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BOARD OF DIRECTORS STRUCTURE AND BANK�S PERFORMANCE: EVIDENCE

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Article · June 2018

DOI: 10.18374/JABE-18-2.3

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 JABE, Volume 18, Number 2, 2018 ISSN: 1542-8710
 
BOARD OF DIRECTORS STRUCTURE AND BANK’S PERFORMANCE:
EVIDENCE FROM BANGLADESH

Sharmin Akter Eva, Voice of South Bangladesh, Bangladesh

Mohammad Saiful Islam, Leading University, Bangladesh
Mohammad Shibli Shahriar, Daffodil International University, Bangladesh
Rozina Akter, Daffodil International University, Bangladesh
Shakil Ahmad, Daffodil International University, Bangladesh

dx.doi.org/10.18374/JABE-18-2.3

ABSTRACT

The purpose of the study is to explore impact of the characteristics of board of directors (BoD) structure on
banking performance indicators of banking sector in Bangladesh. The sample size of the study consists of
31 banks in Bangladesh with complete profile of total 294 directors of the banks. Return on assets (ROA),
return on equity (ROE), non-performing loan (NPL) and capital adequacy ratio (CAR) of the 31 banks have
been selected as measures of banking performance. Besides, BoD structure of world’s top 5 biggest banks
which have reached into these positions due to their better performance have been taken into consideration
to depict the international best practices analyzing the complete profile of 66 board members of the banks
for making comparison. The research uses three categories of characteristics of BoD structure namely
board composition, educational qualification, and professional experience. Total 13 characteristics of BoD
have been considered under these 3 categories. Regressions have been performed separately for ROA,
ROE, NPL and CAR. The research paper provides empirical evidence that size of board of directors matters
in explaining ROA. Besides, existence of civil service holders as member of BoD matters in explaining ROE,
NPL and CAR. The study will support policy makers to develop and execute proper amendments toward
the transition into good corporate governance and better banking performance. Literatures have been rarely
found that focus on the impact of board of directors structure on bank’s performance in Bangladesh. Hence,
this study seems first to address such issue in the context of a developing country as Bangladesh covering
13 characteristics of BoD.

Keywords: Corporate governance; Board of directors; ROA, ROE, NPL, CAR.

1. INTRODUCTION

Banks deal with other’s money where fulfilling the interest of all the stakeholders seems very significant to
sustain in the perfect competitive banking sector of Bangladesh. Compared to other companies the
responsibilities of the board of directors of a bank are more significant as banks do business with depositors’
money where it is essential to build and maintain confidence of the depositors (BRPD Circular 11 of
Bangladesh Bank, 2013).Regulatory authority has given only the flexible guideline that competent and
professionally skilled persons should be considered as board of directors to formulate policy guidelines,
efficiently supervise bank activities and ensure good governance in bank management without mentioning
specifically defined expected characteristics from board members that must be enforceable with prudential
regulation(BRPD Circular 11 of Bangladesh Bank, 2013). BoD takes the responsibility on shoulder to
monitor management’s actions representing and protecting shareholders’ interest (Srivastava R.P., Masli,
A. et al, 2015). Customers’ deposit and owners’ (shareholders’) paid up capital are the two sources of
bank’s total working capital (Khaled, K.I, 2016). Paid up capital provides less than 10 percent of working
capital where customers’ deposit provides more than 90 percent of working capital (Khaled, K.I,
2016).Hence, owners suffer less than 10 percent where depositors suffer more than 90 percent as major
stakeholder of bank if bank fails(Khaled, K.I, 2016).

According to Adam Smith’sopinion, firm’s key to success deals with separation of ownership and control
which has been evidenced from his quotation “The directors of such companies, however, being the
managers rather of other people‘s money than of their own, it cannot well be expected, that they should

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watch over it with the same anxious vigilance with which the partners in a private co-partnery frequently
watch over their own. Negligence and profusion, therefore, must always prevail, more or less in the
management of the affairs of such a company.” (Smith, reprinted in 2008, p. 700; Horvath, Roman et al,
2012).Board of Directors is the part of the bank that deals with ensuring better performance and good
corporate governance looking after the interests of the employees, depositors, borrowers, government and
other parties that have interest into the bank. Structure of BoD seems very important determinant of better
bank performance and corporate governance because they are the vital decision making authority of the
bank. According to the corporate governance guideline of Bangladesh Securities and Exchange
Commission, number of directors in board should not be less than 5 and more than 20, number of
independent non shareholder director should be at least one-fifth of total number of directors in board and
the chairman and CEO cannot be the same person (Corporate Governance Guideline of BSEC, 2006).

