Saint Mar’s University

Department of Accounting and finance

Financial Management Practice of church: the case study of Ethiopian Kale Hiwot Church

By

Binyam Taye---------------------------EAD/1702/2012

Melaku Korma-------------------------EAD/2439/2012

Melaku Worku------------------------RAD/1423/2012

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 Table of content

Chapter one
Introduction------------------------------------------------------------------------------------3
Study background-----------------------------------------------------------------------------4
General Objective -----------------------------------------------------------------------------5
Specific Objectives------------------------------------------------------------------------------6
Scope and Limitation---------------------------------------------------------------------------6
Chapter two
Literature review
Theoretical Review-------------------------------------------------------------------------------7
Empirical Review---------------------------------------------------------------------------------14
Chapter three
Research Design and Methodology----------------------------------------------------------17
Study Area and Approach-----------------------------------------------------------------------18
Sample Size and Sampling Method-----------------------------------------------------------18
Data Collection Methods and Instruments-------------------------------------------------18
Document Review………………………………………………………………………………………….19
Data Analysis Method…………………………………………………………………………………….19
Reference ………………………………………………………………………………………………………..20

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CHAPTER ONE

Introduction
According to historical records, the origin of recording financial events can be traced
back to ancient times when it was initially used for faith-based activities in ancient
Greece (Mesopotamia). Clays with financial records have been discovered in
Mesopotamia, which include lists of expenditures and records of goods received and
traded around temples (Biobele, 2008). The development of accounting, money, and
numbers may have been influenced by the taxation and trading activities of temples.
Evidence of an early form of accounting can also be found in the Bible, specifically in the
first millennium BC, where it describes the engagement of Ithamar to account for the
materials contributed towards the construction of a certain building (Bible reference
needed).
Around 40 AC, the New Testament mentions that in the early church, there was a
distinction between sacred and secular work. The apostles appointed a committee of
seven members to manage the giving and other properties from the church members
(Acts 6:3).
During the medieval period, the Church of Scotland utilized financial management
decisions for various investment activities with social aims in mind (Catriona & et al,
2010).
The practice of using accounting for financial management decisions in faith-based
organizations in general, and Christian churches in particular, is not a recent
development. However, there are two main reasons for this practice. Firstly, churches
often rely heavily on volunteer support and may lack professional oversight to
adequately monitor their resources (Thomas & et al, 2003). Secondly, churches may
ignore accounting and financial management due to the perceived conflict between the
secular nature of finance and accounting and the sacred activities of the church. In this
context, accounting systems are not considered part of the sacred agenda for churches
(Thomas & et al, 2003).
The division between the sacred and secular aspects of the church separates its core
activities from supporting activities. Accounting is viewed as a supporting activity and
therefore considered profane. It is seen as irrelevant to the organization's existence and
only tolerated to the extent that it supports the sacred (Niklas Kreander & et al, 2004).
The Ethiopian Kalehiwot church (EKHC) is the pioneering Protestant church in Ethiopia.
According to the 2010 United States department of state, Report on international
religious freedom, 19% of the Ethiopian population is Protestant, with the EKHC
constituting more than 10% of that population, totaling 11,500,000 members. The
church's annual budget for the year 2016 is about 540,000,000.
This study explores the financial management practices within the Ethiopian Evangelical
Church Kale Hiwot.

1.2.Study Background
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To the best of the researcher's knowledge, no study has been conducted on the financial
management practices of the Ethiopian Evangelical Church Kale Hiwot both locally and
globally. However Previous research has focused on the financial management practice
of Ethiopian Mekane Eyesus Church, by Gemechis Mathewos, Addis Ababa University,
and a previous research focused particularly in relation to funds received from foreign
partners. However, these studies have primarily addressed the use of funds and
provided guidelines for higher officials. Limited research is available on financial
management in not-for-profit organizations, including religious ones. There have been
studies conducted on church financial management. According to Thomas et al. (2003),
Not for Profit Organizations, including churches, are driven by social responsibility and
service rather than a profit motive. As a result, they may not prioritize financial control,
which can hinder their ability to achieve their goals and missions. While financial control
in the for-profit sector has received significant attention from scholars, there is limited
research available on financial control in Not for Profit Organizations, particularly in
religious contexts (Duncan et al., 1999).

Suge et al. (2013) investigated how financial planning practices can improve the balance
between outflow and inflow of church funds and explored the impact of financial
analysis practices on sound investment decisions. They found that churches that employ
financial management analysis tend to make better financial decisions.

