A Project Paper

on
Corporate Governance and its impact on Non-performing loan in the
Banking sector of Bangladesh

Submitted To
Department of Finance
University of Dhaka

Supervised By Submitted By
Ms.Mahabuba Lima Nusrat Jahan Tanu
Assistant Professor Id No: 20-021
Department of Finance BBA 20th batch
University of Dhaka Department of Finance

Date of Submission: April 30, 2018

1
 Letter of Transmittal

April 30, 2018

Ms. Mahabuba Lima

Assistant Professor
Department of Finance
University of Dhaka

Subject: Submission of Research Paper on “Corporate Governance and its impact on

non-performing loan in the banking sector of Bangladesh”

Madam,
With due respect, I would like to state that I am Nusrat Jahan Tanu, a student of BBA 20th
Batch, Department of Finance, University of Dhaka. Under your supervision, I have assigned
to prepare a research paper on “Corporate Governance and its impact on non- performing
loan in banking sector of Bangladesh” as the mandatory requirement for successful
completion of the BBA Internship Program.

I really would like to convey my gratitude to you for giving me with the proper guidance and
valuable advice. I also would like to mention that I have gained practical experience from this
study that will assist in my future professional life. By doing this study, I have identified my
weakness and strengths. This study also assists in applying my theoretical expertise to
practical set up, sharpening my views and ideas on a particular issue. If I have any
unintentional error that may have entered into the report will be considered with sympathy.

I, therefore, would like to request you to accept the project paper on the assigned topic. I
earnestly request you to call upon me if you think any further work should be done on the
topic.

Sincerely Yours
Nusrat Jahan Tanu
ID: 20-021
Batch: 20th (BBA)
Department of Finance
University of Dhaka
_______________
Signature

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 Acknowledgement
First of all, I might want to pass on my appreciation from my heart to Almighty Allah for
giving me the quality and tolerance to set up the task paper appropriately inside the planned
time.

I might likewise want to give an uncommon appreciation to my fair instructor and manager
Ms. Mahabuba Lima, Assistant Professor, Department of Finance, University of Dhaka. I
might truly want to recognize with much thankfulness the significant part of my regarded
instructor and manager for his consistent nearness and commitment in empowering
recommendations and consolation amid the season of arrangement of the venture paper that
helped a ton in composing this report.

Besides, I might want to express my most profound gratefulness to all who have given me
strength and profitable proposal to finish this report.

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 Abstract

This study is mainly concerned with investigating the corporate governance and its impact on
non-performing loan in banking sector of Bangladesh. Through the study the impact of
corporate governance variables size of the board, composition of audit committee, power
separation, board composition have been examined on non-performing loan of commercial
bank in Bangladesh; with a intention og finding out whether these CG variables can be useful
in reducing the incidence of non-performing loans. The first chapter of the report contains the
origin of the research, rationale of the research, objective of the study, and the scope of the
research. The second chapter of the research focused on review of different existing
literatures regarding corporate governance and non-performing loan. The third chapter of the
research determined the methodology of the research that specifies the analysis techniques,
model formulation, data collection plan, and data sampling method. The fourth chapter of the
research contains the discussion related to corporate governance and non-performing loan of
Bangladesh. The fifth chapter of the research focuses on analysis, findings and discussion of
the research. In the analysis part, descriptive statistics, quartile analysis, correlation analysis,
regression analysis has been done. The relationship between the research variables is shown
using the fixed effect regression model. The finding from the analysis identified that board
size, board composition, composition of audit committee and power separation don’t have
significant impact on non-performing loan in banking sector of Bangladesh. The last chapter
contains the conclusion and policy implications from the research. The policy implies that
emphasis should be shifted from these explanatory variables to other Corporate Governance
variables, for instance; transparency, insider abuse, accountability, disclosure etc.

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 Table of Contents

Chapter-1: Introduction .............................................................................................................. 8

1.1. Origin of the Study.......................................................................................................... 8

1.2. Rationale of the study ..................................................................................................... 8

1.3. Research Aim .................................................................................................................. 8

1.4. Research Objectives ........................................................................................................ 9

1.5. Research Hypothesis ....................................................................................................... 9

1.6. Scope of the Study .......................................................................................................... 9

1.7. Limitations of the study .................................................................................................. 9

Chapter 2: Overview of Janata Bank Limited.......................................................................... 11

Chapter 3: Corporate Governance and Non-performing Loan ................................................ 24

3.1. Introduction ................................................................................................................... 24

3.2. Corporate Governance .................................................................................................. 24

3.3. Non-performing loan .................................................................................................... 27

3.4. Corporate Governance and Non Performing Loan ....................................................... 31

Chapter-4: Literature Review .................................................................................................. 33

Chapter-5: Methodology .......................................................................................................... 36

5.1. Research Design............................................................................................................ 36

5.2. Research Method .......................................................................................................... 37

5.3. Identification of Variables ............................................................................................ 38

5.4. Data Collection Plan ..................................................................................................... 39

5.5. Sampling Method .......................................................................................................... 39

Chapter-6: Analysis, Findings and Discussion ........................................................................ 40

6.1. Descriptive Statistics ..................................................................................................... 40

6.2. Regression Analysis ...................................................... Error! Bookmark not defined.

6.2.1. Correlation Matrix ................................................. Error! Bookmark not defined.

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 6.2.2. Fixed Effects (within) Regression ......................... Error! Bookmark not defined.

6.2.3. Random-Effects GLS Regression .......................... Error! Bookmark not defined.

6.2.4. Hausman Test......................................................... Error! Bookmark not defined.

6.2.5 Interpretation of the Result of Fixed-effects (within) RegressionError! Bookmark

not defined.

6.3. Discussion on Findings ................................................. Error! Bookmark not defined.

Chapter-7: Conclusion ............................................................. Error! Bookmark not defined.

References ................................................................................................................................ 48

Appendix .................................................................................................................................. 50

1. Fixed Effect Model Regression Output ........................................................................... 50

2. Random Effect Model Regression Output ....................................................................... 51

3. Hausman Test................................................................................................................... 52

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 Chapter 1
Introduction

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Chapter-1: Introduction

1.1. Origin of the Study

This research is prepared for the partial requirement of the BBA program of Department of
Finance, University of Dhaka under the academic supervision of, Ms. Mahabuba Lima,
Department of Finance, University of Dhaka. The topic of the research is “Corporate
governance and its impact on Non-performing loan in banking sector of Bangladesh.”

