’ behaviour in the study of Seock

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(2009). The result of this research is similar with the study of Duong (2016). Duong (2016)
also found that the store environment on customer satisfaction is positively significant
correlated with music, lighting, assortment. It is also found from this study that layout has not
significant impact on customer satisfaction. This result is contrary with Duong (2016). Layout
is also significant in the study of Duong (2016). However, all store environment variables
except layout affect the customer satisfaction.

5. Conclusion
In today’s competitive world, one can hardly deny the facts that the impact of store environment
on purchasing behavior of customers. Various store-owners want to provide a perfect store
environment for their customers. The findings, it is concluded that there is a significant effect
of store environment on customer satisfaction in Bhatbhateni Super Stores. Customers of the
Bhatbhateni Super Stores are satisfied with store environment like music, lighting, assortment,
interior design and employees except layout.
Only customers’ perceptions on employees’ behaviour in Bhatbhateni Super Stores are
different by gender. Male customers are more satisfied than female customer with the
employees’ behaviour of Bhatbhateni Super Stores. But the perception between male and
female are not significantly different towards music, lighting, layout and assortment. However,
in overall satisfaction level of male and female customers of Bhatbhateni Super Stores are not
significantly different.
Therefore, it is proven that a congenial store environment is a good factor for the supermarket
to enhance the customers’ satisfaction level.

References

Baker, J., Grewal, D., & Parasuraman, A. (1994). The influence of store environment on
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