Peninah Jepkogei Tanui et al. (2016) examined the usefulness of internal control for
effective financial management in the church, considering the expected growth of
Christianity worldwide. They cited the Status of Global Mission (2014), which projected
that the total number of Christians would reach 2,700,343,000 by 2025, generating a
total annual church income of $350 billion. However, reports from the Status Global
Missions and the Centre for the Study of Global Christianity in 2013 suggested that
Christians worldwide experienced over $37 billion in church-related financial fraud that
year. The Brotherhood Mutual Insurance Company (2015), referenced by Peninah et al.
(2016), which insures American churches and related ministries, stated that church
crime continues to increase by $100 million each day. In response, the company
proposed best financial management practices to prevent fraud in churches, such as
establishing written financial policies and conducting annual background checks.Some
studies have examined how financial planning practices and financial analysis affect
decision-making and investment in church funds. Another study has explored the
usefulness of internal control in effective financial management, considering the
expected growth of Christianity worldwide. Reports have highlighted the occurrence of
financial fraud and church-related crimes, emphasizing the need for best financial
management practices and preventive measures.

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This research aims to assess various elements of financial management in the EKHC,
such as accounting records, financial policy, financial planning, financial reporting and
evaluation, and internal control. The goal is to improve the financial management
practices of the church by examining its current performance and providing
recommendations.

1.3. Problem Statement

There is a lack of research on financial management practices and control in Ethiopian

Protestant churches in general, and specifically in the Ethiopian Kale Hiwot Church.
Limited studies have been conducted on modern financial management practices in
Protestant churches globally. The EKHC has historically relied on foreign sources of
funding due to reasons such as religious freedom constraints, a weak local fundraising
system, and prevailing poverty in the country. However, the church is now experiencing
a decrease in funds from foreign sources due to doctrinal disagreements and other
priorities of its partners. Consequently, the church is transitioning to rely more on its
internal income. It is implementing various strategies such as making investments,
establishing local sources of finance, designing a hierarchical fund flow system, and
implementing income-generating schemes in different locations. The primary source of
income for the EKHC is expected to come from member tithes, which flow from lower
structures (congregations) to upper structures (Synods and the Central Office). This
system involves each structure retaining a portion of the collected funds and passing the
remainder to the next level. The EKHC is also investing its resources in other endeavors.
The EKHC currently relies primarily on member tithe contributions as its main source of
funding. These contributions are expected to come from the lower structure, specifically
from congregations, and flow upwards to the upper structure up to the Central Office.

Various types of investments, including investments in banks and profit organizations, as

well as fixed asset investments like constructing buildings for rental purposes,
contribute to the income of the church. The church relies on both member contributions
and income from investments to sustain its financial stability.

Mufadal et al. (2016) emphasized the significance of diversifying income sources for
nonprofit organizations. They argued that having additional sources of funding, such as
grants and income generated from investments, can enhance the financial stability of
nonprofit organizations and enable them to better serve their constituents.
Organizations that heavily depend on contributions are more vulnerable to resource
dependency. Since donations are the second major source of revenue for nonprofits
(after service fees) and are crucial in certain industries, a shrinking donor market and
increased competition for donations can lead to greater financial instability for

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organizations that heavily rely on donations. Therefore, diversifying revenue sources can
be particularly beneficial for organizations that primarily depend on contributions.

Deborah A. Carol et al. (2009) also supported the idea that nonprofits and churches with
diversified revenue portfolios experience lower levels of revenue volatility over time,
indicating that diversification is an effective strategy for organizational stability. By
balancing their reliance on earned income, investments, and contributions, nonprofits
and churches can reduce the fluctuation in their revenue streams. Although this positive
effect of diversification on revenue stability does not take into account potential trade-
offs between funding sources, such as earned income potentially reducing private
donations, it suggests that a diversified portfolio promotes more stable revenues and
can contribute to the long-term sustainability of organizations.

Diversifying income sources has helped the EKHC (Ethiopian Kale Hiwot Church)
generate more funds, as evidenced by the annual budget versus actual report. The
church's income has been increasing over time, with the annual working budget for
2017 reaching nearly more than 500,000,000 Ethiopian birr, not including the majority
of congregational working budgets.

The researcher raises the question that diversifying income alone is not sufficient to
ensure income sustainability. Proper management of funds, including the collection of
various sources and transparent expenditure practices, is equally, if not more, important
for the organization's financial well-being.
According to a study by Thomas C. Wooten et al. (2003), faith-based nonprofit
organizations operate without owners and are driven by hope, prayers, and dreams
rather than individual financial gain. They heavily rely on volunteer management and
support from individuals who align with the organization's mission. Consequently, they
may lack professionals to effectively oversee the organization's resources and the
conduct of its leaders. Even full-time employees are typically attracted by the
organization's mission and have limited interest in financial management. On the other
hand, churches face the challenge of operating with uncertain revenues (Mufadal et al.,
2016). The unpredictable economic climate has necessitated churches to seek assistance
in managing their limited resources.

To ensure safety and sustainability, practicing financial management principles is crucial

for faith-based organizations, particularly church organizations.