1.2. Rationale of the study

The research issue is to analyse corporate governance and is impact on non-performing loan
in banking sector of Bangladesh.

For effective functioning of a bank, corporate governance is considered as on of the most

important issue. From day to day banking activities corporate governance is an essential
requirement. Hence the study related to corporate governance structure is important to
understand the capability of the firm in generating cash flow and investing in asset or project.

The business world is very competitive nowadays. Bank should know its capability of
generating resources and using those properly to get the best output of those. Without proper
understanding of the of the business pattern as well cash flow pattern bank should not grant
loans. Corporate governance can help the bank in reducing the non-performing loan by
issuing some rules and condition.

This study shed light on identifying the determining factors of non-performing loan in
Bangladseh banking sector. Besides, it investigated and identified a relationship between
non-performing loan and corporate governance structure to portray the significance of
relationships among variables of banking sector of Bangladsesh.

1.3. Research Aim

The purpose of the study is to investigate the nfluence of Corporate Governance on the Non-
performing Loan of the Banks in Bangladesh

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1.4. Research Objectives
The objectives of the research paper are:

i. To determine the important element of corporate governance

ii. To analyse the different policy of corporate governance in different banks in
Bangladesh.
iii. To assess the present situation of non-performing loans in our banking sector
iv. . To examine the loan default status of commercial banks.
v. To investigate the impact of Corporate Governance on the Non-performing Loan of
the Banks in Bangladesh
vi. To recommend strategies improve the NPL condition of the Banks in Bangladesh.

1.5. Research Hypothesis

H0: There is no significant impact of Corporate Governance on the Non-performing Loan of
the Banks in Bangladesh

H1: There is significant of impact of Corporate Governance on the Non-performing Loan of

the Banks in Bangladesh

1.6. Scope of the Study

This study contains an analysis of corporate governance and its impact on non performing
loan of 29 banks in Bangladesh over the period of 2012-2016.. This report also contains
literature review about corporate governance non performing loan in banks of different
country, especially Asian countries. In Bangladesh, there is a vast scope of analysis and
determining the performance of the banks with respect to their corporate governance.

1.7. Limitations of the study

The limitations of the study are:
 Unavailability of data: The major problem faced while conducting the research was
unavailability of relevant data.
 Lack of information: This study did not cover primary and unpublished data.
 Lack if time: There was a time constraints to prepare the research.

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 Chapter 2
Overview of Janata Bank
Limited
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Chapter 2: Overview of Janata Bank Limited

Profile of Janata Bank Limited

Janata Bank, one of the greatest business bank in the country, was set up under Bangladesh
Bank (Nationalization) Order 1972 (Presidency Order of 1972). By accepting control
branches of past United Bank Limited and Union Bank Limited, were two private banks
performing class dealing with a record over the country. After the presentation of Bangladesh
on sixteenth December 1971, as of late encircled Janata Bank for mass sparing cash got
remarkable workplaces from the organization to fill in as nationalized business bank
wherever all through the country. With the extension of commitment and by decency of
execution inside two or three years, it transforms into the greatest business bank of the
country with 906 branches including 4 abroad branches at United Arab Emirates. It is
associated with 1239 remote journalists wherever all through the world. Mean specialists of
JBL are more than 14 thousands (14,244). Its head office arranged at Janata Bhaban at
Motijheel C/A, the center of the capital city, Dhaka.

Corporatization
In 15 November, 2007 Janata Bank got enrolled with the Joint Stock of Registrars and rebuilt
it as a pulic limited company with the name Janata Bank Limited.

List of Branches:

Figure: JBL Branches

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Management
Janata Bank is the best business bank of the nation. It has 906 branches all through the nation
and abroad to serve the country. There are 4 abroad branches at U.A.E. The HeadOffice of
the bank is organized at Janata bhaban 110 Motijheel C/A, Dhaka. It has 15 GM, 77DGM
192 AGM, 576 First AGM, 1037 Website optimization, 3085 EO and 460 AEO. Basic
Workplaces are passing by First AGM and every office is going by AGM.

Figure: Functional Hierarchies

Products and Services offered by JBL

Personalized Service
Janata Bank Constrained grows all the genuine individual dealing with a record workplaces
and organizations to its customers with its skilled work and greatest arrangement of around
906 branches covering all the urban and remote commonplace areas of Bangladesh.

Janata Bank Ltd. gives Neighborhood and Remote Settlement in the speediest possible time.
Outside Settlement is available in both T.C and taka draft.

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1. Exchange of store starting with one branch then onto the next by

- Demand Draft sparing A/C

- Mail Transfer FDR A/C

- Telegraphic Transfer Trade Finance

2. Exchange of store on Standing Instruction Agreement

3. Gathering of checks through clearing house.

4. Issuance of installment arrange.

5. Locker offices for safety's sake of significant.

6. Corporate customer administrations with modernized frameworks at specific branches

Deposit schemes section

Bank is the greatest relationship of gathering surplus family unit hold reserves. For
desperation relief, we require free work, for autonomous work we require wander and for
hypothesis we require save stores. In substitute words, save stores empower capital courses of
action and the capital advancements to help interests in the country. The enthusiasm for its
turn helps industrialization driving towards creation of wealth of the country. Additionally,
the wealth finally takes the country on road to progress and flourishing. In that limit, hold
stores is seen as the very commence of flourishing of the country. The more the advancement
of assets, the more will be the flourishing of the nation. The speculation reserves rate in
Bangladesh is one of the minimum on the planet rate of nearby saving being 17.78 %. To
upgrade the venture stores rate, Cash related Establishments accountable for get together of
save assets should offer charming Speculation reserves Designs so the fringe slant to save
increases. The assets don't, clearly, depend just on the quantum of pay yet by and large
depend upon the inclination for speculation assets of the all inclusive community. Stores are
life-blood of a business bank. Without stores there are no associations for the business banks.
Enduring stores is a champion among the most basic extraordinary components of business
banks. Bank stores can be widely designated -

Demand Deposits:Demand stores can be pulled back with no before see, e.g. current stores.

