Bank Governance, Disclosure and Stability: Evidence from Africa

Abstract

The Stability of the financial system specifically, the banking sector is of a primary concern for economic management. The features of the financial sector are such that an entity’s failure could easily spill over to endanger the health of an entire economy. This explains the contagion effect of the sector. The weakness in the operations of the banking sector if not checked and controlled, can undermine the effective process of financial intermediation. The destructive macroeconomic externalities as a result of bank fragility underscores the need for financial sector, operating to maximize stakeholders’ interest and not solely for the shareholders. The corporate governance framework of this sector is unique from the non-financial sector hence, making it imperative to examine its uniqueness for banks stability. Further, corporate transparency through information disclosure is deemed relevant for market efficiency yet the banking sector regardless of the high supervision is classified opaque. The financial sector thrives on market trust and confidence since the business of banking is highly risky. Among the factors to influence trust and confidence of the market is the bank’s governance structures and information disclosure policies. This study investigates the effect of bank governance and financial disclosure on stability, and employs bank-level data from 29 African countries over the period 2006-2012. The motivations for the study are; 1- The ramifications of global financial crisis (banking crisis), particular on African economies spurs the debate on bank stability; 2- The aftermath investigations of the banking crisis revealed weak corporate governance and poor disclosure policies yet existing literature offer inconclusive results whereas literature on Africa is dearth hence the study bridges the gap; 3- the study draws attention to the stakeholder theory in bank governance given that the dominated agency theory appears deficient in addressing the governance challenges in the banking sector; and 4– to contribute to knowledge in the area of the bank governance, information disclosure, and stability. To appreciate the Africa financial sector dynamics and to advance knowledge, the study splits the sample into Non-Islamic and Islamic populated and developed and less developed credit market economies. The rationale is to enable comprehensive understanding of bank stability in Africa and its sub-divisions. The objectives for this study are; 1- to empirically examine the effect of internal governance structures on bank stability; 2- to examine the nexus on disclosure- stability; 3 – to investigate the relation between internal governance structures and financial disclosure; and 4- to examine the interactive effect of bank governance and disclosure on stability. This study employs the panel data framework which entails both cross-sectional and time series data to ensure that both time and entity observations are captured. The use of this method certifies reliability in results. For the purpose of the study, annual data is obtained from Bank Scope and World Development Indicators (WDI) databases. Specifically, corporate governance variables as well as bank-specific variables were captured based on data from Bank Scope, whiles data on macroeconomic conditions were obtained from WDI. The study period captures the unique events in the Africa economies. For instance, the shrink in GDP growths from average of 5% in 2007 to 2.8% in 2009, Nigeria banking crisis in 2009, credit contractions witnessed in the 2008-2009, the external shocks from the global financial crisis and also accounts for the effects of the second-generation reforms required for the institutional and structural defects. The empirical results show significant association between internal governance structures and bank stability. The study found a significant positive relation between CEO duality and bank stability as well as board size and bank stability. On the other hand, a significant negative association was established between non-executive board and bank stability as well as board gender and bank stability. The results show that the effect of internal governance structures on stability is not straight forward and had contextual influence. Also, the study found positive and significant relation for bank size, capital and stability. Further, findings show positive support for financial disclosure on bank stability given non-Islamic populated economy and that of developed credit market economies. The results suggest that the effect of financial disclosure on bank stability varies across the different forms of economies employed, making the effect of information disclosure on stability strongly contextual. The third empirical work found non-executive board, female board membership and audit independence supporting financial disclosure significantly. The fourth empirics found a complementary effect between bank governance and disclosure on stability. Whiles, other variables such as management quality, profitability, diversity, sale growth, inflation had adverse effect on bank stability. From the findings, we recommend that, policies be contextualized in line with bank governance and disclosure in relation to stability as the Africa settings is heterogeneous in nature. We further recommend that, in line with the complimentary effect between governance and disclosure, the market can leverage on both internal bank governance structures together with greater disclosure for transparency to promote market discipline and stability. We strongly advocate for punitive sanctions for banks’ board members for going against their fiduciary duties since their performance has influence on bank stability. We also propose strengthen of female board membership to boast their influence on corporate boards. Finally, we recommend that to strengthen bank stability, we need to augment the capital base and increase the size of the banks.