Three banks out of the world’s five biggest banks came from China. According to the law regarding BoD
composition in China, number of directors in BoD of a bank shall not be less than 11 or exceed 19, number
of independent director shall not be less than one-third of total directors, chairman and president of bank
shall not be same person and chairman of the committees from BoD shall be independent director (Rules
of BoD in CEBCL, 2015). Banking sector in Bangladesh is in the process of transition into better
performance and standardized corporate governance through various amendments regarding BoD
structure since the inception of Banking Companies Act, 1991 in light with size of BoD, current tenure of
board members, introduction of independent director and depositor director, requirement for establishment
of audit committee, mainstreaming CSR activities in banking companies etc.(Siddiqui, J., Financial Express,
May 12, 2017).In 2017, two amendments in the BoD structure of banking sector have become talk of the
time that include increasing tenure of BoD from six years to nine years in a row and amendment of
appointing maximum four members from a family instead of two family membersas board members to
facilitate the sponsor directors (Kallol, A.S., Dhaka Tribune, May 08, 2017).

However, these two amendments seem contradictory to better performance and good corporate
governance according to somesenior bankers (Rahman, M. &Udddin, Z., Newage, May 09,2017).According
to the opinion of formal Bangladesh Bank Governor, Ibrahim Khaled, proposed amendments regarding
increasing tenure of directors to nine years, provision of allowing maximum four members from same family
and appointing directors without prior approval from Bangladesh Bank will create a monopolistic family
oriented banking sector adversely affecting depositor’s interest (Rahman, M. & Udddin, Z., Newage, May
09,2017). The proposed amendments in 2017 seems more controversial as it came in a situation under
allegations of loan scams and irregularities against directors of several banks (Rahman, M. & Udddin, Z.,
Newage, May 09,2017).Bank depositors borrowed Tk. 88,790.03 crore from each other’s bank through
mutual understanding until September 30, 2016 (Rahman, M. & Udddin, Z., Newage, May 09, 2017).
According to a report of Bangladesh Bank, 13.96 percent of Tk. 6,35,986.89 crore lend by 56 scheduled
banks were pocketed by 50-70 directors of 46 scheduled banks (Rahman, M. & Udddin, Z., Newage, May
09, 2017).Despite significant reforms in banking sector of Bangladesh, corporate governance status and
bank’s performance failed to reach its desired level which is still subject to investigate (Siddiqui, J., Financial
Express, May 12,2017).It is high time to determine whether these amendments have any implication or
significance to boost bank’s performance and ensure good corporate governance (Siddiqui, J., Financial
Express, May 12, 2017).

Some authors in Bangladesh and abroad have made efforts to investigate whether there is any impact of
BoD characteristics on organization’s performance or not. For example, the resultsof an empirical study on
local private commercial banks in Bangladesh evidenced that there is statistically significant positive
correlation between board size and Tobin’s Q (Kutubi, S.S., 2011). However, no statically significant relation
has been found in terms of ROA and ROE (Kutubi, S.S., 2011). Moreover, it has been statistically
significantly found from the research that proportion of independent directors in board and bank
performance is positively related (Kutubi, S.S., 2011).

Another study on Bangladesh reveals that outside independent directors in BoD are not good for better firm
performance that supports the agency theory of board leadership structure (Rashid , A., 2009). However,
only board composition and board leadership structure these two characteristics have been taken into
consideration in the research. It has been found from a research conducted on the banking sector in Nepal

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that board size negatively impacts on financial performance where proportion of independent directors in
BoD has positive impact on financial performance of commercial banks (Bhattrai, H.,2017).

A study on commercial banks in Malaysia found that independent directors positively influence cost
efficiency by monitoring and evaluating performance of management effectively (Chan, S.G. and Heang,
L.T., 2010). The study also found that board size and gender diversity have no significant impact on cost
and profit efficiency of banks (Chan, S.G. and Heang, L.T., 2010). The study covers only few variables as
BoD characteristics. Darmadi, S., (2013) has provided empirical evidence that educational qualification of
board members matters in explaining ROA to a certain extent in Indonesian firms. However, the research
has not taken into consideration any other category of characteristics of BoD.A study from USA suggests
that as insider ownership reduces agency problem, it influences positively on firm performance (Horvath, R
and Spirollary, P., 2012). Besides, it has been supposed from the study that independent directors reduce
firm’s performance preferring overly conservative business strategies (Horvath, R and Spirollary, P., 2012).
However, the research paper does not cover the banking industry solely in developed country. An empirical
research on European banks evidenced that bank’s cost and profit efficiency is negatively affected by board
size (Agoraki, M.E.K., Delis, M.D.et al, 2010). Hence, the research outcome contradicts with other
researches.