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Time Deposits:A store that is payable at a settled date or after a period of notice is called
'Time Store'. This branch recognizes time store through: Settled Store Receipt (FDR) ,
Without a moment's hesitation Store (sexually transmitted infection), Janata Bank Store
Design (JBDS), Sanchoy Annuity Design (SPS).

Fixed Deposit Receipt (FDR)

Fixed deposits are deposits in which a measure of exchange is spared out the bank for a
settled period showed early. From now on these stores are time stores or time liabilities.
Routinely, the money on settled stores isn't repayable before the expiry of the settled period.
At the period of opening the store account, the agent issues a receipt perceiving the receipt of
money on store account. It is broadly known as FDR.

Fixed deposit are stores in which a measure of exchange is kept out the bank for a settled
period showed early. Therefore, these stores are time stores or time liabilities. Normally, the
money on settled stores isn't repayable before the expiry of the settled period. At the period of
opening the store account, the agent issues a receipt perceiving the receipt of money on store
account. It is famously known as FDR. The loan fee took after by Janata Bank Ltd for Fixed
Deposit Account are-

Regularly a client isn't permitted to pull back cash before the expiry of the settled period if
there should be an occurrence of Settled Store Record. Regardless, Janata Bank Ltd. engages
its clients to pull back settled stores add up to at whatever point coming about to giving a
short notice.

Janata Bank Deposit Scheme (JBDS)

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According to Janata Bank annual report, “A man of least 18 years of age can open any 'Janata
Bank Deposit Scheme A/C' by saving in any event tk.500 or most extreme tk.20000 in every
month for a long time term. After development of the term, the investor can pull back the
aggregate kept sum with premium or can pull back by regularly scheduled payment. The
contributor needs to store the predetermined sum for him/her by the 11thday of every month
either in real money or check. In regard of JBDS account, the contributor can choose in
excess of one chosen one for asserting the stored cash after his/her demise. No shared service
is permitted in this plan”.

The primary attributes of JBDS are, “A arrangement of secured wage has been affirmed by
JBDS for the contributor in their maturity who contributed cash from their initial livelihoods,
a extent of legitimate and correct use of cash is conceivable by JBDS, the add up to kept sum
with premium will be given to the speculators and this is sure”.

• According to Annual report of Janata Bank, “The JBDS gives the financial specialists a
possibility of bearing the instructive or conjugal costs of their grown-up children or little
girls. The add up to put cash in JBDS is completely salary tax exempt. The winning from
JBDS isn't considered while charging the yearly wage impose”.

•In JBDS, “a 8.5% exacerbating loan fee is connected and it is normally computed on yearly
premise”.

• Account holder can take solitary on JBDS and Interest rate for advance id 2% more
than JBDS rate (8.5% + 2% = 10.5%)

Besides, “a contributor can pull back the aggregate sum of cash (Principal + Interest) at the
expiry of the specific time frame”. For JBDS, the installment frameworks if there should arise
an occurrence of development of a record are as per the following:

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 Source: Deposit Department, Dhakeshwari Branch.

Sonchoy Pension Scheme (SPS)

According to Janata Bank Annual Report (2016), “Janata Bank Ltd. Begin 'Janata Ltd
Sonchoy Pension Scheme' so as to enhance the financial states of the experts of all levels.
This framework depends on a month to month premise. Significant attributes of SPS are
given beneath”.

 “The accounts term is either five or ten years in this plan”.

 “The portions sums are tk. 100, tk. 200, tk. 300, tk. 400, tk. 500, or tk.
1000”.

 “Any individual at least 18 years of age can open a SDPS account”.

 “Installment should deposit by the tenth day of every month. On the

off chance that the tenth day is open occasion, at that point the
contributor can deposit the cash by the following working day and the
portion can be kept either with money or check”.

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  “The financing costs are, for a long time length 8.5% intensifying loan
fee and for ten years term 9% exacerbating loan fee. In the two cases,
intrigue is computed on yearly premise”.

 “The contributor can have in excess of one candidate. In the event of in

excess of one chosen one, the contributor can decide the measure of
cash for every candidate”.

Short term deposit

In short term deposit Account the depositor should keep the money at least for seven
days if he/she wants to get the interest. The interest offered in short term deposit is
less than that of saving deposit. In this type of short term deposit account current
withdrawal s discouraged by the bank. Short Term deposit accounts also known as
‘Seven Days Notice A/C’

Utility Service
Janata Bank provides utility services to a large number of client’s through the country.
Janata bank provides their utility services in different sector of the country such as
different govt. organizations, corporate bodies, educational institutions, students, local
bodies etc.
Janata bank also collects different types of bill and payment made on behalf of govt to
different parties, such as:
 Water/Sewerage bills of water and Sewerage Authority.

 Phone bills of transmit and Telephone board.

 Gas bills of Titas, Bakhrabad and Jalalabad Gas Transmission and

Distribution Companies.

 Power bills of Dhaka Electricity Supply Authority, Dhaka Electricity

Company, Bangladesh Power Development Board and Rural
Electrification Board.

17
  Girls's understudy grant/stipend and Primary Student Stipend.

 Armed force benefits

 Maturity Allowances

 Sustenance acquirement bills and so forth.

One Stop Service

Among all the nationalized Commercial Banks, Janata Bank first start the one
stop benefit. In this framework there are some remarkable highlights, for
example,

 From a solitary record a client can store and pull back cash

 The arrangement of token and parchment has been suspended.

 From a solitary counter client are getting instant and customized.

 Verification of mark is simple as the same is put away in the PC.

Financing on Export
Janata Bank has been giving various types of help to exporters to support up to the country,s
sends out. Janata bank encourages the nation's fare by giving Pre-shipment and post-shipment
Finance. Moreover, Janata bank gives trade ensure, holding office, concessional rate of
enthusiasm for sends out Finance, send out motivator program and so forth. Janata Bank
likewise gives some managing an account at sending out preparing zone, the scope for the
foundation of fare arranged by 100% outside speculation and by joint-wander and so on.