In order to evaluate the presence and implementation of financial management

elements in the Ethiopian Evangelical Church of Kale Hiwot, the following research
questions have been formulated for the study:

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- Does the church maintain proper financial record keeping in its units?
- Does the church engage in financial planning and implementation?
- Are there clear and up-to-date financial policies and manuals in the church?
- Are financial reports prepared in a timely manner, audited, and reported to
stakeholders?
- Are internal controls established and followed within the church?
- Does the church achieve its collection objectives from members?

1.4. Research Objective

1.4.1. General Objective:

The main objective of this study is to assess the financial management practices of the
Ethiopian Evangelical Church of Kale Hiwot (EKHC).

1.4.2. Specific Objectives:

The specific objectives of this paper are:

1. To evaluate the practice of financial record keeping in the EKHC.
2. To examine the financial policies and manuals of the EKHC.
3. To study financial planning and forecasting of the church.
4. To investigate financial reporting and monitoring of the church.
5. To assess the existence & employment of internal control procedures in the church

1.5. Scope and Limitation

For this study, only the Ethiopian Evangelical Church of Kale Hiwot (EKHC) was chosen
out of 36 similar Evangelical Churches (denominations) based on the annual report of
EECF (Ethiopian Evangelical churches Forum). It should be noted that the findings of this
assessment cannot be applied to all similar churches. The decision to focus on one
church was made because the Ethiopian Evangelical Church of Kale Hiwot was
established in 1927 G.C. and is considered a pioneer Evangelical Church in the country,
with other evangelical churches being formed later. The study involves church leaders in
the questionnaire and interview process, as they hold important positions within the
church. However, it is important to acknowledge that many of these leaders are
theologians and may not have extensive finance backgrounds. Additionally, the
researchers faced challenges due to the busy schedules of the leaders, resulting in some
reluctance to respond to the distributed questionnaires. Furthermore, the turnover rate
of finance staff in certain church units was high, which could potentially lead to
inconsistencies in data gathering within these units.

1.6. Significance of the Study

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The objective of this study is to evaluate the financial management practices of the
EKHC. In general, the study holds the following significance:
- As the church has undergone a paradigm shift from relying on financial assistance from
partners to adopting a self-reliant strategy, where the church aims to fund all its
ministries through internally generated income, the examination of financial
management practices within the church can have a positive impact on its operations
and provide an opportunity to review financial procedures.
- This study offers a chance for church leaders and managers to reflect on the journey
taken during this shift and evaluate existing practices, with the aim of implementing
appropriate corrective measures.
- The research findings will serve as a guide for the future direction of the church,
assisting in the adjustment of its goals and objectives.
- The study will provide valuable insights into the financial management practices of
Evangelicals and other churches, serving as a foundation for future research on church
economy.
- There has been limited research conducted on the financial management of religious
organizations both within the country and internationally. Therefore, this study
contributes to expanding our knowledge in this area.

CHAPTER TWO

Literature Review

2.1. Theoretical Review

2.1.1. Definition of Financial Management:

Financial management involves the acquisition and management of resources, which

includes tax administration, collection of user fees, cash management, methods of
financing capital projects (such as bond issuance), and accounting (James C. & et al,
2002).

Christian Regobeth (2009) provides a broader definition of financial management, which

encompasses the administration and maintenance of financial assets, identification and
management of risks, and the diversification of financial asset portfolios to ensure a
steady flow of financial resources in the future.

2.1.2. Importance of Financial Management in the Church and Non-Profit Organizations

(NPOs):

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Regobeth (2009) argues for the contemporary significance of financial management in
Assembly of God churches in Ghana, specifically in Accra. It is asserted that sound
financial management is not only essential for the financial health of the church but also
for its spiritual well-being. Regobeth recommends that churches must employ
competent individuals, establish proper priorities, monitor revenue flow, plan
expenditures accordingly, identify and manage financial risks, and diversify their
portfolio of financial assets to ensure a regular flow of financial resources in the future.

Svitlana (2009) also examines the importance of financial management for not-for-profit
organizations (NPOs) and NGOs, based on her work on USAID-funded service capacity
projects in Kyiv, Ukraine. It is emphasized that financial management is crucial for
achieving sustainable development in today's challenging reality. Svitlana further
discovers that implementing financial management best practices in NPOs and NGOs
can:

- Enable managers to utilize resources efficiently and effectively.