Unfortunately, the studies found from existing literature have some research gaps that are needed to be
addressed. Firstly, the existing studies in the area of BoD structure and bank’s performance are based on
USA and some other developed countries which are relatively scarce for developing countries as
Bangladesh.Secondly, present status of board characteristics with facts and figures has been found rarely
other than theoretical analysis in the context of banking sector in Bangladesh. Thirdly, existing studies show
little research evidence on BoD structure and banks performance in the context of banking sector in
Bangladesh covering only few variables.

The main goals of the research paper are to fill up these gaps identified from the existing literatures.
Therefore, firstly, the study has been conducted in the context of banking sector in a developing country as
Bangladesh. Secondly, present status of board structure of the banking sector in Bangladesh has been
shown with facts and figures generated from descriptive statistics. Thirdly, to test the impact of board
characteristics on bank’s performance, regression analysis has been conducted with 13 independent
variables and 4 dependent variables to have a robust idea in this field of study. The role of the
characteristics of BoD structure on bank’s performance has been examined empirically. The effect of
comprehensive characteristics of BoD structure including size of BoD, current tenure of board members,
percentage of independent directors, experience of board members, proportion of PhD holders, masters
degree holders and bachelor degree holders in BoD, proportion of chartered accountants, civil service
holders, bankers, faculty members, businessman and other professionals on banking performance
indicators have been investigated in this research paper.Banking performance indicators including ROA,
ROE, NPL and CAR have been taken into consideration.

The research paper has been structured in the following manner. Section 2 reviews previous relevant
literatures in this area. Section 3 describes research design in light with research sample, variable
measurement and research model used in the study. Analysis and empirical results have been shown in
section 4. Finally, section 5 concludes the paper with key findings and recommendations.

2. LITERATURE REVIEW

American study conducted by Horvath, and R., Spirollari, P. (2012) has found that as degree of insider
ownership reduces agency problems, it influences firm performance positively in USA. To improve future
prospects of firms, younger board members bear more risk and undertake major structural changes
(Horvath, R., Spirollari, P.,2012). Besides, independent directors deteriorate performance of firm due to
over conservatism in business strategies to protect shareholders with the cost of lower performance of firm
(Horvath, R., Spirollari, P.,2012).

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Study on 3000 firms in China, Canada and Burmuda evidenced thatfirm size,size of board, tenure of board
members, proportion of outside directors and available public information to outside directors are the
determinants of board committees’ activity where busy directors rarely serve on multiple committees to
avoid overload (Chen, K.D.,Wu, A., 2016). Educational qualification of board members and CEO matter to
a particular extend in explaining ROA as CEOs with degree from prestigious domestic universities show
significantly better performance than others who are without such educational qualification that has been
evidenced from developing economy namely Indonesia (Darmadi S, 2013).

Study on commercial banks in Malaysia reveals that cost and profit efficiency is negatively affected by
board size where impact of board composition is non-linear on profit efficiency. As independent director
plays an effective monitoring role reviewing and evaluating management’s performance, proportion of
independent directors in board is positively related to cost efficiency of the bank (Chan, S.G., 2010).
Besides, gender diversity has no significant influence in cost and profit efficiency (Chan, S.G.,
2010).MsFahmidaKhatun, Research Director of Center for Policy Dialogue in Bangladesh, has opined that
loans which are defaulted are approved by the bank directors in connection to the party in power (The New
York Times, 2016). Between FY 2009 and FY2012, about $ 565 million of assets were looted from state
owned BASIC bank limited which scam suspected chairman of the bank(The New York Times, 2016). Due
to some major scams in Sonali Bank Limited such as Hallmark group scam amounting BDT 344 million,
non -performing loan of the bank became 37% in 2014 where the bank had been recapitalized by BDT 640
million and BDT 700 million in FY 2014 and FY 2015 respectively (The New York Times, 2016).

