HOW CORPORATE GOVERNANCE, CREDIT RISK AND PERFORMANCE LINK TOGETHER?

Suhadak ,Sri M Rahayu,Pitoyo Nurtrontong,Siti R Handayani

doi:10.21776/ub.ijabs.2021.29.3.1

Abstract

Purpose: In this study, research was conducted to compare link corporate governance, credit risk, and performance on conventional banking and Islamic banking in Indonesia. Methodology: This research used a quantitative method with Generalized Structured Component Analysis (GSCA) for testing and analyzing. This study uses conventional and sharia banking data in Indonesia for the period 2012-2016 which are listed on the Indonesia Stock Exchange and the Indonesian Financial Services Authority. Finding: The result of the research showed that in conventional banking, profitability is influenced by the link together of corporate governance, liquidity and credit risk, while in Islamic banking, profitability is influenced by the link together of liquidity and credit risk. Practical Implication: First, the existence and number of the Board of Commissioners and Audit Committee in conventional banking are able to support the achievement of performance. This should be maintained and improved. Second, supervision is needed to manage the distribution of sharia financing. Islamic banking has two indicators that play a role in the formation of credit risk which has the potential to reduce liquidity and profitability. Third, it is necessary to trade-off for the management of Islamic banking in managing their liquidity because the increase in liquidity has the potential to reduce profitability. Novelty: The first study compares the linkage between corporate governance, credit risk and performance in conventional and Islamic banking in Indonesia using GSCA. Keywords: corporate governance, credit risk, performance

Highlights

Discussion about corporate governance cannot be separated from the agency theory, where there is an agency problem between managers and principals
Agency problems that occur in banks can be broader, between managers and principals, and with depositors, debtors and regulators, even regulators have a strong influence on corporate governance in banking (Ciancanelli & Reyes-Gonzalez, 2005; Macey & O’Hara, 2003; Marcinkowska, 2012)
IMPACT CORPORATE GOVERNANCE ON PROFITABILITY Based on above results, the research showed that corporate governance had no significant effect toward profitability in islamic banking and wasn’t relevant to previous research by Nurtrontong et al, (2018) in conventional banking

Summary

Introduction

Discussion about corporate governance cannot be separated from the agency theory, where there is an agency problem between managers and principals. Agency problems that occur in banks can be broader, between managers and principals, and with depositors, debtors and regulators, even regulators have a strong influence on corporate governance in banking (Ciancanelli & Reyes-Gonzalez, 2005; Macey & O’Hara, 2003; Marcinkowska, 2012). With regulations regarding good corporate governance and risk management, regulator hope can assist Islamic banking in achieving performance while still considering the risk limits and interests of all stake holders as well as conventional banking. This has attracted the interest of researchers to examine more deeply on islamic banking and compare it with conventional banking to continue previous research by Nurtrontong et al, (2018) on conventional banking. The comparison between islamic and conventional banking with the collaboration of the three components using GSCA is a novelty in this study

Methods

Discussion

Conclusion