Credit Risk Management: Evidence of Corporate Governance in Banks of Pakistan

  • Damian Honey Department of Commerce, Forman Christian College (A Chartered University), Lahore, Pakistan https://orcid.org/0000-0003-1741-494X
  • Rubeena Tashfeen Department of Finance, School of Business and Economics, University of Management and Technology, Lahore, Pakistan https://orcid.org/0000-0002-2423-5539
  • Saqib Farid Department of Finance, School of Business and Economics, University of Management and Technology, Lahore, Pakistan
  • Ramla Sadiq Department of Finance, School of Business and Economics, University of Management and Technology, Lahore, Pakistan
Keywords: Corporate governance, loan loss provisions, banking sector of Pakistan, OLS regression

Abstract

The paper evaluates the impact of corporate governance on the Loan Loss Provisions (LLPs) of banks. Linear regression model is applied on a strongly balanced panel data obtained from eighteen commercial banks of Pakistan for the years 2011-2016. The study considers several corporate governance mechanisms such as independent directors, board of directors, Chairman-CEO duality, attendance in board meetings etc. and takes LLPs as proxy for credit risk. Our findings suggest that with reference to Pakistani banks, corporate governance does have an influence on loan loss provisioning. The results clearly indicate that larger boards in Pakistani banks provide ineffective governance through increased loan loss provisioning, while independent directors and director attendance at meetings do not seem to matter. On the other hand where one strong family member dominates, the CEO-Chairman duality appears to induce a reduction in the percentage of LLPs and therefore causes decreases in credit risk. This reflects that the separation of these two positions could lead to higher accountability and responsibility, where there is higher transparency with segregation of duties. The paper concludes that effective corporate governance plays an important role in credit risk management in banks and recommends that regulations are needed to further endorse the validity of CEO-Chairman duality in Pakistan.

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Published
2019-02-28
How to Cite
Honey, D., Tashfeen, R., Farid, S., & Sadiq, R. (2019). Credit Risk Management: Evidence of Corporate Governance in Banks of Pakistan. Journal of Finance and Accounting Research, 1(1), 1-18. https://doi.org/10.32350/JFAR.0101.01
Section
Articles