Banks of Russia and Ukraine with better performance are less relative to corporate governance (Love, I.
and Rachinskey, A., 2007).In terms of ownership variables, financial variables and control variables, banks
in Russia are holding the better position (Love, I. and Rachinskey, A., 2007). In Russia, performance
measurements are positively correlated with corporate governance except reserve where only the net
interest income is positively correlated with corporate governance in Ukraine (Love, I. and Rachinskey, A.,
2007).

In terms of ROA and ROE, it has been found that Ukraine has to make a positive correlation with
governance and Russia should devote their attention in positive co-relation of reserve with governance
(Love, I. and Rachinskey, A., 2015).Corporate Governance (CG) mainly controls how well the interests of
the stakeholders are being maintained, reflecting the need for accountability in the handling money and the
ways of commercial activities (M. Shabuz & A. Jesmin, 2015).Critical areas of corporate governance are
responsibilities of the board where respective directors are aware of their responsibilities (M. Shabuz & A.
Jesmin,2015).In the banking sector of Bangladesh, shareholders rights and disclosure of informationare
not properly maintained, external auditor of the bank works as directed by the bank authority, independent
directors participating in the meetings rarely (M. Shabuz & A. Jesmin, 2015). It is required to put good
regulation and make it effective by strict implementation of ruleswith a view to having good corporate
governancein the banking industry of Bangladesh (M. Shabuz & A. Jesmin, 2015).

For a sound and transparent corporate system,the need for strengthening the corporate governance in
Bangladesh arises with a global demand at present (M. Shabuz & A. Jesmin, 2015).The large number of
companies listed in the stock exchange in Bangladesh should pay adequate attention to examine the
requirements for qualifications of directors including independent directions (M. Shabuz & A. Jesmin).
Empirical results from a research conducted in China represents that a significant fluctuation of China's
banking sector took placedue to reducing the state ownership and increasing the role of foreign ownership
(Berger, A.N., Hasan, I., et al, 2008).

According to previous Indonesian studies, size of firm positively influences performance of firms (Darmadi,
S.,2013). It was also evidenced from the study that generally family controlled firms are smaller in size
(Darmadi, S.,2013). It has been predicted that family control and firm performance are associated
negatively(Darmadi, S.,2013). Any pitfall in banking sector can have significant impact on overall economy
as Bangladesh is in the process of transformation into industry based country from agriculture based
country (Mahmood, R. et al., 2015). In spite of several guidelines of Bangladesh Bank, banking sector is
facing errors in terms of loan management, political influences, attachment of management through
nepotism rather than bank's interest, misleading information provided by head office, investment in risky

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project, inefficiency in collecting authentic information etc.(Mahmood, R. et al., 2015). Hence , betterment
of bank’s performance can be ensured through prudential regulation and supervision and consistent
attention toward customs, laws, policies and procedures of corporate governance (Mahmood, R. et al.,
2015).

3. RESEARCH DESIGN

3.1 Research Sample

Initial sample of this research consists of 48 scheduled banks against population size of 57 scheduled
banks according to the table of sample size developed by Krejcie & Morgan in 1970. Data of financial year
2016 has been taken into consideration as recent normal period to conduct the study.

Only the board members excluding CEO or MD of the banks have been considered in the sample as CEO
or MD is part of management who is highly qualified with at least 15 years of banking experience to be
eligible for the post according to law.

From the annual reports and websites of particular banks data only secondary data have been collected
for the study. Finally, complete data of BoD composition, educational qualification of board members,
professional qualification of board members, ROA, ROE, NPL and CAR required for the study have been
obtained from 31 scheduled banks due to unavailability of required information in the annual reports and
websites.

Stratified sampling has been used to conduct the survey from 31 scheduled banks excluding rest of the 17
banks of initial sampling. As, the banking sector of Bangladesh consists of state owned banks (state owned
commercial banks and specialized banks), private commercial banks and foreign commercial banks with
the proportion of 14%, 70% and 16% respectively, the proportion of total final sample has been developed
randomly according to the proportion.

Total number of board members of 31 banks under observation is 294 who have been analyzed. In addition,
BoD structure of 5 world’s biggest banks in terms of asset size titled ICBC, China Construction Bank, JP
Morgan Chase, Bank of America and Bank of China surrounding in three developed countries namely USA,
UK and China ranked in 2016 by Forbes under Global 2000have been taken into consideration to measure
international best practices of the characteristics of board members and making comparison with local and
foreign banks operating in Bangladesh.