Encouraging Import

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Through a significant decent number of Authorized Dealer Branches and 1229 nos. outside
reporters, overall Janata Bank Limited has been broadening full range import and relevant
fund offices.

 Opening of L/C at focused/sensible edge and commission

 Outside Remittance Service

Foreign Remittance Service

In Bangladesh Janata Bank has in excess of 906 residential branches covering the entire
nation including country zones. Settlement administrations are accessible in all the branches.
Janata has saving money connection with every single significant bank in all nations.
Settlements are credited to the record of recipients in a flash or inside most brief conceivable
time. ostracize Bangladeshis may send their well deserved remote monetary forms through
those banks and trade houses or may contact any eminent banks close-by.

Import, Export and Remittance

200000
180000
160000
140000
120000
Milion Tk

100000 import
80000 Export
60000 Remittance
40000
20000
0
2012 2013 2014 2015 2016
Year

Figure: Income from import, export and remittance

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Loan and advances and credit rating o f Janata Bank
Credit and Advances possess a vital position in current saving money. A bank is a business
venture of the nation. It is a benefit looking for worry as some other business and modern
association. A bank can't be profited just by taking deposits from the public with finding
appropriate roads for putting them in gainful wander. Since it needs to pay intrigue
convenient on the real piece of its deposits. Other than it needs to get together the
authoritative and different expenses of the organization. So it is important to contribute them.
So unmistakably gainfulness of a bank dependably relies upon the decent behavior and the
roads in which its assets are utilized to get the greatest income. A general business concern
will investigate the different manners by which it can acquire its assets, similar to extra
capital, floatation of debentures, bank borrowings, credit on buy. Generally there are three
types of loan:

1. Enterprise loan
2. Revolving loan
3. Clean loan

Income from loan and Investment

40000

35000

30000

25000
Milion Tk

20000
Loan
15000
Investment
10000

5000

0
2012 2013 2014 2015 2016
Year

Figure: Income from Loan and Investment

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My experience in Janata Bank
I have finished my internship in Janata Bank. I had worked in Dhakeshwari Branch. All
through my temporary position period, I have been put in the General Banking Department.
General saving money exercises are the center division of the bank. It plays out the greater
part elements of the bank. I had a chance to be familiar with the down to earth keeping
money winning in the Dhakeshwari Branch, Janata Bank Limited. The information I have
gained from my entry-level position period, for the most part, useful learning about general
managing an account exercises of Janata Bank. However, I couldn't do down to earth exercise
in every one of the offices because of time and asset limitations. All things considered, I
endeavored to gather information/data from the accompanying sources:
- Direct perception in the managing an account exercises

- Face to confront discussion with the officer

- Practical work area work
- Consultation with the accompanying people
- Browsing the site of JBL.

Lesson gained from internship program

Based on my 45 days entry-level position program I have learned numerous essential thing in
managing an account exercises in Janata bank. The abilities I have gained from my temporary
job program is given after:

 We all realize that general saving money exercises is the underlying exercises of all
banks that are the reason I amassed myself in this segment amid my temporary
position period. I accumulate information about various sorts of records.

 I had ready to know distinctive kind of qualities that are especially required amid
opening records, for example, customers signature, national id card or travel permit,
choosing one's data and so forth.

 I additionally learned distinctive kinds of client account prerequisite for various sort
of client. For instance, sole proprietorship required substantial enlistment card, tin

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 endorsement, for the association, Partnership Deed and Partners letter of the expert to
open record and approval for activity are exceptionally required.

 I additionally found out about cash book issuing and diverse kinds of checkbook
issuing.
Through this period, I have gathered much practical knowledge about general banking
activities. I also am being able to correlate my practical knowledge with theoretical
knowledge.

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 Chapter 3
Corporate Governance and
Non-performing Loan

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Chapter 3: Corporate Governance and Non-performing Loan

3.1. Introduction
Corporate governance turns into a debated issue among a wide range of individuals,
government, industry activities, executives, financial specialists, investors, scholastics and
global associations as of late. The present world has seen that association
straightforwardness; money related revelation, independence, board measure, board structure,
board advisory groups, and board decent variety and among other is the foundation of good
administration rehearses. These factors are in the fundamental motivation of most gatherings
and meetings overall includes,“World Bank”, “International Monetary Fund (IMF)” and
“Organization of Economic Co-activity and Development (OECD)” (Inyanga, 2009). Banks
give attributes in the everyday exchange to clients with the desire of reimbursement toward
the finish of a predetermined time. Nonetheless, now and then such credits stay uncollectible;
these uncollectible credits constitute what is known as non-performing advances (NPLs).
Nonperforming advances are advances that are never again delivering salary for the bank.
Credits move toward becoming nonperforming when borrowers quit influencing installments
and the advances to enter default. Also, “Non-performing advance as per the International
Monetary Fund (IMF), is any credit in which intrigue and main installments are over 90 days
past due; or over 90 day of intrigue has been renegotiated, promoted, or deferred by
understanding, or installments are under 90 days late, yet are never again foreseen; that is,
there are great motivations to question that installments will be made in full”.

3.2. Corporate Governance

Corporate governance is an arrangement of choices and activities used to direct and control
an association. It comprises of connections between, and responsibility of, the association's
partners, and the laws, approaches, methodology, practices, guidelines, and standards which
may influence the association's heading and control (Cadbury, 1992).

3.2.1. Category in corporate governance

Corporate administration can be ordered into two structures. One is underlining in an
arrangement of corporate conduct that can be estimated by execution, development, treatment
to investors and partners. The second one is standardizing structure, which whether gets from
the legitimate framework, equity framework, budgetary markets, or different things
influencing organization conduct. (Claessens, 2006 and Hardikasari, 2011).

24
From the above definitions, the great corporate governance can be characterized in the
accompanying:

1. A structure that deals with the symphonious connection between Board of

Commissioner, Board of Director, investors, and partners.

2. An arrangement of checks and adjust on the expert of corporate control to constrain

the development of two openings: blunder and abuse of corporate resources.

