THE IMPACT OF CORPORATE GOVERNANCE MECHANISMS ON RISK MANAGEMENT: EVIDENCE FROM COMMERCIAL BANKS IN ETHIOPIA

Year 2014, Volume: 1 Issue: 2, 1 - 21, 16.07.2014

Sewale Abate , Girma Zeleke

Abstract

The risk positions of Ethiopian banks have been under tension since 2007 as per the National Bank of Ethiopia report (2009). However, existing theory on the impact of corporate governance mechanisms on bank risk-taking still remains limited and the evidence is conflicting. Most studies concentrate on US and European banks, while empirical evidence has remained scarce for Ethiopian banks. Added to that, to my knowledge, there are almost no papers on this subject for commercial banks in Ethiopia. Thus, the main contribution of this study is to shed some light on the impact of corporate governance mechanisms on bank risk-taking and analyze its relationship with credit and liquidity risks in Ethiopian commercial banks. This paper focuses on commercial banks as they constitute an important segment of the Ethiopian banking sector. I employed a panel multiple regression model in which the relationships between credit &liquidity risk with corporate governance mechanism variables are modeled. Ordinary least squares with random effects & pooled OLS estimation procedure are applied to a panel data set of 9 Ethiopian banks over the period 2005 through 2011. Based on the results central bank regulation negatively affects both measures of risks but management efficiency found to have positive impact on both risks. Depositors’ influence has negative and significant impact on liquidity risk but positive and does not impact credit risk. Board meeting frequency has negative impact on both measures of risks. Regarding bank size and inflation both have significant impact on credit risk with a negative and positive coefficients respectively, but insignificant for liquidity risk. Based on independent samples T test results, the study revealed no evidence about the difference on risk management between government and private banks using liquidity risk. With respect to credit risk the result confirmed the belief that private banks manage well credit risk than government-owned banks. Generally, the result is similar to earlier studies (Jensen, 1993 and Greuning and Bratanovic, 2004) that corporate governance has an impact on bank risk management.

Keywords

Bank risk management, corporate governance, Impact of corporate governance mechanism.

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