Research seminar in finance, MBA 3rd Trimester, Uniglobe College, Pokhara University, 7th June 2013.

Presented by: Anup Mool, Manish Bhattarai, Muna Baral and Ravi Bhandari.
A synopsis on: Relation between corporate governance and bank performance in Malaysia during the pre and post Asian financial crisis by Peong Kwee Kim and Devinaga Rasiah. About the author: Peong Kwee Kim is a lecturer in a faculty of business, multimedia university in Malaysia. Her areas of expertise are finance, banking, and corporate governance. Devinaga Rasiah is the lecturer in faculty of business, multimedia university. She has done a PhD. in banking and finance (MMU). She is the certified planner. Research context: This article attempts to identify and understand the difference between two types of banking ownership- the private domestic owned banks and the foreign owned banks in term of relationship between corporate governance and bank performance in the pre and post Asian financial crisis. Different variable uses in the article are corporate governance, bank performance, and ownership structure. This research uses capital adequacy requirement (CAR) as the main Proxy for corporate governance. CAR represents the degree of banks obedient functions towards the rules, which serve and protect the public interest. This research has used six exogenous variables that are relevant to access external corporate governance in banking base on the banks health level, which are capital ratio (CR), cash claim on central bank (CCC), secondary reserve ratio (SRR), loan to deposit ratio(LDR), Loan loss provisioning (LPP) and fixed assets and inventory to capital (FAI). In this research, the measurement of ownership structure is based on the highest proportion percentage of government connected ownership (OWNg) for private domestically on bank, and highest proportion percentage of foreign ownership (OWNf) for foreign owned banks in Malaysia. This research employee a single proxy for bank performance relevant to return on shareholders investment called return on equity (ROE). Purpose of study: To identify and understand the difference between two types of banking ownership- the private domestic owned banks and the foreign owned banks in term of relationship between corporate governance and bank performance in the pre and post Asian financial crisis. Significance of the study: The significance of this study is to view the corporate governance practices and performance in selected private domestically owned banks and foreign owned banks for the pre and post crisis. And this study has also been conducted to find relationship between corporate governance and bank performance. Study methodology: This research uses secondary data as the main data to measure and analyze the practices of corporate governance and performance in Malaysian banking system. The study employees the annual directors reports and financial statements of four private domestically owned banks and seven foreign owned banks in Malaysia as the source of samples data for the sample period from 1995-2005. This research uses simultaneous equation models by using generalize methods of moment (GMM). Apart from that this research adopts the regression model of Supriyatna et. al. (2007) Data findings: This research uses two types of data analysis methods, descriptive and inferential statistical analysis and regression model to analyze the sample data. Descriptive statistics for foreign-owned banks in the pre and post crisis The increase in capital adequacy ratio, in foreign owned bank was 1.67, 1.15, 0.13, 2.13, 0.26 and 1.51 in 1996, 1999, 2000, 2002, 2003 and 2005 respectively. For capital ratio has increase by 2.33, 1.53, 0.18, 6.21, 1.36 and 6.97 in 1996, 1999, 2000, 2002, 2003 and 2005. Foreign ownership increased by 0.86, 4.14, 1.97, 4.71, 0.57, and 0.18 in respective years as given above. Whereas capital adequacy ratio decrease by -0.04, -0.11, -0.08, and -0.72. Capital ratio decrease by -0.10,-0.53,-1.25, and -0.36. Percentage of foreign ownership decreased by -0.14,-.1.4,-4.71 and -0.14. FAI increased by 27.31, 5.50, 35.03 and 0.98 in 1997, 1998, 2001, and 2004 in respective years. FAI decline by -7.26,-38.88,-5.96,-2.98, 9.15 and 0.48 in 1996,199,2000,2002,2003 and

2005 respectively. Profitability of foreign banks based on ROE increased by 1.28,1.49,23.29,3.98,14.26 and 0.26 in 1996,1999,2000,2002,2003 and 2005 similarly ROE dropped by -6.99,-19.55,-4.80,and-15.06 in 1997,1998,2001, and 2004. Regression result for corporate governance in private domestically owned banks in the pre and post crisis. CARg=8.894+0.063CR - 0.043FAI + 0.042OWNg CARg=10.394+0.092CR- 0.060FAI +0.061OWNg t (4.896) (1.300) (-1.408) (1.204) t (6.652) (1.600) (-2.504) (1.808) Regression result for corporate governance and bank performance in private domestically owned banks in the pre and post crisis ROEg = 18.417+1.876CARg ROEg = 64.067+5.557CARg t (1.648) (1.790) t (3.973) (4.410) Regression result for corporate governance in Foreign-owned banks in the pre and post crisis. CARf = 11.947+0.098CR-0.080FAI+0.071OWNf CARf = 9.900+0.234CR-0.020FAI+0.061OWNf t (6.764) (1.800) (-2.976)(1.892) t (4.029) (7.689) (-2.752)(0.895) Regression result for corporate governance and bank performance in Foreign owned banks in the pre and post crisis ROEf = 23.80+2.314CARf ROEf = 10.811+0.878CARf t (2.976) (3.103) t (1.388) (2.032) Findings This study finds, there is linear relationship between corporate governance and bank performance. This research finding indicates that there is positive effect of corporate governance on bank performance. Thus, this finding has confirmed hypothesis better corporate governance leads to better bank performance. From the empirical analysis data, this research finds that foreign owned bank have better corporate governance practices that lead to better bank performance than foreign owned banks in the pre-crisis in Malaysia. The results indicate that foreign owned banks have better implementation of good corporate governance and have better bank performance than that of private domestic owned banks in Malaysia. The results suggest that reputable foreign owned banks are more able to implement good corporate governance than private domestically owned banks in Malaysia. Conclusion In pre-crisis, foreign owned banks had a better implementation of good corporate governance and had gained better performance than that of private domestically owned banks. In the post crisis, private domestically owned banks had a better implementation of good corporate governance, and had gained better performance that of foreign owned banks due to prudential regulatory and supervisory measures in internal governance and external governance by governance by government and central bank. The board must be more conscious and passionate of its role in establishing the ethical and cultural values of good corporate governance. Board diversity is always an important ingredient for those interactions to take place that are necessary to promote open and constructive engagements within board discussions and decision making processes. Implication The implication of study is to analyze the impact of good corporate governance in bank performance. It suggests that corporate governance practice ensure that banks maintain the level of risk they can handle and give depositors a sufficiently safe level of their saving and investment. Several regulation encouraging corporate governance practices are legal lending limits, the quality of assets, knowledge of your customers rules, and protection rules against money laundering. Limitation This research indicates politics as a main reason that affect the bank performance and corporate governance of private domestically owned banks. But there can be other external factors that affect the bank performance and corporate governance. All determined variable cannot be same in case of all company that has been observed. Thus, the result that has been made can be a generalization. Research states cultural likeness to be important determinant for the better corporate governance of domestically private banks after post crisis. But that may not be true for all domestic private banks. Recommendation Maximum possible sample needed to be included in research for bias free findings. Thank You