Credit Risk Management: Evidence of Corporate Governance in Pakistan Banks

Damian Honey, Rubeena Tashfeen

Abstract


The paper evaluates the impact of corporate governance on loan loss provisions of banks. Linear regression model is applied on a strongly balanced panel data, obtained from eighteen commercial banks of Pakistan over the period 2011-2016. The study considers several corporate governance mechanisms such as independent directors, board of directors, chairman-CEO duality, attendance in board meetings and takes loan loss provisions as a proxy for credit risk. Our findings suggest that in terms of Pakistani banks corporate governance does have an influence on loan loss provisioning. The findings clearly suggest that larger boards in Pakistani banks provide effective governance through increased loan loss provisioning, while independent directors and director attendance at meetings do not seem to matter. Surprisingly, the CEO-Chairman duality appears to induce a reduction in percentage of provision and therefore increase in credit risk. This may reflect that separation of the positions could lead to lower accountability and responsibility, where blame may be shifted onto the other. It appears that the division of positions results in higher credit risk. The paper concludes that effective corporate governance plays an important role in credit risk management in banks and recommends that regulations may need to further examine the validity of CEO-Chairman duality in Pakistan.

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