3. A straightforward process for defining up corporate objectives, accomplishment,

trailed by the estimation of the exhibitions.

3.2.2. Corporate governance in bank

Every commercial bank should have good corporate governance that follow some basic
principle such as Accountability, Responsibility, independence and Fairness. The principal
issues and needs for changes in Corporate Governance of banks in Asia that were recognized
are:

1) The panels of the board – review advisory group, the risk management committee, the
governance committee with consolidated duties of Nomination, compensation, progression
arranging, preparing, execution assessment, and so forth.

2) The parts/elements of the board – directing, endorsing and administering

systems/strategies instead of being drenched in everyday activities. Making clear
responsibility lines and interior control frameworks. Adequate streams of data and
administrative help.

3) The synthesis of the board – banks are more urged to have autonomous chiefs than
different firms. Division amongst Chairman and CEO.

4) The duty of individual board individuals – trustee obligations of bank' board

individuals, need of aptitudes, individual capacities, preparing programs on honesty and
demonstrable skill.

25
5) Bank holding organizations and gatherings of organizations holding banks – a bank's
parent organization ought not block the full exercise of the Corporate Governance of the bank
inside the saving money gathering.

6) Preventing injurious related gathering exchanges – assessment of the current firewall.

Making of the specific advisory group to screen and endorse related part exchange. Freely
uncover such exchange.

7) Disclosure – exertion on meeting into universal guidelines on bookkeeping, and so on

ought to be supported.

8) Bank's observing of the Corporate Governance structure of its corporate borrowers –

the degree to which banks ought to survey/screen Corporate Governance of their corporate
Borrowers or look to enhance it.

3.2.3. Benefit of Corporate Governance Practice

In a bank corporate governance is essential for maintaining the banking activities properly.
Good corporate governance can help to reduce the financial crisis of bank in several ways.
For the recent financial crisis researchers are getting more concern about the corporate
governance of bank. Almost every country set some recommendation for corporate
governance in banking. Bank can have get some benefit by following a good corporate
governance. Benefit of practicing good corporate governance is following:
a) Corporate governance can improve the performance through the creation of better
decision making.
b) By giving ideal decision corporate governance can improve operational efficiency as
well as the service of the shareholder.
c) Efficient corporateadministration will distinguish the less expensive financing sources
keeping in mind the end goal to upgrade the investor esteem
d) If corporate governance has good reputation among people, they will be more
motivated to invest their money.

26
 e) Eventually, that will in increment the benefit of bank and investor. Investors
will be happy with the organization execution subsequently will build investors
esteem and furthermore the profits.

As indicated by Mas Achmad Daniri, GCG is additionally esteemed to be material in

term of; a) lessening the office cost, b) decreasing the cost of capital because of loan
cost diminishment on the assets or assets obtained, c) Increasing the organization's
stock esteem, d) Creating the help of partners.

In a review directed by IICG, Bank expresses that completion of GCG as a framework

has been indicating the positive connection with its execution comes about. The usage
of GCG in the bank is one of the colossal attractions for financial specialists to
purchase Bank shares and emphatically associated with the expanded stock cost of
Bank since its IPO in 2004 (IICG, 2009).

3.3.Non-performing loan
According World Bank, “A Non-performing credit is an advance that is in default or near
being in default. Numerous credits progress toward becoming non-performing in the wake of
being in default for 90 days, yet this can rely upon the agreement terms”. As indicated by
IMF, meaning of NPLs is

“A loan is nonperforming when payments of interest and principal are past due by 90 days or
more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by
agreement, or payments are less than 90 days overdue, but there are other good reasons to
doubt that payments will be made in full”
According to the World Bank report, “Credit may likewise be non-performing on the off
chance that it is utilized as a part of an unexpected route in comparison to that for which it
has been taken”. According to Section 5 (cc) of Bank Company Act 1991, “defaulting
account holder implies any individual or establishment presented with propelling, advance
allowed for him or an organization including premium or any bit thereof, or any premium
which has been past due for a half year as per the meaning of Bangladesh Bank. Non-
performing credits are likewise called non-performing resources (NPA), which are advances,
arranged by a bank or a money-related organization, at the guideline of the administrative

27
expert, on which reimbursements or premium installments are not being set aside a few
minutes. A credit is a benefit for a bank as the premium installments and the reimbursement
of the foremost make a flood of money inflows. Premium money inflow is abundance cash
over foremost, which is called benefit.”

In the event that advantages are not overhauled in planned time, “banks more often than not
regard them as non-performing advance”. At the point when installment turns out to be late
for the brief timeframe, it is called arranged for the past due. NPL is a whole both of the
obtained cash whereupon the indebted person has not made his/her booked installments,
which is in default or near being in default.

3.3.1 Causes of non-performing loan

Lack of business experience.

Individuals without related knowledge regularly need to accomplish something. By and large
individuals after retirement from Govt. or then again private administration need to set up
their own particular business. However, this business may not be pertinent to his or her past
experience. At the point when bank back these undertaking with which there is the absence of
individual experience, there is a probability of hazard for the bank.

Absence of Business and Lack of Institutional Training Background.

In spite of the fact that there is no immediate connection between business foundation and
business execution. Yet, more often than not the general population who have more learning
about business foundation know about business and managing an account.

Unwillingness to Pay
Sometimes people willingly don’t pay the loan. It’s a common phenomenon in Bangladesh.

It happens more in security banking sector because security-banking loan is weak. In this
type of loan customer feel that defaulting loan may not harm them.

Absence of Supporting Facilities

28
Now and then business requires bolster from different sources like government expert. At the
point when income is lean and the task is in hush, it needs nourishing. Without additionally
encouraging organization may wind up wiped out and cause misfortune in back to back eras.
In our nation, a large portion of the organizations doesn't have the supporting sources with
which they can withstand the turmoil that comes into their business every once in a while.

Non-appealing Industry

According to Bangladesh Bank Review, “Some of the time non-alluring industry goes about
as essential driver of advance default. Organizations working in non-appealing businesses
have higher likelihood of performing poorly. In light of poor monetary execution,
organization's income gets influenced. In view of income the organization turns out to be less
fluid which contributes to defaulting bank advance. Not really that every one of the
organizations on-appealing industry performs poorly.”

