The financial crisis as a wake-up call: corporate governance and bank performance in an emerging economy

Pages80-101
DOIhttps://doi.org/10.1108/CG-02-2018-0080
Published date24 September 2018
Date24 September 2018
AuthorNurlan Orazalin,Monowar Mahmood
Subject MatterCorporate governance,Strategy
The f‌inancial crisis as a wake-up call:
corporate governance and bank
performance in an emerging economy
Nurlan Orazalin and Monowar Mahmood
Abstract
Purpose This paper aims to investigate the effectsof different sets of corporate governance (CG)
practices on bank performance before, during and after the financia l crisis. The study proposes
some policy measures for improved CG practices to protect banks from the detrimental effect s of
future financial crises and economic meltdowns in the context of emerging market s such as
Kazakhstan.
Design/methodology/approach The study analyses data from all commercial banks listed in
Kazakhstan Stock Exchangefor the pre-economic crisis, during the crisis andafter the economic crisis
periods.The study uses the panel regression modelto control unobserved time-constantheterogeneity.
Findings The study found that better CG practicesled to better operating performance of the banks
after the financial crisis periods. The changes in CG codes, board structures, disclosure requirements
and board members’ competencies over time had a significant influence on CG practices and
subsequentlyimproved operating performanceof the banks.
Originality/value This is one of the first studies to examine the effects of CG practices on bank
performance in central Asian transition economies, which are still heavily influenced by Soviet heritage
and legacy.
Keywords Kazakhstan, Financial crisis, Emerging economies, Bank performance,
Corporate governance reforms
Paper type Research paper
1. Introduction
This paper investigates the effects of corporate governance (CG) practices on bank
performance in Kazakhstan before, during and after the recent financial crisis. T he impact of
CG on accounting and market performance is still a subject of debate in the academic
literature. Prior studies on the relationship between CG practices and firm performance have
provided mixed results. Al-Hussein and Johnson (2009),Gompers et al. (2003),Jackling and
Johl (2009),Orazalin et al. (2016) and Wang et al. (2012) provide evidence that effective CG
leads to better firm performance. Other studies, across a range of market settings, provide no
conclusive evidence that better CG improves firm performance (Bhagat and Bolton , 2008;
Core et al., 2006). This indicates that global investors still remain skeptical about the strong
and positive association between CG and performance measurements.
The relationships between CG practices and organizational performance in developed
capitalist countries with stable economic conditions are well-documented in research (De Haan
and Vlahu, 2016;Wang et al.,2012). However, in transition economies, where governments
frequently initiate institutional reforms to improve CG measures, the effects of different sets of
CG practices on organizational performance in times of economic uncertainties and financial
crises have not been incontestably validated to date (Haß et al .,2016;Liu et al., 2012). A dearth
Nurlan Orazalin and
Monowar Mahmood are
both based at Bang
College of Business, KIMEP
University, Almaty,
Kazakhstan.
Received 13 February 2018
Revised 17 April 2018
7 June 2018
Accepted 28 June 2018
PAGE 80 jCORPORATE GOVERNANCE jVOL. 19 NO. 1 2019, pp. 80-101, ©EmeraldPublishing Limited, ISSN 1472-0701 DOI 10.1108/CG-02-2018-0080
of credible research in transition economies hinders CG reforms, and governments and
policymakers in transition countries are looking for more empirical research to develop
appropriate GC practices to prevent the detrimental effects of financial crises and economic
meltdowns (Black et al.,2014;Khan et al.,2013). Within the backdrop of research on CG
practices in transition economies, this paper investigates the effects of different sets of CG
practices on bank performance in the pre-crisis (2004-2006), during-the-crisis (2007-2009)and
the post-crisis (2010-2012) periods in a post-communist transition economy, i.e. Kazakhstan.
The present study focuses primarily on internal CG practices such as board composition,
ownership structure, corporate disclosures and executive education and examines their
effects on bank performance before, during and after the financial crisis in the context of
Kazakhstan. Ext ernal macro-economic factors a re constantly changing in emerg ing markets
and are difficult to manage at a bank-level. Thus, to investigate the impact of CG on bank
performance in Kazakhstan, we assess the effectiveness of changes in internal aspects of
CG, which are influenced by primarystakeholders and internal bank-specific factors.
Since gaining independence in 1991, Kazakhstan has been in transitional change from a
traditional planned economy to a marketeconomy, carrying out large-scaleprivatization and
financial market reforms. Being among the world’s top oil and gas producers, Kazakhstan is
the ninth largest country in the world and the largest of all the landlocked nations by its
territory, though its population density is amongst the lowest (approximately 6 people/km
2
with an estimated17 million people as of 2015). Over the pasttwo decades, Kazakhstan has
attracted over $130bn of investments, and it is currently regarded as one of the most
attractive countries in the Commonwealth of Independent States (CIS) region for foreign
investors. The banking sector of Kazakhstan is significantly different from those of other CIS
and Asian countriesdue to the country’s geographical, social and economic characteristics.
It has a two-tier system whereby The National Bank of Kazakhstan (NBK), as the central
bank of Kazakhstan, represents the first tier and all other commercial and investment banks
represent the secondtier. Banks play a significant role in the financial system of Kazakhstan
and account for approximately 77 per cent of all financial system assets and 44 per cent of
gross domestic product (GDP) as of December 31, 2012.
The government promulgated the law on banks and the banking system in Kazakhstan in
January 1996, which provided specific guidelines for bank supervision. From the very
beginning, the banking industry of Kazakhstan has operated under strict regulations and
close supervision of the NBK. Commercial banks are not allowed to deal with equity and
securities’ markets, while investment banks are prohibited from retail banking services.
Banks in Kazakhstan had been obliged to follow the Basle G10 norm since 1996. The NBK
also initiated other regulatory measures on liquidity, lending limits, loan portfolio
classification, insider transactions, internal audit system, as well as minimum reserve
requirements. However, after the financial crisis of 2007-2009, the banking industry has
undergone significant changes. The NBK initiated different measures to improve the
situation, including provisions local and foreign ownerships, board memberships, reporting
practices, loan portfolio classifications and adjustment of non-performing loans. The
immediate response from the government side was important to stabilize the national
financial system and support a quick recovery from the crisis. By the end of 2008, the
government had injected approximatelyUS$5bn into four of the major banks of Kazakhstan
(Prodengi, 2010). Another important financial support from the government side was
refinancing mortgage loans. To refinance high-interest loans with low-interest loans, the
government spent 145 billiontenge or approximately US$1bn in 2009 (Prodengi,2010).
Other measures to stabilize the national financial system included the introduction of banking
mechanisms focusing on creating provisions, increasing equity capital and reserves and
improving liquidity in growth periods and using them in recession periods (Kalyuzhnova and
Nygaard, 2011). As a result of reforms, signs of stabilization in the banking sector started
appearing in the first half of 2010. At the end of June 2010, the total amount of assets of a ll
VOL. 19 NO. 1 2019 jCORPORATEGOVERNANCE jPAGE 81

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