Corporate governance reforms and bank performance: evidence from the Middle East and North Africa

• DOI: https://doi.org/10.1108/CG-11-2016-0211
• Published date: 02 October 2017
• Date: 02 October 2017
• Pages: 822-844
• Author: Saibal Ghosh
• Subject Matter: Strategy,Corporate governance

Corporate governance reforms and bank

performance: evidence from the Middle

East and North Africa

Saibal Ghosh

Saibal Ghosh is based at

the Centre for Advanced

Financial Research and

Learning, Reserve Bank

of India, Mumbai, India.

Abstract

Purpose –The purpose of the study is to understand the importance of corporate governance reforms

for the Middle East and North Africa (MENA) country banks. To address this issue, the author combines

the staggered timing of corporate governance reforms for banks across MENA countries with bank-level

data for the period 2000-2012 and examine the impact on bank performance.

Design/methodology/approach –The author employs fixed effects regression within a difference-

in-differences specification for the analysis.

Findings –The analysis suggests that not all governance characteristics are equally effective and

some of these characteristics exert a more pronounced effect on bank performance as compared to

others. These results also vary across oil-exporting and -importing nations and differ during the crisis.

Besides, the authors find that improved operating efficiency and access to finance are the key channels

through which governance improves bank performance.

Practical implications –Corporate governance reforms in the MENA countries need to be carefully

tailored, taking into account the inherent economic characteristics of the country for it to exert durable

impact. The challenge for policymakers is to find the right balance that can ensure maximum benefits for

the banking sector, while minimizing the challenges involved in its implementation.

Originality/value –To the best of the authors’ knowledge, this is one of the earliest studies for MENA

country banks to examine the interface between corporate governance reforms and bank performance,

while controlling for the possible endogeneity of such reforms on performance.

Keywords Corporate governance, MENA, Banking

Paper type Research paper

Introduction

Over the past two decades or so, a significant amount of attention in both the academic

literature as well as in policy circles has been devoted toward understanding the role of

corporate governance in banks and, more so, following the outbreak of high-profile

corporate irregularities in several advanced economies and elsewhere. The culmination

of these interests has resulted in the formulation of corporate governance codes in

several countries or, alternately, revamping the existing codes with focus on their

implementation[1].

One region of the global economy where the importance of corporate governance has

been relatively under-researched has been the Middle East and North Africa (MENA)

region. In the early 2000s, the World Bank (2003) had highlighted the significant

governance gap in the MENA region and suggested possible pathways to good

governance. Subsequently, although some studies have explored the efficacy of corporate

governance for the MENA countries (Saidi, 2004;International Finance Corporation, 2008;

Organization for Economic Cooperation and Development, 2005,2009,2011), these have

Received 7 November 2016

Revised 30 March 2017

Accepted 14 May 2017

PAGE 822 CORPORATE GOVERNANCE VOL. 17 NO. 5 2017, pp. 822-844, © Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-11-2016-0211

been more in the nature of documentary evidence, highlighting the weaknesses in

governance standards in the MENA region. With MENA countries having undertaken

significant governance reforms during the past decade, the efficacy of such reforms in

affecting bank performance remains a moot empirical concern.

To inform this debate, this paper studies the impact of corporate governance reforms on

bank performance. The information base comprises a sample of over 100 banks, a quarter

of which are Islamic, in 12 MENA countries during the period 2000-2012. The empirical

research design exploits the exogenous variation arising from the staggered reforms in the

corporate governance framework across the banking sector in these countries and adopts

a difference-in-differences research design to isolate the impact on performance. We find

that the economic impact of governance reforms on bank profitability is limited. However,

when considered in conjunction with relevant governance characteristics, these

magnitudes are quite significant in several instances and indicate that corporate

governance reforms do have a role to play in influencing bank profitability.

These cross-sectional heterogeneities also mitigates concerns about omitted variables.

Economically, it is possible that the results are driven by other contemporaneous reforms,

and not just those related to corporate governance. If that were the case, we would

incorrectly attribute changes in bank performance to governance reforms. Under such a

situation, exploiting the cross-sectional heterogeneity enables us to difference out such

effects. Additionally, as we can control for country as well as year effects, we are able to

take into account the changes in the regulatory and economic environment across

countries and over time.

A number of factors make the MENA banking sector a compelling laboratory to investigate

this issue. First, the insufficient development of equity and bond markets makes banks the

most important source of external finance for firms. In addition, the high level of family

involvement in corporations also necessitate close ties with local banks, more so given the

inadequate disclosure practices of companies which makes access to alternate sources of

external finance challenging.

Second, although these countries have introduced corporate governance reforms for

banks, the implementation of requirements contained in the relevant legislations vary

markedly across countries. Illustratively, in Oman and Egypt, the first set of countries to

enunciate corporate governance codes in 2002 and 2005, respectively, these standards

have become significantly more rigorous over the years, whereas in others such as Bahrain

and Kuwait, these norms are of recent origin. In addition, the statutes of these governance

codes also differ. In Algeria and Tunisia, these codes were introduced as voluntary;

however, in Saudi Arabia, Oman, Jordan and Qatar, these apply on a “comply or explain”

basis. This unevenness in the application raises the concern as to how far governance

codes impact bank performance.

Third, the recent global financial crisis and the subsequent political turmoil has significantly

eroded market confidence and dented capital flows to the region. By reinforcing corporate

governance standards, banks have not only sought to improve their market valuation and

lower credit and market risks, but additionally, engender improvements in governance

standards in borrowing firms, protect investors’ interests and, in turn, encourage durable

capital flows to the region.

The rest of the paper unfolds as follows. Section 2 presents an overview of the literature

and highlights the contribution of the paper. An overview of the evolution of corporate

governance standards in these countries against the backdrop of their banking and

financial systems follows thereafter. Section 4 discusses the data and methodology and

follows it up with an analytical assessment of the results. The final section

concludes.

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