For example: Assume in Bangladesh Jute industry is one of the non – appealing ventures.
Directly any money related master need to place assets into this section may on the grounds
that adversity. So this budgetary pro can't pay the interest.

Solid Competition
In the study of Bangladesh bank states, “The solid rivalry does not straightforwardly
contribute to defaulting advance. In the solid rivalry, just effective players survive. So the
wasteful organizations think that its hard to make benefit and deal their item. When they
neglect to make benefit, the organization is probably going to default its credit portion in the
bank”.

Poor Management ability

According to Bangladesh Bank Report (2016), “Before authorizing an advance banks
investigate the issue that how the administration of the organization is. On the off chance that
the bank feels that the administration is sufficiently competent to effectively maintain the

29
business and use bank fund, at that point bank consent to back generally not. Administrative
ability assumes the fundamental part in reimbursing bank advance. The more expert the
administration is, the less the likelihood of defaulting credit is.”

Poor Financial Performance

According to Bangladesh Bank Report (2016), “Unquestionably poor budgetary execution is

the most vital reason for credit default. Once an organization isn't dissolvable, it is probably
not going to reimburse its credit. Poor money related execution is the key purpose for most
extreme credit default.”

Poor Cash Flow

As a rule, “Poor income is the outcome of poor monetary execution. In light of poor income
organizations principally default advance. In view of sporadic income, business ends up
shaky and illiquid. All things considered, business does not have enough money to benefit
credits installment and premium.”

Low Market Share

The review of Bangladesh Bank states,“The low piece of the overall industry might be a
reason for credit default yet not a solitary respondent said it as one reason for their advance
default. Working in a specialty showcase, having a low piece of the pie a firm can be
sufficiently gainful to reimburse its whole credit commitment and additionally hold sizable
winning. However, working in specialty item in a market which isn't legitimate or has fewer
clients that are expected then it can't be gained. So it can't pay its advantage installment.”

Absence of Proper Monitoring

According to Bangladesh Bank Report (2016), “Observing is a standout amongst the most
imperative parts of money related organizations. Here and there dispensed cash is utilized for
purposes other than the particular zones. All things considered, the danger of advance default

30
gets higher. Banks endorse advance based on the attainability of the task. Bank as a
moneylender expects that the credit will be overhauled by the income produced by that
specific business. In any case, if credit is utilized as a part of some different regions wanted
income may not originate from the business and possibility of advance default gets high.
Consequently banks screen exercises of the borrower whether the reserve is as a rule
appropriately used or business is creating enough income or not. Banks utilize specific
configurations for advance observing. Bank intermittently survey the execution of the
borrower and in light of that bank chooses whether to recharge the offices or not. The
apparatuses utilized for checking are portfolio audits, benefit examination and so on before
assorted advance, Banks can check the FICO score of the association. Banks can create data
about borrowers from Bangladesh Bank. At that point, banks can choose how much cash
financial specialist needs and how much cash he will be contributed. Valuation culture of the
security or insurance is truant in a large number of banks.”

3.3.2. Non- performing loan in Bangladesh

According to Bangladesh Bank Report (2016), “In Bangladesh, the issue of nonperforming
loan isn't wonder. Amid the early freedom time frame (1972-1981) the seeds of
nonperforming advance really developed by the extension of credit strategies on the close by
a weak and in the firm managing an accounting framework joined with an untalented work
constrain on the other. In the beginning period the development of credit strategy was
coordinated for the dispensing of credit on generally less demanding term, however, this
arrangement really grows credit on the ostensible term.”

3.4. Corporate Governance and Non-Performing Loan

As indicated by Siamat (2005), “NPL proportion can be utilized to decide what number of
potential awful obligations that must be foreseen by the bank. High NPL proportion indicates
the wasteful bank execution in dealing with the advantages. The GCG application atbank,
especially with the viable Independent Commissioners and Audit Committee, is relied upon
to decrease the wastefulness or potentially misrepresentation in loaning, which commanded
by top administration in different outrages and give effect of high NPL.” The GCG negative
impact on NPL has been exhibited in a study conducted by Ariyanto (2004) in Amaranggana
(2009).

31
 Chapter 4
Literature Review

32
Chapter-4: Literature Review

Corporate governance idea has gone further as a topic for the great investors, workers,
clients, financiers and to be sure of the notoriety of a country and its economy. The idea of
corporate administration is as of now states by the OECD(1999) as the framework by which
business partnership coordinated and controlled for the advancement of partners and
investors.

Researchers have faced some challenges to analysis the impact of corporate governance on
non-performing loan. Yakasai(2001) states, “board size could be an ideal measures of
corporate governance.” However, (Chiorazzo et al., 2008) has argued, “corporate ownership
and control is the measure of corporate governance for big and non-financial institutions.”
According to Roman Et al., (2012), “Corporate should use those variables which have impact
on corporate performance.” After analyzing the concept of board size, structure and
composition Boone, Field Karpoffa and Raheja (2007) state, “Good corporate governance
good corporate governance practices enhances the bank performances as well as keep the
reputation on the bank in the overall market.”

In the developed countries corporate has taken stronger foothold compared to emerging
economies. Kolk and Pinkse states, “Good corporate hasmuch benefit on performance of the
bank. Good corporate governance also helps to reduce the non-performing loan of the
bank.”“Company that have higher standard of corporate governance reduces the risk level of
the company” (IFC, 2004). In a similar view, Barth, Caprio and Levine (2006) also pointed
in the same statement, “Good corporate reduce the risk of financial crisis, which can have
devastating social and economic costs.”
The chiefs are the center attributes of good corporate administration mechanism(Blair, 1995)
and are viewed as the officers of the organization by the organization law( Coleman, 2008).
Since executives are the individuals who control the organization, in light of the writing
board structure (board estimate, board creation, board councils and board decent variety)
could be utilized as an intermediary for estimating corporate administration in firms
(Enobokhane, 2010). The term board structure can be depicted in the way an association is a
structure regarding the governing body (Vaithilingam, 2006). In any case, Ogbechie and
Koufopoulos (2009) state that a board structure is a vital piece of the company as it assumes

33
part of the change of the bank. In the long run, this structure will affect the non-performing
advance of the bank.