3.2 Variable Measurement

The dependent variables in this research paper is accounting based banking performances which have
been measured by ROA, ROE, NPL and CAR (Darmadi, S., 2013). Independent variables are BoD
composition, educational qualification and professional qualificationdivided into three categories under 13
characteristics of BoD.BoD composition has been measured by size of board, current tenure of board
members, Proportion of independent directors and experience of board members.

Educational qualification of the board members has been measured by proportion of PhD, masters and
bachelor degree holders. Other degrees have been ignored due to not having any existence of the degrees
in board characteristics. Finally, professional qualification has been measured by proportion ofchartered
accountants, civil service holders, bankers, faculty members, businessman and other professionals.

3.3 Research Model

Regression model has been employed to test the impact of BoD composition, educational qualification and
professional qualification on banking performance. The regression model of the study is as follows:

Banking _ Performance   0  1 ( Board _ Composition)   2 ( Educational _ Qualification) 

3 (Pr ofessional _ Qualification)....................(1)

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Regression model has been run separately for separate banking performance indicators namely ROA,
ROE, NPL and CAR. Research variables of this studyhave been shown in table 01 of appendix.

4. ANALYSIS AND FINDINGS

Descriptive statistics and regression analysis have been employed for the purpose of the study covering
13 independent variables and 4 dependent variables under observation. All the variables have been
analyzed using SPSS software.

4.1 Descriptive Statistics:

Figure 01:Composition of Board of Directors

In terms of size of the BoD, it has been found that state owned banks and foreign commercial banks are
belonging in single digit with board members of 9 and 8 respectively. Board size reached double digits in
case of private commercial banks. Compared to the average board size of top 5 biggest banks in the world,
board size of the total banking sector is 10 which is 13 as international best practices. Average current
tenure for board members is 2 years in term of state owned banks which is 4 years in the industry.
Compared to the average of top 5 banks, our banking industry has lower current tenure by 2 years. In case
of percentage of independent directors in BoD, independent directors have been rarely found in state owned
banks; even the percentage is insignificant for private commercial bank and foreign commercial bank.
Banking sector in Bangladesh is far from the average percentage of independent directors maintained by
the top five biggest banks.Year of experience of board members is quite similar ranging from 30 years to
31 years in terms of private commercial banks, foreign commercial banks, banking sector average and top
5 biggest banks in the world. However, average year of professional experience of each board member is
37 years in case of state owned banks.

Figure 02: Educational Qualification of Board Members

In terms of educational qualification, PhD holder board members have been rarely found in the state owned
banks, commercial banks and overall banking sector in Bangladesh. However, PhD holder board members

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are 18 percent and 20 percent respectively in case of foreign commercial banks and top 5 biggest banks in
the world. In case of state owned banks, 89 percent board members are masters degree holders. Most of
the board members are masters degree holder in case of all categories of banks in Bangladesh. Bachelor
degree holders are 4 percent,32 percent and 16 percent respectively in case of sate owned banks, private
commercial banks and foreign commercial banks.

Bachelor degree holders seem higher in terms of top 5 biggest banks in the world with 36 percent compared
to overall banking sector with 23 percent. Board members educational qualification is quite balanced in
terms of top 5 biggest banks in the world as international best practice.

Figure 03: Professional Qualification of Board Members

It has been found that BoD of state owned banks are mainly dominated by civil service holders as 53
percent board members are from this professional qualification. BoD of private commercial banks is
dominated by businessman as 47 percent of board members are businessman. Most of the board members
are banker in case of foreign commercial banks as this profession covers 38 percent BoD members. It
seems that overall banking sector in Bangladesh is dominated by businessman where both bankers and
businessman dominate in the BoD of top 5 biggest banks in the world holding 30 percent and 31 percent
shares respectively in total board members.

No businessman has been found as board member in terms of state owned banks. Chartered accountant
and faculty members have been found in small proportion compared to other professions in case of all the
categories of bank. Highest proportion (17%) of chartered accounts has been found in foreign commercial
banks.

Figure 04: Banking Performance Indicators

Data Source: Developed by authors from Annual Report 2015-2016, Bangladesh Bank

With respect to most recent (2016) comparative banking performance indicators of four categories of banks
operating in Bangladesh, it has been found that both state owned commercial banks and specialized banks
are in negative figure taking into consideration return on asset and return on equity.Non performing loan
seems significantly higher for both thestate owned commercial banks and specialized banks with 25.7

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percent and 26.1 percent respectively.Percentage of NPL is within single digit in respect to both private
commercial banks and foreign commercial banks. However, capital adequacy ration of stateowned
commercial bank is positive with 5.8 percent but it is lower compared to there regulatory requirement of 10
percent as minimum capital requirementof BASEL II.Specialized banks are facing huge shortage of capital
with capital adequacy ratio of -34.7 percent.