- Improve reporting to fiscal authorities and donors.
- Earn respect and trust from partners and beneficiaries.
- Enhance competitiveness for limited resources.
Financial management involves acquiring, financing, and managing assets with a specific
objective in mind. Consequently, the decision-making process in financial management
can be divided into three main categories: investment decisions, financing decisions,
and asset management decisions (James C. & et al, 2009).

a) Investment Decision
The investment decision is the most crucial among the three major decisions made by a
company in terms of creating value. It begins with determining the total amount of
assets that the company needs to hold. The financial manager must ascertain the dollar
amount reflected above the double lines on the left side of the balance sheet, which
represents the size of the firm. Even after this number is known, the allocation of assets
needs to be decided. For instance, what proportion of the company's total assets should
be allocated to cash or inventory? Additionally, the decision to dispose of assets that are
no longer economically justified must not be overlooked. Such assets may need to be
reduced, eliminated, or replaced (Deborah & et al, 2016).

According to Deborah et al (2016), capital investment decisions are not determined by

one or two factors alone. This is because the investment problem is not merely about
replacing old equipment with new ones, but rather about replacing an existing process
within a system with another process that enhances the overall effectiveness of the
system. Deborah et al (2016) also highlighted several relevant factors that influence
investment decisions:

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a.1. Management Outlook
If management is forward-thinking and has an aggressive marketing and growth
outlook, it will promote innovation and favor capital proposals that enhance
productivity, quality, or both. In industries where the manufactured product is a simple
standardized one, innovation may be challenging, and management would prioritize
cost consciousness.

a.2. Market Forecast

Both short-term and long-term market forecasts have a significant impact on capital
investment decisions. To capitalize on long-term market potential, critical decisions
regarding capital investment need to be made.

a.3. Fiscal Incentives

Tax benefits, such as reduced taxes on new investment income or allowances for
depreciation deductions, can impact the decision to make new investments. The way
depreciation deductions are allowed also influences these investment decisions.

a.4. Cash Flow Budget

The evaluation of a cash flow budget, which illustrates the inflow and outflow of funds
in a company, can affect capital investment decisions in two ways.
Firstly, the analysis may reveal that the company can acquire the necessary cash to
purchase equipment at a later time, for example, after one year. Alternatively, it may
show that purchasing capital assets now could lead to significant capital expenditures in
two years, which may conflict with anticipated expenses that cannot be postponed.
Secondly, the cash flow budget provides information on the timing of cash flows for
different investment options, helping management select the desired investment
project.

Duncan et al. (2003) explained that traditional finance theories assume investors make
rational investment decisions based on all available information. However, in reality,
this is not always the case. Considering the growing significance of behavioral finance,
this study aims to investigate how behavioral factors like risk aversion, the use of
financial tools, and firm-level corporate governance influence the decision-making
process of equity fund managers. The study's results demonstrate a positive and
significant relationship between heuristics, the use of financial tools, risk aversion, firm-
level corporate governance, and investment decision making. Additionally, the findings
highlight the crucial role of firm-level corporate governance as a significant factor
affecting investment decision making. Institutional equity fund managers employ

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heuristics and financial tools in their decision-making processes and tend to be risk-
averse.

b) Financing Decision

The second major decision for a firm is the financing decision, which involves
determining the composition of the right-hand side of the balance sheet. When
examining the financing mix used by firms across industries, noticeable differences can
be observed. Some firms have a relatively high level of debt, while others have minimal
or no debt. Does the type of financing employed have an impact? Once the financing
mix is determined, the financial manager must also determine the most effective means
of obtaining the required funds.
According to James et al. (2009), the fiscal and organizational health of a firm is
determined by its capital structure. Financial executives aim to create an optimal capital
structure by diversifying the company's debts and outstanding shares. Business analysts
assess capital structure by considering various corporate characteristics, such as long-
term financial assets, executive control, planning flexibility, and historical performance.
Achieving an optimal capital structure is essential for reducing expenses and increasing
profits for stakeholders.

Firms utilize equity trading, which involves borrowing capital against the profits earned
by equity shareholders. These profits result from issuing securities to preferred
stockholders and debenture holders. In theory, shareholders benefit from this financing
practice because the interest rates on funds are typically lower than standard loan rates.

Furthermore, James et al. (2009) discuss how a firm's security composition determines
its organizational ownership and can be classified as highly geared or low geared. Highly
geared companies rely on a small percentage of equity capitalization to secure financial
assets, while low geared firms primarily rely on equity capital.

Optimizing capital structure is crucial for both short-term and long-term growth.
Financial analysts consider various factors, among others, when evaluating capital
structure.
b.1. Emergency Preparedness

According to James et al. (2009), the fiscal and organizational health of a firm is
determined by its capital structure. Financial executives aim to create an optimal capital
structure by diversifying the company's debts and outstanding shares. Business analysts
assess capital structure by considering various corporate characteristics, such as long-
term financial assets, executive control, planning flexibility, and historical performance.

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Achieving an optimal capital structure is essential for reducing expenses and increasing
profits for stakeholders.
Firms utilize equity trading, which involves borrowing capital against the profits earned
by equity shareholders. These profits result from issuing securities to preferred
stockholders and debenture holders. In theory, shareholders benefit from this financing
practice because the interest rates on funds are typically lower than standard loan rates.