According to Enobakhane, (2010), “ Board size is the total number of directors that a bank
has in its board structure. This is measured by the total number of directors (at least five)
needed by the central bank over the total number of directors in the board of directors at the
end of the annual financial year.” It obvious that the quality of directors have an impact on
the board functions as well as the performance of the bank. Enobakhare (2010) also argued,
“that total number of directors from outside the company to sit on the board divided by board
size for given period.” The empirical research pointed that firms committing reporting fraud
have more possibility to have a poor board of directors dominated by the insiders (Farber,
2005; romano et al., 2012). That’s why many nations have straightforward recommendation
on board omposition and independence of the banks(Huse, 2005). Busch(2008) states, “Both
regulatory framework and market best practices place more emphasis on board independence
in the bank’s management.” When it comes to the board committee, according to RBZ
(2004), “internal regulatory and supervision board chaired by an external director which over
sees the effective operation and acts of the board of directors. They are calculated as the total
minimum number of internal committees, in which the central bank and international
corporate governance cods needs at least three audit committees and risk committees.”

Roman et al. (2012) states that board advisory groups are exceptionally urgent components
for the corporate administration which screen corporate exercises and assurance of investor
esteem. Review panel and Risk administration advisory group helps the board to work its
obligation of audit the nature of advance portfolio (Najjar, 2011). Analysts and professionals
focus towards bank's corporate administration for the current monetary emergency. The Basel
Committee on keeping money Supervision (BCBS) states that“Effective corporate
governance practice are essential for achieving and maintaining public trust and confidence in
the banking system, which are critical for the absolute functioning of the banking sector and
economy”.

34
 Chapter 5
Methodology

35
Chapter-5: Methodology

5.1. Research Design

Different types of technical analysis are used in this research with a view to analyze the
collected data, and generate findings to determine the relationship between corporate
governance and non-performing loan. Here, various statistical tools are applied. Actually, two
types of statistical analysis are used such as Descriptive Statistics and Inferential Statistics.

Measures of Central Tendency (Mean, Median)

Descriptive
Statistics
Measures of Dispersion (Standard Deviation)
Data Analysis
Techniques Fixed Effects Regression Model

Inferential
Random Effects Generalized Least Square Regression Model
Statistics

Hausman Test

Figure: Data Analysis Techniques

Descriptive Statistics

The descriptive statistics is used to analyse each variable of the research separately.
Descriptive statistics are brief descriptive coefficients that summarize a given data set, which
can be either a representation of the entire population or a sample of it. Descriptive statistics
are broken down into measures of central tendency and measures of variability, or spread. In
Descriptive analysis, the researcher used identification of, mean, median, standard deviation
etc.

Inferential Statistics

The inferential statistics are used to analyze the relationship between the variables of the
research. Two types of regression analysis that are used in this research include Fixed Effects
Regression model and Random Effects Generalized Least Square Regression model.
Hausman Test is also used here. This test evaluates the consistency of a variable compared to
another less efficient but consistent variable. As, the probability value is greater than 0.05, the

36
researcher used Random Effects Generalized Least Square Regression model for explaining
the relationship among the variables.

Statistical Tools

The researcher used professional statistical analysis software Eviews, MS Excel to analyse
and present the collected data.

5.2. Research Method

In this research, regression analysis technique is selected to use in the data analysis purpose
for identifying the relationship among the variable. A regression is developed with all the
available variables. The Model is formulated based on considering the theory rather than
empirical evidence. In a Random Effect Generalized Least Square model a variable is used to
show the relationship between explanatory variable and control variable and the variable to
be explained. The regression analysis has three steps namely model formulation, estimation
of parameters and interpretation of parameters. Before parameters are calculated, it is
necessary to formulate the regression model or equation. Next two steps depend on the
correct formulation of the model. In this research, the variable to be determined and the
variables that will be used in determination of the variable is known which helped in
formulating the Random Effect Generalized Least Square model equation.

Regression analysis has been used through the study to find out whether corporate
governance variables can explain the variation in nonperforming loans.

So,

NPL = f(cg).

NPL = f (bc, bs, ps, cac )

The function could be expressed using the least square structure as:

NPL = a0 + a1bci +a2bsi + a3psi + a4aci + c

Here,

Dependent variable

NPL = Non-performing loans

37
Independent Variable
CG = Corporate governance

Determinants of CG
BC = Board Composition
BS = Board Size
CAC = Composition of Audit Committee
PS = Power Separation
a1, a2 a3, a4 = Linear regression co-efficient.
e = error terms

5.3. Identification of Variables

Nonperforming loan is dependent variable and corporate governance that is composition of
board, size of board, composition of audit committee and power separation are the
independent variables of the study. These terms are defined in the following table:

38
5.4. Data Collection Plan

The researcher the secondary sources of data are used to collect the required quantitative data
for the research. The researcher used audited and published Annual Reports, Dhaka Stock
Exchange (DSE) monthly reviews, DSE websites and company websites to collect required
secondary data from 2012 to 2017.

5.5. Sampling Method

The method in which the researcher takes a sample from the population of the data is called
the data sampling method.

5.5.1. Identification of Population

The purpose of this study is to analyze corporate governance and its impact on
nonperforming loan in Bangladesh banking sector. So, the population of the research is all
the. The data source is the financial information of 30 commercial banks from the
commencement of the banks.

5.5.2. Sample Size and Selection

The researcher selected the financial data and non-financial from year 2012 to 2017 of the 30
commercial banks of the Bangladesh as the sample size of the research. In this research,
annual reports, monthly reviews of DSE from 2012 to 2017 for the 30 commercial banks of
Bangladesh are collected as data sample.

Collection of all the data from the population is difficult, complex and sometimes impossible.
So, the use of sample assists in selecting a representative amount of data to conduct the study
that represents the whole population.

