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The corporate scandals such as Enron, Global Crossing, Tyco,
and World Com have shaken the Investors' confidence and
made it difficult for companies to raise equity from the stock
market (Agrawal, 2005).
The health of the financial system has vital importance and role
in the country (Das & Ghosh, 2007) as the failure can disrupteconomic development of the country (Abor, 2007).
Corporate governance was one of the factors contributing to
the financial crises that swept Asia beginning in 1997 (Mitton,
2002) (Lemmon & Lins, 2003). On the same way, a global financial challenge in late 2007
raised various question to settle financial sector stability and
which become a central challenge to bank regulators and
supervisors (Nepal Rastra Bank, 2010).
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Corporate governance issues are getting special importance in transition
economies, as these countries do not have the long-established financialinstitution infrastructure to deal with corporate governance issues (McGee,
2010).
Meanwhile, the given infant stage of securities market development and
gradual transformation of the external sources of corporate finance from
bank to market, Nepal is passing through a transitional phase of institutionaland governance reform (Pokhrel, 2007).
The relationship between bank governance and its performance could be
studied by investigating the impact of element of corporate governance
(namely board size, board independence, audit committee size and audit
diligence and ownership structure) on bank performance. Several organizations like OECD, the World Bank, the IFiC , U.S. Commerce
and State Departments have popped up in recent years to help adopt and
implement good corporate governance principles (McGee, 2010).
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Nepalese Organization are mostly family owned and operated by
inexperienced family members holding positions like mangers, accountantsand other senior positions (Pradhan & Adhikari, 2009). Ultimately, the high
concentration of corporate ownership structure and dominance of family
business groups in corporate affairs have become major constraints in
exercising good corporate governance (Pokhrel, 2007).
Nepalese financial sectors were shocked when Nepal development bank went into liquidation in 2009,
NRB's management takeover action against Nepal Bangladesh Bank in 12/11/2006, action
against
Gorkha Development Bank for Corporate Governance in 2011,
Paschimanchal Development Bank's CEO suspension for lack of Corporate Governance in
2011 ,
action against People's Finance limited in 2011,
action against Nepal Share market limited in 2011,
activation of 'lender of last resort' measure in favor of Vibor Development Bank to solve
the liquidity crisis in 2011.
Kamal Gyawali Case
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The major objective of this research study is to
determine the impact of Board Composition
(Board Size, No. of Public Director,
Professional Director, and Female Director) on
firm performance (ROA & ROE) in Nepalese
Banks.
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Board Composition
BSIZE = Board size
PRODIR = Professional
Director
PDIR = No of Public
DirectorBDIVERSITY = No of
Female Directors
ROE = Return on
Equity
ROA = Return On
Assets
H1
Figure 1. The Research Model
CONCEPTUALFRAMEWORK
CG VariablesFirm Performance
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H1 Board size is negatively related to bank performance.
H2
Professional Director/ Board independence is
positively related to bank performance.
H3
Board Diversity is positively related to bankperformance.
H4
Public Director is positively related to Bankperformance
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S.N. Name Operation
1 ABIL Bank Limited (NABIL) 1984/07/16
2 epal Investment Bank Limited (NIBL) 1986/02/27
3 Standard Chartered Bank Nepal Ltd. (SCBN) 1987/01/30
4 Himalayan Bank Limited (HBL) 1993/01/18
5 epal SBI Bank Limited (NSBI) 1993/07/07
6 Everest Bank Limited (EBL) 1994/10/18
7 Bank of Kathmandu Limited (BOK) 1995/03/12
8 epal Credit and Commerce Bank Ltd. (NCCBL) 1996/10/14
9 Lumbini Bank Limited (LBL) 1998/07/17
10 epal Industrial & Commercial Bank Ltd. (NIC) 1998/07/21
11 Machhapuchchhre Bank Limited (MBL) 2000/10/03
12 Kumari Bank Limited (KBL) 2001/04/03
13 Laxmi Bank Limited (LXBL) 2002/04/03
14 Siddhartha Bank Limited (SBL) 2002/12/24
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S.N. Name Operation
15 Global Bank Limited (GBL) 2007/01/02
16 Citizens Bank International Limited (CBIL) 2007/06/-21
17 Prime Commercial Bank Limited (PCBL) 2007/09/24
18 Sunrise Bank Limited (SRBL) 2007/10/12
19 Bank of Asia Nepal Limited (BOA) 2007/10/12
20 DCBL Bank Limited (DCBL) 2008/05/25
21 MB Bank Limited (NMB) 2008/06/02
S.N Sources of Data Period
1. Nepal Stock Exchange (NEPSE) 2007/08-2011/12
2. Securities Board of Nepal (SEBON) 2007/08-2011/12
3. Annual Reports of Selected Banks 2007/08-2011/12
4. Nepal Rastra Bank official Website 2007/08-2011/12
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Variables Acronym Measurement
Dependent variables (Profitability):
Return on Equity ROE The percentage of Net Income to total equity.