Furthermore, James et al. (2009) discuss how a firm's security composition determines
its organizational ownership and can be classified as highly geared or low geared. Highly
geared companies rely on a small percentage of equity capitalization to secure financial
assets, while low geared firms primarily rely on equity capital.

Optimizing capital structure is crucial for both short-term and long-term growth.
Financial analysts consider various factors, among others, when evaluating capital
structure.
b.2. Impact of Economic Conditions

The state of the economy has an impact on stock prices. When the financial market
experiences a downturn, companies tend to establish debenture and loan capital
structures. Conversely, during periods of market growth, firms prefer to maintain equity
capital structures.
To secure funds, companies obtain short-term loans from banks and other lending
institutions, and they raise long-term capital by issuing stocks and debentures. The cost
of borrowing money, which is influenced by economic conditions, plays a role in
determining the capital structure when a firm seeks funding through securities.
b.3. Impact of Interest Rate Fluctuations

Changes in interest rates have an impact on the profitability of companies. Companies

obtain loans with varying interest rate structures, such as fixed or floating rates. If a
company is successful but fails to consider potential changes in interest rates, it may
struggle to meet its payment obligations.
The Federal Reserve, taking into account the economic conditions of the country,
determines changes in interest rates. When they aim to stimulate economic activity,
such as consumer spending, they lower interest rates. This not only makes it easier for
businesses to secure loans but also reduces borrowing costs. During periods of low
interest rates, businesses borrow funds for purposes such as research, development,
and expansion. Conversely, when the Federal Reserve raises interest rates, businesses
reduce borrowing because high-interest loans make it challenging to achieve a
satisfactory return on investment.

c) Asset Management Decision

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The asset management decision is a crucial aspect of a firm's operations. After acquiring
assets and securing the necessary financing, it is essential to manage those assets
efficiently. The financial manager has varying degrees of operational responsibility over
existing assets. However, their primary focus is on managing current assets rather than
fixed assets. The responsibility for managing fixed assets primarily rests with the
operating managers who utilize these assets.
3. The Role of Financial Manager

The success of a firm and the overall economy heavily rely on the abilities of a financial
manager to adapt to change, raise funds, make wise investments, and manage
effectively. If funds are misallocated, it can hinder the growth of the economy.
Therefore, the financial manager plays a crucial role in ensuring efficient resource
allocation and contributing to the overall economic prosperity.
When economic needs and desires remain unmet, the misallocation of funds can have
negative consequences for society. In an economy, the efficient allocation of resources
is crucial for optimal growth and for individuals to achieve satisfaction of their highest
personal wants. Therefore, by effectively acquiring, financing, and managing assets, the
financial manager makes valuable contributions to both the firm and the overall vitality
and growth of the economy. (JAMES C. & et al 2008)
Characteristics of Church-Based Organizations
As per Thomas C. Wooten et al. (2003), Faith-Based Not-for-Profit Organizations
(FBNPOs) possess distinct qualities that set them apart from for-profit organizations.
They are required to adhere to a specific mission or purpose in order to maintain their
tax-exempt status. Additionally, they are prohibited from distributing surpluses, and
they lack owners. FBNPOs operate based on hope, prayers, and dreams rather than
pursuing financial gain for individuals, creating a challenging environment for financial
control and planning (Thomas, 2003).

FBNPOs also differ from for-profit organizations in their heavy reliance on volunteer
management and support from individuals who align with the organization's mission.
Consequently, they may lack professional oversight to effectively monitor the
organization's resources or the conduct of its leaders. Even full-time employees are
often drawn to these organizations due to their commitment to the mission, rather than
having a strong interest in financial management. This further reinforces the belief that
no one involved in the organization would intentionally misuse or misappropriate its
funds due to their dedication to the mission. As a result, staff members often perceive
the need for controls as unnecessary since FBNPOs do not face the same temptations
and pressures as traditional for-profit businesses. Numerous manuals are available to
guide FBNPOs in addressing their financial control, planning, and other needs (Thomas,
2003).

