The Influence of Internal Corporate Governance on Bank Credit Risk: An Empirical Analysis for Tunisia

Abstract

Bank governance has received special attention after the financial crises of 2008 that have occurred. Nevertheless, the literature presents seemingly conflicting evidence on the implications of governance for bank credit risk quality. The purpose of this article is to examine the impact of corporate governance variables of board size, board composition and board gender diversity on credit risk. Panel data regression analysis is applied to a sample of listed banks from the Tunisia during the 2000-2014 period. We improve the robustness of our results by employing four measures of credit risk commonly used in the literature as the dependent variable in our study. Our results show that the higher the number of board members, the lower the quality of credit is and, consequently, the credit risk increases. The concentration of power within the board of directors may increase bank risks when the cumulative functions of CEO and chairman negatively affect the weight of the board and make it less effective. Also, our findings highlight the importance of board independence and the presence of foreign directors in enhancing credit quality. Nevertheless, we document that the NPLs ratio increases and NPL coverage ratio decreases in the presence of state directors. Finally, we find evidence that the presence of a woman on board influences credit risk, as it is argued that female directors may differ from male directors with regard to their risk attitude, and this, in turn, may influence board's monitoring ability and its decision-making process. Therefore, this evidence provides beneficial information for supervising authorities, stakeholders and academics, and banks should take this into account during the composition of their board of directors.

Respond OJK Regulation Number 55: Can Good Corporate Governance Affect Banks Credit Risk in Indonesia?

“…With the increasing number of members of the Board of Directors, the company's decision making and crucial policies related to risk management will be more effective and efficient (Aryani, 2019). This research is in line with Aryani (2019); Lu & Boateng (2018); Moussa (2019) and Setyawati (2016).…”

“…In line with these regulations, various previous studies have explored the influence of various determinants in corporate governance mechanisms on credit risk. Some of the attributes in good corporate governance that most of the earlier researches are interested in are the Board of Commissioners, Independent Commissioners and the Board of Directors (Saadaa, 2017); (Lu & Boateng, 2018); (Moussa, 2019); (Switzer & Wang, 2013); (Annisa & Wardhani, 2017); (Aryani, 2019); (Atika et al, 2020); (Ana et al, 2021) (Maria, 2014); (Mathew et al, 2017); (Setyawati, 2016) and (Widiastuty, 2018). Most of these studies formulate evidence that if a company has a large enough number of members of the Board of Commissioners, Independent Commissioner or Board of Directors, then the company has sufficient strength to manage credit risk so that it becomes lower.…”

The Interactional Relationships Between Credit Risk, Liquidity Risk and Bank Profitability in MENA Region

“…Some recent studies have reported that credit risk could be influenced by corporate governance. For example, to investigate the link between internal governance mechanism and credit risk, Ben Moussa (2019) used a sample of listed banks observed during the 2000–2014 period. The empirical results show that the higher board size and the duality are associated with lower quality of credit that increases credit risk.…”

Systematic and Unsystematic Determinants of Sectoral Risk Default Interconnectedness

“…According to a report by Standard & Poor’s (2011), the Tunisian banks have ‘the appetite for high risk’. Subsequently, Moussa ( 2019 ) among others, found that Tunisian banking sector remains characterized by a high credit risk compared to the Middle East-North Africa (MENA) countries. In a related report by the WordBank ( 2014 ), shows evidence that the ultimate controller of three largest government-owned banks still imposes great influence on external governance mechanisms.…”