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Improving corporate governance in Nepalese financial institutions to promote growth and performance

This study investigates the impact of corporate governance practices on the performance of commercial banks in Nepal. Specifically, the analysis focuses on the relationship between corporate governance mechanisms and financial performance. It explores the influence of corporate governance policies, guidelines and directives issued by the central bank, Nepal Rastra Bank, and self-initiatives implemented by the commercial banks. The research undertaken in this thesis is important to stimulate economic growth and to encourage a more equitable sharing of growth. The lack of proper development of corporate governance and monitoring of financial systems results in a failure to capitalise on growth opportunities when they arise. A lack of capital is a major inhibitor to development, and enhanced governance will be a major fillip in promoting investor confidence, leading to a deeper and more efficient capital market in Nepal. There are many untapped opportunities in Nepal and a well-developed capital market will attract more local and foreign investors. An improved capital market will alleviate unemployment, and the balance of payments deficit, help to restrain the brain drain and help foster financial stability, strengthen risk management and ultimately contribute to a strong financial system. A significant portion of Nepalese people, variously estimated to be around 30 per cent, do not have access to formal financial services and rely on informal service providers. There are many providers who take advantage of high interest rates, with financial frauds gaining recurring coverage in the news media. These issues are not specific to the informal sector; they also occur in the formal financial sector. There have been several corporate governance failures in Nepali banks including the Nepal Development Bank Limited, the first Commercial Banks of Nepal-Nepal Bank Limited, Nepal Bangladesh Bank, Lumbini Bank, Gurkha Development Bank, United Development Bank, giving rise to demands for greater transparency and accountability in the way banks are controlled and managed. Good corporate governance builds the platform for a smooth, faster, easier and reliable financial system, clarifying responsibilities, fostering transparency and fairness to encourage greater individual accountability. Although various corporate governance mechanisms have evolved in developed countries, their applicability in a low-income country such as Nepal may not be efficacious due to differences in political, cultural, social and economic factors. Hence this thesis addresses the requirement for an evidence-based study that evaluates the best fit corporate governance mechanisms applicable for the Nepalese banking sector. Panel data were collected from all commercial banks' annual reports, central bank reports and world development indicators. The time period for the study commences in 2003, after the period of Maoist insurgency, and ends in 2012, prior to the devastating earthquake. The analysis proceeds using quantile regression, which is appropriate given the distributional properties of the data. This thesis contributes to the existing literature of corporate governance and bank performance in several ways. First, it contributes with a precis of how corporate governance developed in Nepal during severe political turmoil, including civil wars. Second, the method used is more robust than approaches reported in prior research and the careful diagnostics potentially provide useful guidance for other low-income country studies. Third, the present study recommends possibilities to improve corporate governance practices of financial institutions in Nepal by formulating good policies, processes and robust regulatory and supervisory systems. These improvements will ultimately lead to strengthening institutional structures, which in turn will foster various opportunities for sustainable development, not only in the banking sector but the economy as a whole. The findings indicate that corporate governance does affect the financial performance of commercial banks in Nepal. The results indicate that corporate governance structures, e.g., board size, existence of CFO, percentage of minority directors and the percentage of female directors have statistically positive effects on performance, while the percentage of external directors has a negative impact on bank performance. The findings from this study provide guidance to assist with policy formulation by highlighting the key areas that foster good governance, which in turn can improve the financial performance of the Nepali banks. The formulation and implementation of laws, regulations and policies by the government and central bank will enhance financial capability, reduce banking failures and build trust amongst depositors to help and develop more sustainable sources of financing.
Type of thesis
Acharya, S. (2018). Improving corporate governance in Nepalese financial institutions to promote growth and performance (Thesis, Doctor of Philosophy (PhD)). The University of Waikato, Hamilton, New Zealand. Retrieved from https://hdl.handle.net/10289/11720
The University of Waikato
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