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 IFRS Standards
As outlined by Meshack Matengo (2012), the International Accounting Standards (IASs)
and International Financial Reporting Standards (IFRSs) listed below have been
recognized as applicable to Non-for-Profit Organizations. The guidelines outlined in
these IASs have been taken into account. And modified to align with the specific
operations and transactions of these organizations. The International Accounting
Standards (IASs) that are relevant to Non-for-Profit Organizations include:

1. Presentation of Financial Statements (IAS 1)

2. Inventories (IAS 2)
3. Cash Flow Statements (IAS 7)
4. Accounting Policies, Changes in Accounting Estimates & Errors (IAS 8)
5. Events after the Balance Sheet Date (IAS 10)
6. Construction Contracts (IAS 11)
7. Income Taxes (IAS 12)
8. Property, Plant & Equipment (IAS 16)
9. Leases (IAS 17)
10. Revenue (IAS 18)
11. Employee Benefits (IAS 19)
12. Borrowing Costs (IAS 23)
13. Related Party Disclosures (IAS 24)
14. Accounting for Investments (IAS 25)
15. Consolidated and Separate Financial Statements (IAS 27)
16. Provisions, Contingent Liabilities, and Contingent Assets (IAS 37)
17. Investment Property (IAS 40)
2.1.8 Financial Ministry in the Church
The United Methodist Church in Oklahoma (Robert, 2000) has implemented a book of
financial discipline to effectively manage their financial affairs. Financial ministry within
the church involves a dedicated team of individuals who assist the congregation in
supporting its mission. This team comprises the following people and entities:

- The Pastor: The role of pastors in the financial ministry of the church includes providing
leadership in fundraising efforts, modeling and promoting faithful financial stewardship,
and encouraging giving as a spiritual discipline.

- The Committee on Finance: The committee is responsible for providing financial

guidance, developing an annual funding program, creating and managing the church's
budget, generating financial reports, and ensuring the safeguarding of assets and
donated funds.

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- The Financial Secretary: This individual handles the day-to-day accounting tasks of the
church, such as recording income and expenditures, summarizing and categorizing
financial transactions, and reporting to the committee on finance.

- The Treasurer: The treasurer is in charge of disbursing funds, receiving weekly deposit
slips from the finance secretary, providing the committee on finance with regular
expenditure reports and fund balances, and implementing the policies and procedures
established by the committee on finance.

Empirical Review

Financial Management and Financial Sustainability in Churches

In a study conducted by Bright (2016) focusing on Church-related organizations in Kenya
and their financial sustainability, it was found that out of the 17 organizations
interviewed, 18% claimed to have achieved a reasonable level of sustainability, while
82% acknowledged that they were moving towards a crisis. The research revealed that
financial management plays a significant role in determining the financial sustainability
of these organizations. Factors such as budgeting systems, funds flow control systems,
asset management systems, financial planning, reporting and monitoring systems,
accounting policies and procedures, internal and external auditing systems, and financial
analysis and information systems all contribute to the financial sustainability of Church-
related organizations.

Based on the findings, Bright recommended that Church-related organizations should

focus on strengthening the monitoring and evaluation processes associated with their
financial management practices. Additionally, he suggested that these organizations
should develop and implement action plans to ensure regular supervision of financial
management processes, thus promoting greater financial stability and sustainability. Lisa
et al. (2012) put forth the argument that non-profit organizations face several key
challenges in achieving financial sustainability. These challenges include the risk of
relying heavily on external funding sources, the need to demonstrate value and
accountability to funders and supporters, and the promotion of community engagement
and leadership.

The authors also highlight that an organization may be sustainable in the long term but
face short-term cash shortages, which can hinder its operations. On the other hand, an
organization may be sustainable in the short term but not in the long term, potentially
resulting in sufficient cash reserves but the erosion of asset value over time due to
inflation. Consequently, without periodic capital campaigns to inject new assets, the
quantity and quality of services provided by the organization may diminish.

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Overall, Lisa et al. (2012) emphasize the complex nature of achieving financial
sustainability in non-profit organizations and the need for strategic planning to address
these challenges effectively.
2.2. Accounting Records and Updates in Non-Profit and Religious Organizations
Jamaliah (2013) conducted research on financial management practices in religious
organizations, specifically mosques in Malaysia, and highlighted the importance of
proper financial record-keeping in improving financial performance. Jamaliah's findings
indicated that maintaining accurate records of fund disbursement and income receipts
significantly impacts financial management practices in mosques. The author
recommends that robust accounting records enhance donor confidence in channeling
funds to the mosque.

Similarly, John et al. (2012) enumerated the significance of accounting records for NGOs
and non-profit organizations (NPOs) in Sub-Saharan countries. They identified two
primary reasons for devoting resources to maintaining accounting records and preparing
sound financial statements. Firstly, there are legal and regulatory obligations to the
government that necessitate accurate financial records. Secondly, with increased media
attention on non-profit organizations that have high overhead costs or struggle to
account for received funds, there is a growing understanding among donors that
organizations need to provide more information to ensure accountability and
transparency.

Mark Vincent (1999) conducted a study on congregational financial management and

argued that accounting records and substantiated financial documents provide crucial
information about a church's income and expenditures, supporting the preparation of
accurate financial statements. These documents serve as indicators of a church's
financial health as of a specific date.