Return on Assets ROA The percentage of Net Income to total assets.
Hypothesized variables:
Board Size BSIZE Total number of directors on the board.
Public Director PDIR No of Public Director
Professional Director PRODIR No of Professional Director
Board Diversity BDIVERSITY No of Female Director
Control variables:
Firm Size FSIZE The book value of the total assets of the
company.
Leverage / Debt proportion DEBT The percentage of total liabilities to total
assets.
Non Perfoming Loan Ratio NPL The percentage of non-performing loans to
total loan.
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ROE = 0 + 1 * BSIZE + 2 * PDIR + 3 *
PRODIR +4 * BDIVERSITY + 5 * FSIZE + 6 *
DEBT + 7 * NPL+ ROA = 0 + 1 * BSIZE + 2 * PDIR + 3 *
PRODIR +4 * BDIVERSITY + 5 * FSIZE + 6 *
DEBT + 7 * NPL+
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Descriptive Statistics
N Range Min. Max. Mean Std. D Var. Kurtosis
Statistic Statistic Statistic StatisticStatist
icStd.
Error Statistic StatisticStatist
icStd.
Error
ROA105 1.91 -.005 1.91 .096 .0357 .366 .134
18.590
.467
ROE105 1.08 -.354 .728
.164207
.011 .122 .015 5.702 .467
BSIZE105 4 5 9
7.285714E0
.0797 .817 .668 1.126 .467
BDIVERSITY105 3 0 3
.885714
.0988 1.012 1.025 -1.442 .467
PDIR105 3 0 3
1.533333E0
.0635 .651 .424 -.184 .467
PRODIR105 2 0 2
.695238
.0508 .521 .272 -.679 .467
DEBT105 .21 .74 .9523
.901026
.0035 .036 .001 4.953 .467
NPL105 .16 0 .1642
.017943
.0024 .025 .00117.30
3.467
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ROA ROE BSIZE BDIVERSITY PDIR PRODIR FSIZE DEBT NPL
ROA Pearson Correlation
1 .116 .197* -.206* .164 .140 .288** .117 .106
Sig. (2-tailed)
.238 .044 .035 .094 .153 .003 .236 .280
ROE Pearson Correlation
.116 1 -.077 -.375** .106 .339** .479** .340** .075
Sig. (2-tailed)
.238 .432 .000 .283 .000 .000 .000 .446
BSIZE Pearson Correlation
.197* -.077 1 .040 .289** .139 -.074 -.150 .212*
Sig. (2-tailed)
.044 .432 .687 .003 .158 .455 .127 .030
Pearson Correlation Table
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ROA ROE BSIZE BDIVERSITY PDIR PRODIR FSIZE DEBT NPL
BDIVERSITY Pearson Correlation-.206* -.375** .040 1 -.767** -.467** -.166 -.264** -.180
PDIR Pearson Correlation.164 .106 .289** -.767** 1 .483** -.004 .164 .227*
Sig. (2-tailed).094 .283 .003 .000 .000 .967 .094 .020
PRODIR Pearson Correlation
.140 .339** .139 -.467** .483** 1 .343** .174 .115
Sig. (2-tailed).153 .000 .158 .000 .000 .000 .075 .242
FSIZE Pearson Correlation.288** .479** -.074 -.166 -.004 .343** 1 .462** -.158
Sig. (2-tailed) .003 .000 .455 .090 .967 .000 .000 .107
DEBT Pearson Correlation.117 .340** -.150 -.264** .164 .174 .462** 1 -.005
Sig. (2-tailed).236 .000 .127 .007 .094 .075 .000 .960
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Model R R SquareAdjustedR Square
Std. Errorof the
Estimate
Change Statistics
R SquareChange F Change df1 df2
Sig. FChange
1.417a .174 .114 .3450102 .174 2.909 7 97 .008
b. Dependent Variable: Return on Assets
Model R R SquareAdjustedR Square
Std.Error of
theEstimate
Change Statistics
R SquareChange F Change df1 df2
Sig. FChange
1 .631a .398 .354 .09810 .398 9.151 7 97 .000
Predictors: (Constant), NPL, DEBT, PRODIR, BSIZE, BDIVERSITY, FSIZE, PDIR
Dependent variable: Return on equity
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ModelSum ofSquares Df Mean Square F Sig.
