AbstractThe purposeof this paper is to examine the impact of corporate governance characteristicson financial performance of banks in Bangladesh.
The sample includes selectedstate owned and private commercial banks in Bangladesh in period of 2011-2016. Based on the findings of this paper it appears thatfor selected state owned banks, mostinfluencing variable is board meeting frequency and most uninfluential variableis audit meeting frequency for both the case of ROA and ROE. In case ofselected private commercial banks, most influencing variable for ROA is boardmeeting frequency and most uninfluential variable is audit committee meetingfrequency. On the other hand most influencing variable for ROE is board sizeand most uninfluential variable is audit committee meeting frequency.Correlation of coefficient for state owned banks are at expected level for bothROA and ROE but for private commercial banks it is at moderate level. Key words: Corporate governance, financial performance, Banks inBangladesh, Hypothesis test,ROA, ROE.
IntroductionCorporategovernance has evolved and grown significantly in the last decade in Bangladesh(Claessens and Yortuglo, 2012). Followingthe Enron Collapse there has been an increased emphasis on various aspects ofcorporate governance, including its disclosure aspect. Ever since the globalfinancial crisis the world had seen that numerous banks went bankrupt due toasymmetric information which of course linking to corporate governance (Gillanand Martin, 2003). Management has the incentive to pursue their own objectiveat the expense of shareholders. There isconflict of interest between owners and managers (De and Nandwani, 2015). Thispaper deals with the various corporate government arrangements which are vitalpart for any bank set up.
Effectivecorporate governance can ensure maximization of shareholders value, utilizationof banks resources, enabling to access to capital, improving investors’confidence. Good governance is ensured through strong internal structure whichthat accountability ultimately transparency and results in ability to responsein adverse market condition. The ability to response in adverse marketcondition is related to manager’s efficiency too.Inthe context of Bangladesh, bank is the most dominant form of intermediarybetween borrowers and lenders. In the event of vulnerable capital market, thegrowth of our economy remains a lot dependent on banks.
But recent scams in thebanking industry has pointed out finger to the corporate governance practice inthe banks. The scenario is more vivid for the state owned banks (Shah, 2016). This paper triesto focus on corporate governance from a different dimension that if it has anyinfluence on banks financial performance. Accordingly the paper describes the presentcondition of corporate governance in the banks in Bangladesh. Particularly ifthere exist any relationship between corporate governance and banks financialperformance.Objectives of the studyThemain objective of this research paper is to identify the impact of corporategovernance on selected state owned and private commercial banks’ financialperformance in Bangladesh. Specifically the research looks fora. Whether there is any relationship between corporategovernance components and financial performance of selected banks in Bangladesh.
b. Compares the financial performance of selected state ownedand private commercial banks based on their corporate governance compliances.1.2 Hypothesis of the studyAccordinglythe null hypothesis of the study as developed belowH0:There is no impact of corporate governance on banks’ financial performance.
H0a: There is no impact of corporategovernance on ROA. H0b: There is no impact of corporategovernance on ROE.H1:There is impact of corporate governance on banks’ financial performance. H1a: There is impact of corporategovernance on ROA. H2b: There is impact of corporate governanceon ROE.1.3 Limitation of the studyNothingis flawless in the world. This paper suffers from some limitations which arementioned belowa) The sample size was relatively small as compared to thetotal population.
b) For secondary data (Annual Report) would be manipulated bythe terms window dressing. Using the ratios ROA and ROE to calculate financial performancehas many shortcomings. c) Getting access at sensitive information is restricted whichmakes the information more valuable.2.0 Literature reviewInrecent years a lot of emphasis has been given in corporate governance.Especially after the global crisis in the year 2008 the magnitude of emphasishas increased. The reflection of this has been observed in Bangladesh too.
Whenlooked at the banking industry, it is found that particularly in private sectorthe issue of corporate governance has taken special care of. On the contrary inpublic sector, the corporate governance is yet to be established in a propermanner. Mahmood & Islam (2015) identifies issues that top management influence as well as politicalpressure exists in banking sector which affect the lending decisions.
Corruptedbankers and dishonest officials were found associated with several scams.Proper documentation is mandatory but sometimes banks show flexibility in thisregards and provide extra benefits to the clients. Selection of wrong borrower,unhealthy competition among the banks, fund diversion, inefficient auditing andinsufficient collateral cause major harm to the banks.
Sometimes banks do notfollow the rules and guidelines related with corporate governance provided byBangladesh Bank properly which were actually designed to protect themselves andoperate business smoothly. Their findings are closely on insufficient execution of creditor’s rightshas raised the numbers of classified as well as non-performing loans andInadequate enforcement of bankruptcy law has made it nearly impossible for acompany to close or declare bankrupt which need to be revised for winding up orbankruptcy process specifically for overdue indebtedness reasons. Now a days itis clear that without proper corporate governance issues any institution cannotget the ultimate success. Because tosurvive in the market goodwill is a major issue for companies. Rana Al Mosharraf (2015) published his work under the name of “Relativeconsequences due to absence of corporate governance in nationalized banks andprivate commercial banks in Bangladesh. In this study 3 state owned banks and 3 three private commercial banks hadbeen