Corporate Governance and Nonperforming Loans: Empirical Evidence from Pakistan

Abstract

Growing default loans in a financially troubled economy may further limit a bank's ability to finance economic growth. Financial institutions can effectively control the expansion of nonfinancial loans by implementing robust corporate governance practices and adherence to stringent banking regulations. The objective of this study is to analyze the influence of corporate governance on the occurrence of non-performing loans in commercial banks in Pakistan. A panel data set was developed by retrieving information about nonperforming loans, corporate governance attributes, and bank-level control variables from the audited annual reports of 20 commercial banks from 2009 to 2020. Fixed effect and random effect panel estimators were employed to regress the effect of corporate governance attributes on the nonperforming loans. The results of regression analysis revealed that the corporate governance structure had a mitigating effect on loans. The size of the directors' board and the size of the risk committee board were the only commercial corporate governance attributes of bank governance that controlled the nonperforming loans of Pakistani commercial banks. Policymakers and regulators should give due consideration to corporate governance attributes while developing strategies and mechanisms for controlling the persistent rise in nonperforming loans. The surprisingly insignificant effect of some attributes of corporate governance calls upon academics to consider other board attributes like qualifications and experience of board members in their future research agenda.