1 Regression 2.424 7 .346 2.909 .008a
Residual 11.546 97 .119
Total 13.970 104
a. Predictors: (Constant), Non Performing Loan, Debt Proportion, Professional Director, Board Size,
Board Diversity, Firm Size, Public Director
b. Dependent Variable: Return on Assets
ModelSum ofSquares Df Mean Square F Sig.
1 Regression .616 7 .088 9.151 .000a
Residual .933 97 .010
Total 1.550 104
a. Predictors: (Constant), NPL, DEBT, PRODIR, BSIZE, BDIVERSITY, FSIZE, PDIR
b. Dependent Variable: ROE
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Model
UnstandardizedCoefficients
StandardizedCoefficients
T Sig.
Collinearity Statistics
B Std. Error Beta Tolerance VIF(Constant)
-.380 1.062 -.358 .721
Board Size.106 .050 .237 2.145 .034 .699 1.430
Board Diversity-.089 .060 -.245 -1.469 .145 .307 3.257
Public Director-.033 .099 -.059 -.336 .738 .276 3.627
Professional Director
-.066 .082 -.094 -.813 .418 .632 1.582
Debt Proportion
-.378 1.108 -.037 -.341 .734 .719 1.390
Non Performing Loan
1.276 1.427 .088 .894 .373 .880 1.136
a. Dependent Variable: Return on Assets
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Variables Specific Hypothesis Empirically supported
Overall support ofmechanism
Board Size H1: Board size is negatively
related to bank performance.
Partially supported
Professional Director H2: Professional director is
positively related to bank
performance.
Supported by both the
model
Board diversity H3: Board diversity is
positively related to bank
performance.
Not supported by both the
model.
Public Director H4:Public Director is
positively related to bank
performance
Supported
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The overall data analysis conclude that there is a positive
relationship between the ROA, and Board size, Boarddiversity, public director, professional director, firm size, debt
proportion and non performing loan (overall model)
There is also the positive relationship between the Return on
equity with the Return on Assets and Board size, Boarddiversity, public director, professional director, firm size, debt
proportion and non performing loan (overall model).
There is a positive relationship between the board size and
Return on Assets (ROA), which indicates that increase in boardsize will increase the ROA and vice versa.
The relationship between the Board diversity and ROA is
inverse, which means that with an increase in board diversity
the ROA will decrease and vice versa
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In this research the Board size, Professional director, Public directorand Board Diversity are the board composition variable whereasthe Return on equity and Return on assets are the Bankperformance variable.
From the research we can explore that increase in board size willpartially increase the bank performance.
Similarly, professional director is positively related to the bank
performance, which indicates that if there is an increase in numberof professional director then it will increase the bank performance.
From the research it came to know that board diversity (Femaledirector) is negatively related to the bank performance, so, increasein the number of female director will decrease the performance ofbank.
On the other hand, public director is positively related to the bankperformance, which indicates that increase in the number of publicdirector will also increase the performance of bank.
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The control variables such as firm size, debt and
non-performing loan are also taken to measure
the bank performance.
Firm size is positively correlated with the Return
on assets and Return on equity, the bankperformance variable.
Similarly, the Debt proportion is also positively
correlated with the Return on equity and Returnon Assets, the bank performance variable.
Similarly the Non performing loan is also
positively correlated with the bank performance.
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The correlation (ROA and Specified independent
variable) R is 0.147 which indicates that there is apositive relation between the Return on Assetsand the independent variables but therelationship was not so significant. Similarly R
square is 0.174 which indicates that only the17.4% of variation in the ROA was explained bythe selected independent variables.
On the other hand, adjusted R square is 0.114which indicates that only the 11.4% of variationin the Return on Assets was explained by theselected independent variable after adjusting the
degree of freedom or the multi co - linearity.
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