David (2012), who assessed financial management practices in the Assemblies of Church
in Ghana, highlighted the importance of regularly updating records as financial events
occur. Internal auditors should review these records periodically as part of best
practices in church finance.
Church Financial Policies and Guidelines
Keith (2007) conducted an assessment of the Baptist churches in Georgia and
emphasized the importance of sound financial policies. The study found that having
well-written and easily understandable financial policies can help churches avoid
conflicts related to financial matters. Furthermore, church financial policies contribute
to establishing a clear Biblical basis for effectively managing the financial resources
entrusted to a congregation.

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In a study by Peter et al. (2008) focusing on the financial principles and policies of the
Orthodox church in America, it was recommended that the church adopt best practices
in financial policy. The study highlighted key elements that should be considered,
including establishing clear and decisive financial governance, implementing ethics and
conflict of interest policies, designing and implementing appropriate financial controls,
conducting annual independent audits of financial statements, ensuring transparency of
financial data and performance, and staying informed about emerging issues related to
non-profit organizations.

David (2009) emphasized that when the leadership of a church is strong and effectively
manages and controls the lower-level structures using proper mechanisms, resources
are appropriately utilized and maintained in accordance with established procedures.
This highlights the importance of strong leadership and control mechanisms in ensuring
the proper utilization of resources within the church.

Financial Reporting and Monitoring of Religious Organizations

Raymond et al. (2015) discussed the issue of financial reporting compliance among
religious organizations in the United States. They referred to a study by Blackwood,
which revealed that Americans contributed approximately $335 billion to charitable
organizations in 2014, with religious organizations receiving 31% of these funds
(equivalent to $104 billion), making them the largest beneficiaries. However, unlike
other public charities, religious organizations are automatically exempt from annual
compliance reporting to the IRS. This exemption is based on the protection of religious
freedom, which exempts such organizations from government scrutiny. The authors
argued that as religious organizations grow in complexity, particularly in the "mega
church" sector, it may be necessary to re-evaluate this exemption and consider
implementing compliance reporting requirements.

Raymond et al. (2015) further highlighted the role of watchdog institutions, such as The
Evangelical Council for Financial Accountability (ECFA), in assisting churches and
religious organizations in improving transparency and accountability in their activities.
Churches can seek accreditation from the ECFA by demonstrating compliance with its
seven standards, including responsible stewardship, governance, financial oversight
(including the preparation and publication of audited or reviewed financial statements),
and compliance with applicable laws. Another watchdog institution mentioned is the
Trinity Foundation, a religious, charitable, and educational nonprofit organization that
monitors and investigates religious fraud within religious organizations.
Internal Controls in Financial Management of Religious Organizations
Mason (2009) discusses the importance of internal controls in managing the finances of
religious organizations. He emphasizes that since the administration of church finances
is considered a sacred trust, it is crucial for church leaders to establish a robust system

17
of internal controls. The church leader holds the responsibility for overall stewardship of
the church, making strong internal controls essential. Duncan et al. (1999) further assert
that the objectives of an internal control structure apply to all entities, including
churches, and are vital. These objectives encompass providing reliable financial
statements, safeguarding assets, promoting adherence to management's policies and
procedures, and enhancing operational efficiency and effectiveness.

In the study conducted by Duncan et al. (1999), it is highlighted that inadequate internal
controls can impede the management responsibilities of church officers and employees.
Insufficient controls can place them in a position where they may face challenges in
fulfilling their duties and responsibilities.
Chapter Three
Research Design and Methodology

Study Area and Approach

According to Catherine (2002), qualitative research focuses on exploring attitudes,

behaviors, and experiences to obtain in-depth opinions from participants. This type of
research generates statistics using scale survey research methods, such as
questionnaires or structured interviews. On the other hand, quantitative research
involves systematic recording of numerical data through measurement processes.
Neither qualitative nor quantitative research is inherently superior to the other; they
simply have different strengths and weaknesses. The concept of "triangulation" is
applied when both qualitative and quantitative approaches are combined in inquiry.
Many researchers consider this approach beneficial as it helps mitigate the limitations of
each individual method (Catherine, 2002).

In this study, the researcher will adopt a triangulation approach by utilizing both
qualitative and quantitative research methods. The purpose of combining data from
both approaches is to gain a comprehensive understanding of the research problem by
incorporating numeric values from quantitative research and the detailed insights from
qualitative research. This approach also helps reduce the risk of errors associated with
relying solely on one method.

Quantitative data will be employed in this research to review financial statements,

including the consolidated income statement and consolidated balance sheet. The aim
was to explore the relationship between the number of members and income collection,
as well as examining manuals and published documents of the EKHC (Ethiopian Kale
Hiwot Church).

