Board Composition and Non-Performing Loans among Commercial Banks in Tanzania
Abstract
Objective – This paper investigates the effect of board composition on non-performing loans (NPLs) for a sample of 31 commercial banks in Tanzania.
Design/methodology – A quantitative study methodology was employed using annual data covering the period of 2011-2020. The authors used a one-step generalised method of moments (GMM) approach to estimate the effect of board composition on the percentage growth of NPLs in Tanzania.
Results – The paper concludes that the number of board members with financial expertise, the board size, the audit committee, and the presence of female directors significantly negatively impact the bank’s NPLs and hence aid in lowering the bank’s NPLs. In contrast, an increase in board size, lagged NPLs, credit committees, independent directors, board meetings, and advances in deposit ratio significantly increases the level of NPLs, which is consistent with the agency theory.
Research Limitations/Implications – Inconsistencies in the reported variables from various databases during the study and afterwards, as well as a lack of data for some banks in specific years. Shareholders should actively establish good corporate governance in the commercial banks (CBs) they own to reduce NPLs at an acceptable rate of less than 5%. Also, the Central Banks of Tanzania should encourage CBs to implement effective corporate governance practices by enacting rules and regulations to reduce NPLs. To minimize loan losses, authorities should impose micro-prudential supervision on commercial banks’ lending behavior.
Novelty/Originality – The paper includes bank size and ownership using a one-step difference and one-step system (GMM) approach to measure the effect, which is usually not the case with most studies.Keywords
Full Text:
PDFReferences
Adusei, C. (2018). Determinants of Non-Performing Loans in the Banking Sector of Ghana Between 1998 and 2013. Asian Development Policy Review, 6(3), 142–154. https://doi.org/10.18488/journal.107.2018.63.142.154
Ahmad, M. (2019). Role of Board Size in the Non-performing Loans of Cambodian Banking Industry. Asian Journal of Economics, Finance and Management, 84-87
Alaryan, L. A. (2017). Exploring the Role of Board Characteristics on Enhancing Financial Performance of Jordanian Listed Companies. International Journal of Economics and Finance, 9(7), 99. https://doi.org/10.5539/ijef.v9n7p99
Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29–51. https://doi.org/10.1016/0304-4076(94)01642-D
Armeanu, D. Ş., Vintilă, G., Gherghina, Ş. C., & Petrache, D. C. (2017). Approaches on the correlation between the board of directors and risk management in resilient economies. Sustainability (Switzerland), 9(2). https://doi.org/10.3390/su9020173
Becht, M., Bolton, P., & Ro, A. (2012). Why bank governance is different. 27(3), 437–463. https://doi.org/10.1093/oxrep/grr024
Biekpe, N. (2011). The Competitiveness of Commercial Banks in Ghana. African development review, 23(1), 75–87.
BOT (2020). Bank of Tanzania Annual Report. BOT search engine http://www.mondaq.com/x/684574/financial+service/Bank+Tanzania+Circular+ on+NPLs. The site was visited on 26/05/2022.
Boulila Taktak, N., Boudriga, A., & Ajmi, D. N. (2010). Loan loss reserves of weakly provisioned banks: evidence from major Tunisian banks. Afro-Asian Journal of Finance and Accounting, 2(1), 1-21.
Brick, I. E., & Chidambaran, N. K. (2010). Board meetings, committee structure, and firm value. Journal of Corporate Finance, 16(4), 533–553. https://doi.org/10.1016/j.jcorpfin.2010.06.003
Choi, I. (2001). Unit root tests for panel data. Journal of International Money and Finance, 20(2), 249–272. https://doi.org/10.1016/S0261-5606(00)00048-6
Chou, H., Chung, H., & Yin, X. (2013). Attendance of board meetings and company performance : Evidence from Taiwan. Journal of Banking and Finance, 37(11), 4157–4171. https://doi.org/10.1016/j.jbankfin.2013.07.028
Ciancanelli, P., Antonio, J., & Gonzalez, R. (2000). Corporate Governance in Banking: A Conceptual Framework. Available at SSRN 253714.
Dao, L. K. O., Nguyen, T. Y., Hussain, S., & Nguyen, V. C. (2020). Factors affecting non-performing loans of commercial banks: The role of bank performance and credit growth. Banks and Bank Systems, 15(3), 44–54. https://doi.org/10.21511/bbs.15(3).2020.05
David, G., & Ali, M. (2020). The University of Birmingham Non-performing loans, moral hazard and Chinese commercial banking system regulation. Journal Of Banking Finance. https://doi.org/10.1016/j.jbankfin.2015.11.010
Doğan, B., & Ekşi, İ. H. (2020). The effect of the board of directors characteristics on risk and bank performance: Evidence from Turkey. Economics and Business Review, 6(3), 88–104. https://doi.org/10.18559/ebr.2020.3.5
Doldor, E., Vinnicombe, S., Gaughan, M., & Sealy, R. (2012). Gender diversity on boards: The Appointment Process and the Role of Executive Search Firms. Equality and Human Rights Commission Research Report, 85, 1-98.
Fama, E. F., & Jensen, M. C. (1983). Separation of Ownership and Control. Journal of Law and Economics 26(2), 301-32.
Fanta, A. B. (2013). Corporate Governance and Impact on Bank Performance. Journal of Finance and Accounting, 1(1), 19. https://doi.org/10.11648/j.jfa.20130101.12
Fernandes, N., & Fich, E. M. (2009). Does Financial Experience Help Banks During Credit Crises? Unpublished working paper, Drexel University.