39
Chapter-6: Analysis, Findings and Discussion

6.1. Descriptive Statistics

Descriptive statistics portray the important features of a given data set in a concise view.
Actually, it shows the summary result of any given dataset. Descriptive statistics is important
in understanding the basic features of a dataset. The important measures under descriptive
statistics include Mean, Standard Deviation etc. The difference between descriptive statistics
and inferential statistics is that descriptive statistics is concerned with showing the features of
the data where inferential statistics is concerned with showing the relation within the dataset.
In the following table, the descriptive statistics of the dataset is given.

Composition
Board of Audit Power NPL% of
Board Size Composition Committee Separation Total Loan
Mean 15.100 0.192 0.393 0.287 0.060
Median 15.000 0.176 0.000 0.000 0.048
Mode 15.000 0.150 0.000 0.000 0.035
Standard
Deviation 4.104 0.078 0.490 0.454 0.059
Table: Descriptive Statistics

6.2. Regression Analysis

6.2.1. Correlation Matrix

Board
Board Compositio Composition of Power NPL% of
Size n Audit Committee Separation Total Loan
Board Size 1.000
Board Composition -0.647 1.000

40
Composition of
-0.086 0.477 1.000
Audit Committee
Power Separation 0.121 -0.252 -0.118 1.000
NPL% of Total
-0.097 0.067 -0.040 0.017 1.000
Loan

41
6.2.2. Fixed Effects (within) Regression

In a fixed effects model the parameters are fixed or non random. The result of random effect
model is explained below.

Table 1: Fixed-effects (within) Regression Estimates

NPL% of Coef. t-statistic Prob.

T.Loan
C 0.038354 0.515257 0.6074
BC -0.092434 -0.605876 0.003
BDSZ 0.002031 0.560630 0.5761
CAC 0.006410 0.352329 0.7252
PS 0.021026 0.402244 0.6882
R-square value = 0.297 Number of obs = 150
Number of cross = 30
sections

From the regression result in table 4, it is identified that all the variable of corporate governance
such as board composition, power separation, composition of audit committee, board size have
probability value higher than 0.10. So board composition, power separation, composition of audit
committee, board size has insignificant relationship with non-performing loans.

42
6.2.3. Random-Effects GLS Regression

Table 2: Random-Effects GLS Regression Estimates

NPL% of Coef. t-Statistic Prob.

T.Loan
C 0.069426 1.590328 0.1139
BC 0.021198 0.195023 0.8456
BDSZ -0.000872 -0.470494 0.6387
CAC -0.004282 -0.332667 0.7399
PS 0.004001 0.302516 0.7627

R-square = 0.0054 Number of obs = 150

value Number of cross = 30
sections
Prob(F-statistic) = 0.9405

From the regression result in table 4, it is identified that all the variable of corporate governance
such as size of the board, power separation, board composition and composition of audit
committee. Probability value is higher than 0.10. So these variables of corporate governance
have no significant relationship with non-performing loan.

43
6.2.4. Hausman Test
For selecting the appropriate model among fixed effects model and random effects generalized
least square model, the Hausman can be used. In this test, null hypothesis, H0: Random effect
model is appropriate. And, alternative hypothesis, Ha: Fixed effect model is appropriate. In the
following table, the findings of Hausman test are given.

Figure: Estimates of Hausman Test

The probability is higher than 5% or 0.05. So, the Random-Effects GLS Regression model is
appropriate for the analysis.

44
6.2.5 Interpretation of the Result of Fixed-effects (within) Regression
According to the Random-Effects GLS Regression Estimates, components of corporate
governance such as composition of audit committee, power separation, size of the board, board
composistion have insignificant relationship with non-performing loan in the banks.

Table 3: Interpretation of the Relationship between Capital Investment and Significant Variables

Variables Coefficient Relation Impact

BC 0.069426 Insignificant Positive
BDSZ 0.021198 Insignificant Positive
CAC -0.000872 Insignificant Negative
PS -0.004282 Insignificant Negative

6.3. Discussion on Findings

Usually It can be expected that effective corporate governance can reduce the non performing
loan amount. But the overall technical analyses show that instructive variables are not
statistically significant with the theme. Basically the results express no significant impact on non
performing loan in commercial banking sector in Bangladesh. Through this study many other
factors found for causing non-performing loan other than corporate governance. These factors
can be entrepreneurs related, business related, lending related, macroeconomic related. Under
these issue there are several factors, such as entrepreneurs related nonperforming loan can be
occur for lacking of business background, business experience, limitation of institutional
training, not having supporting facilities, unwillingness to pay the loan etc.

Business related non-performing loan can be occur for inefficient management capability,
unsatisfactory financial performance, strong rivalry among companies, poor cash flow,
unattractive industry, low market share etc.

45
When it comes to the factors related to lending, fund delayed disbursement, lack of proper
monitoring and taking proper action, delayed assessment of loan proposal can cause non-
performing loan.

There are also some macroeconomics factors that can cause non-performing loan such as
increasing crime, frequent policy changing, Hartal by the political parties etc.

46
Chapter-7: Conclusion

Conclusion
This research is aimed at investigating the influence corporate governance on non-performing
loan within the banking sector of Bangladesh.

Both fixed effects regression and random effect regression have been conducted. But both fixed
effects and random effects regression estimate, composition of board, composition of audit
committee, power separation and board size don’t have significant influence on non-performing
loan in banking sector in Bangladesh.

Through the overall studies, several variables of corporate-governance have been examined to
identify any with non performing loan in the Bangladeshi banking sector. But there are no
significant relationship found between corporate governance and non-performing loan. That’s
why the emphasis should sift to variables. For example, transparency, insider abuse,
accountability, disclosure etc variables of corporate governance should study to find out any
relationship with non-performing loans.

Some policy can be taken to reduce the non-performing loan such as banks should find out the
risk sensitive borrower and avoid them in granting loan. To identify risk sensitive borrowers
banks should collect information about their clients before granting loan. Banks can take help
from Bangladesh bank to collect financial information from the faithful sources. To prevent non-
performing loan bank should take collateral from their clients, so that if any defaults loan
happened banks can compensate from those collateral. Moreover banks should check the proper
value of that collateral from respective asset regulatory agency. However banks should quickly
identify the amount of nonperforming loan and take proper step against them

47
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Appendix

1. Fixed Effect Model Regression Output

50
2. Random Effect Model Regression Output

51
52