How does internal governance affect banks\u2019 financial stability? Empirical evidence from Egypt

Mohamed Marie,Hany Kamel,Israa Elbendary

doi:10.1057/s41310-021-00110-8

Mohamed Marie, Hany Kamel + Show 1 more

Open Access

https://doi.org/10.1057/s41310-021-00110-8

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Abstract

This paper investigates whether internal governance mechanisms were associated with the financial stability of Egyptian banks over the period 2010–2019. To this end, a GMM regression analysis was employed using 252 firm-year observations. The results, in general, indicate that the level of banks’ financial stability is positively associated with board size, board meetings, and board gender. In contrast, the results show that board education and the ownership of shares by directors are negatively associated with banks’ financial stability. More interestingly, our results demonstrate that higher financial stability is significantly associated with lower board independence, the presence of CEO duality, and fewer audit committee meetings. These striking results can be attributed to the argument that the presence of independent directors on the board may reduce the CEO’s willingness to share information with board members, causing a high level of uncertainty in the decision-making process, which ultimately leads to a reduction in the financial stability of their bank.

Highlights

It is well-documented that a bank can be financially stable when it meets its commitments with regard to investment support, the establishment of a deposit protection fund, and the application of strong corporate governance mechanisms, among other things (Uhde and Heimeshoff 2009)
Box 2713, Doha, Qatar led many international institutions to focus on the need for the banking sector to strengthen its internal governance framework. This increased attention is a reflection of a general consensus among academics and practitioners that the origin of this financial crisis may be attributed to a number of shortcomings that act to limit the effectiveness of the existing paradigm of corporate governance in mitigating the effects of the financial irregularity or fraud (Bai and Elyasiani 2013; Kirkpatrick 2009)
This greatly motivated us to investigate whether internal governance mechanisms are associated with the financial stability of banks operating in the context of Egypt, which is currently keen to attract more foreign investment and form many international joint ventures and alliances

Summary

Introduction

It is well-documented that a bank can be financially stable when it meets its commitments with regard to investment support, the establishment of a deposit protection fund, and the application of strong corporate governance mechanisms, among other things (Uhde and Heimeshoff 2009). A review of the literature on the association between corporate governance and the level of financial stability in the banking sector reveals the scarcity of research on this topic in the developing economies This greatly motivated us to investigate whether internal governance mechanisms are associated with the financial stability of banks operating in the context of Egypt, which is currently keen to attract more foreign investment and form many international joint ventures and alliances. Our present paper contributes to the extant literature on banks’ governance in two specific ways It provides the first evidence of the way in which internal governance mechanisms affect the levels of financial stability in Egyptian banks, using a hand-collected dataset that contains details about several aspects of their boards of directors, ownership structures, and audit committees. "Conclusions" section concludes and suggests some avenues for future research

Literature review and hypotheses development

Conclusions

Findings

Compliance with ethical standards