Ghosh, S., & Ansari, J. (2018). Board characteristics and financial performance: Evidence from Indian Co-operative banks. Journal of Co-Operative Organization and Management, May, 0–1. https://doi.org/10.1016/j.jcom.2018.06.005
Haan, J. De, & Vlahu, R. (2016). Corporate Governance Of Banks : A survey. Journal of Economics Survey, 30(2), 228–277. https://doi.org/10.1111/joes.12101
Ho, P. H., Huang, C. W., Lin, C. Y., & Yen, J. F. (2016). CEO overconfidence and financial crisis: Evidence from bank lending and leverage. Journal of Financial Economics, 120(1), 194–209. https://doi.org/10.1016/j.jfineco.2015.04.007
Hu, J. L., Li, Y., & Chiu, Y. H. (2004). Ownership and non-performing loans: Evidence from Taiwan’s banks. Developing Economies, 42(3), 405–420. https://doi.org/10.1111/j.1746-1049.2004.tb00945.
Isik, O., & Riza Ince, A. (2016). Board Size, Board Composition and Performance: An Investigation on Turkish Banks. International Business Research, 9(2), 74. https://doi.org/10.5539/ibr.v9n2p74
Islam, M. N. (2020). The impact of board composition and activity on non-performing loans. Awards for Excellence in Student Research and Creative Activity, 7, 1-24. https://thekeep.eiu.edu/lib_awards_2020_docs/7
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm : Managerial behavior, Agency costs, and ownership structure. Journal of financial economics 3(4), 305–360.
Kofi Akwaa Sekyi, E. K., Moreno Gené, J., Miglietta, F., & Roncone, V. (2018). How do board characteristics and insider ownership affect European banking’s non-performing loans (NPLS)? New trends in accounting and management, 2018, núm. 14, p. 1-66.
Lee, C., & Chung, K. H. (2016). Antitakeover Statutes and Internal Corporate Governance. Corporate Governance: An International Review, 24(5), 468–489. https://doi.org/10.1111/corg.12156
Liang, Q., Xu, P., & Jiraporn, P. (2013). Board characteristics and Chinese bank performance. Journal of Banking and Finance, 37(8), 2953–2968. https://doi.org/10.1016/j.jbankfin.2013.04.018
Mamatzakis, E., Zhang, X., & Wang, C. (2017). How the corporate governance mechanisms affect bank risk-taking. Munich Personal RePEc Archive. Online at https://mpra.ub.uni-muenchen.de/78137/MPRA Paper No. 78137, posted 07 Apr 2017 10:13 UTC
Marius Andries, A. M., Mehdian, S. M., & Stoica, O. (2017). The Impact of Board Gender on Bank Performance and Risk in Emerging Markets. SSRN Electronic Journal, 1–21. https://doi.org/10.2139/ssrn.3041484
Martin Lipton, B., Lorsch, J. W., & Messrs, U. (1992). “A Modest Proposal for Improved Corporate Governance” The Business Lawyer:55-97. Pacific Rim Property Research Journal, 14(1): 1-16.
Pathan, S. (2009). Strong boards, CEO power and bank risk-taking. Journal of Banking and Finance, 33(7), 1340–1350. https://doi.org/10.1016/j.jbankfin.2009.02.001
Petra, S. T. (2005). Do outside independent directors strengthen corporate boards? Corporate Governance, 5(1), 55–64. https://doi.org/10.1108/14720700510583476
Roberts, J., McNulty, T., & Stiles, P. (2005). Beyond agency conceptions of the work of the non-executive director: Creating accountability in the boardroom. British Journal of Management, 16(SPEC. ISS.), S5–S26. https://doi.org/10.1111/j.1467-8551.2005.00444.
Saha, R., & Chandra Kabra, K. (2019). Does corporate governance influence firm performance? Evidence from India. Economics and Business Review, 5(4), 70–89. https://doi.org/10.18559/ebr.2019.4.4
Selma Messai, A., & Jouini, F. (2013). Micro and Macro Determinants of Non-performing Loans. International Journal of Economics and Financial Issues, 3(4), 852–860.
Shakir, R. (2011). Board Size, Board Composition And Property Firm Performance.
Tarchouna, A., Jarraya, B., & Bouri, A. (2017). How to explain non-performing loans by many corporate governance variables simultaneously ? A corporate governance index is built for US commercial banks. Research in International Business and Finance. https://doi.org/10.1016/j.ribaf.2017.07.008
Terjesen, S., & Singh, V. (2008). Female presence on corporate boards: A multi-country study of environmental context. Journal of Business Ethics, 83(1), 55–63. https://doi.org/10.1007/s10551-007-9656-1
Wagner, A. F. (2011). Board independence and competence. Journal of Financial Intermediation, 20(1), 71–93. https://doi.org/10.1016/j.jfi.2010.06.002
Warue, B. N. (2013). The effects of bank-specific and macroeconomic factors on non-performing loans in commercial banks in Kenya: A comparative panel data analysis. Advances in Management and Applied Economics, 3(2), 135.
DOI: https://doi.org/10.24815/jaroe.v6i1.31822
Article Metrics
Abstract view : 0 timesPDF - 0 times
Refbacks
- There are currently no refbacks.
Published by:
Accounting Department
Economics and Business Faculty
Syiah Kuala University
Kopelma Darussalam, Banda Aceh, Indonesia - 23111
E-ISSN: 2621-1041
Journal of Accounting Research, Organization and Economics by Accounting Department of Economics and Business Faculty of Syiah Kuala University is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Based on a work at http://www.jurnal.unsyiah.ac.id/JAROE/index.