18
For both qualitative and quantitative data, self-administered questionnaires were used
in this research. The questionnaires were distributed to finance directors and leaders of
church units, as well as central office officials. The questionnaire facilitated the analysis
of five elements used to assess financial management practices in the church:
accounting records, financial policy, financial planning, financial reporting and
monitoring, and internal controls.
Sample Size and Sampling Method

According to Catherine (2005), conducting a study that covers the entire population can
be challenging, which is why sampling is often employed. Sampling involves selecting a
representative group from the target population to draw conclusions. In this study, a
non-probability sampling method called purposive sampling was used. Purposive
sampling is commonly used in qualitative research to identify and select cases that
provide rich information related to the phenomenon of interest (Patton, 1990). It
involves identifying and selecting individuals or groups who possess significant
knowledge or experience regarding the phenomenon (Cresswell et al., 2010).

Cresswell et al. (2010) further highlight that purposive sampling is particularly

appropriate in case study analysis, where relevant individuals are identified and studied
in depth. In the context of this research, the researcher examined the consolidated
financial report of the church for the year 2016. Among the 35 different church units, 16
synods (CS, WS, NCES, BDS, GJS, SES, SCES, SCS, SWS, CES, WWBS, IBS, SWBS, SS, CGS)
and 4 joint programs (MYS, PIIC, YDCS, CO) were selected as pioneers. These units have
been operating as established entities for over 15 years and have larger financial
capacities. They have also initiated various investments to replace foreign aid with
locally raised funds. The remaining 16 units were chosen from the 20 available options
and are relatively newer in terms of financial management.

Additionally, the selection procedure will consider familiarity with financial management
practices and extensive experience in managing both external and internal sources of
funds. Based on these criteria, the researcher purposefully samples 20 church units for
this study.
Data Collection Methods and Instruments

This study utilizes both primary and secondary data. Primary data will be collected
through the use of close-ended and open-ended questionnaires developed by the
researcher. Some of the questionnaires are adapted from Ozotambgo (2009). On the
other hand, secondary data will obtain through the review of financial statements,
manuals, resolutions, and other relevant documents of the EKHC (Ethiopian Kale Hiwot
Church).

19
The research aimed to assess the quality of financial management practices in the
church by examining various elements of financial management. These elements include
proper accounting record keeping, financial planning, and the presence of a well-
developed financial policy, financial reporting, and a strong internal control system.
Questionnaire

Questionnaires are to be distributed to 20 finance officers and 20 leaders of the selected

church units. Finance officers will be chosen as respondents because of their familiarity
with the elements of financial management, their knowledge of financial decision-
making, and their understanding of the income and expenditures in their respective
branches. According to the church constitution, finance heads are part of the decision-
making bodies in the management committee. The leaders who were contacted
included presidents, vice presidents, treasurers, executive secretaries of the central
office or directors of joint programs.

The researcher employs a mixed questionnaire format, consisting of both close-ended

and open-ended questions. Including open-ended questions provided an opportunity for
respondents to express their thoughts more freely. Mixed questionnaires offer several
advantages, with notable flexibility being one of the key benefits (Yin, 2009).

Regarding the close-ended questions, respondents were asked to indicate their level of
agreement on a five-point scale, using the following ratings: Strongly agree (SA; 5),
agree (A; 4), neutral (N; 3), disagree (D; 2), and strongly disagree (SD; 1). In this scale, a
score of 5 or 4 indicates that the item is perceived as essential, while a score of 3 or 2
suggests that the item is considered fairly important, but not essential. A score of 1
indicates that the item could be disregarded as unimportant (Joseph et al., 2003).

As for the open-ended questions, respondents will be asked to provide free-form

responses to inquiries that required their opinions or any other relevant information
they deemed useful, as determined by the researcher.
Interviews

In addition to the questionnaires, semi-structured interviews will be conducted with two

leaders from the central office. The purpose of these interviews is to validate certain
facts that the investigator already believed to be established (Yin, 2009). The semi-
structured nature of the interviews allowed for flexibility during the discussions,
enabling the exploration of unexpected lines of inquiry that may arise during the study.

Document Review

20
The researcher will review financial statements, manuals, resolutions, and policies to
gain a deeper understanding of the written records pertaining to the financial
management practices of the EKHC and the relationship between members'
contributions and the number of members. The document review will serve as a means
to triangulate the data collection from the questionnaires and interviews.

Data Analysis Method

To fulfill the stated objectives, the data collected through questionnaires are to be
analyzed using descriptive statistics with the assistance of SPSS software. Descriptive
analysis will be performed using this software package, which provided insights into the
characteristics of the data, including measures such as the mean, spread, and other
descriptive aspects (Leedy, 1989). The data will be then further analyzed using the
Statistical Package for Social Sciences (SPSS) software (version 20) and will be presented
through tabulation and graphs. SPSS will be served as the primary tool for summarizing
the data. The quantitative data will help to complement the interpretation of the
qualitative data. In summary, the analysis of quantitative data and the interpretation of
qualitative data will be combined to seek convergence among the results (Creswell,
2003).

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