Only private commercial banks and foreign commercial banks are complying with the regulatory
requirement with CAR of 11.9 percent and 23.8 percent respectively. If BASEL III is fully applied for all the
banks than complying with the regulation of minimum capital requirement of 12.5 percent will be very
challenging for all categories of banks except foreign commercial banks.

Figure 05: Trend Analysis of Return on Asset (ROA)

Data Source: Developed by authors from Annual Report 2015-2016, Bangladesh Bank

From the above figure of return on asset, it has been found that return on asset is in decreasing trend since
last 10 years which is a threat for the profitability and efficiency of all the categories of banks except foreign
commercial banks.

The trend is negative for specialized banks since long that is a matter of concern for the directors to run the
banks efficiently. ROA is highly instable and in risky position with respect to state owned commercial banks.
However, ROA is positive for PCBs but the trend is toward the downward direction which is matter of
concern. Hence, overall banking performance seems deteriorating.

Figure 06: Trend Analysis of Return on Equity (ROE)

Data Source: Developed by authors from Annual Report 2015-2016, Bangladesh Bank

Since the last 8 years it was in decreasing trend and it has become negative consistently since 2014 in
case of SCBs.ROE for both the PCBs and FCBs are close to 0 percent which arein decreasing trend that
can become negative in near future.ROE of SBs are negative since last 10 years except 2013 that is a
huge threat for the efficiency and profitability of this category of bank.In 2009, ROE of SBs decreased to -
170% which seems abnormal fluctuation in the banking sector.

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Figure 07: Trend Analysis of Non Performing Loan (NPL)

Data Source: Developed by authors from Annual Report 2015-2016, Bangladesh Bank

Percentage of non performing loan is highest with respect to specialized banks since last 9 years which
has become 33 percent in 2014 as highest percentage. NPL of state owned banks was 30 percent in 2007
but it was reduced sharply till 2011 reaching NPL of 12 percent. Since 2011, NPL rate of overall banking
sector is in increasing trend sharply threatening the banking sector. Rate of NPL for both PCBs and FCBs
are within single digit since last 10 years but the trend is increasing gradually. NPL ratio of overall banking
sector is around 10 percent in 7 years among last 10 years.

Figure 08: Trend Analysis of Capital Adequacy Ratio (CAR)

Data Source: Developed by author from Annual Report 2015-2016, Bangladesh Bank

Foreign commercial banks are within safe zone with respect to capital adequacy ratio maintaining above
20 percent CAR in last 9 years among last 10 years. SCBs maintained above 10 percent CAR as required
by the regulation in only 2 years among last 10 years under the scenario of decreasing trend of the
indicator.Both PCBs and FCBs are maintaining CAR slightly above 10 percent since last 10 years
complying with regulatory requirement. CAR status of SBs seems threatening for the whole banking
industry as the indicator is in sharply decreasing trend since last 10 years. SBs are running with significant
capital shortage with negative CAR in 9 years among last 10 years where highest negative CAR has been
seen in 2016 with -34.7 percent.

4.2 Regression Analysis:

Regressions are employed to test the impact of board composition, educational qualification of board
members and professional qualification of board members on banking performance indicators. Regression
has been run separately for ROA, ROE, NPL and CAR. Models are tested first to identify and resolve
collinearity problems. Regression results of characteristics of BoD structure and ROA has been reported in
Table -02 of appendix.Using ROA as dependent variable in model 1, it has been found that only size of

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board of directors under the aspect of board composition matters to explain return on asset (ROA) with p
value of 0.058 which is statistically significant at 10 percent level.Rest of the independent variables under
observation are not statistically significant to explain return on asset as p value is greater than 0.10. The
value of coefficient is 0.497 against board size showing positive correlation. Hence, it has been found that
if the size of board of directors increases than return on asset increases through enhancing the profitability
and efficiency of banks. Value of R2in the model is 0.399 which signifies that the independent variables
under observations explains the dependent variable by 39.9 percent.

Regression results of BoD structure and ROE have been evidenced from Table -03 of appendix. It has
been found using regression model 1 that only civil service holders as board members under the category
of professional qualification matter to explain return on equity (ROE) with p value of 0.059 which is
statistically significant at 10 percent level. Other 12 variables are not statistically significant to explain return
on equity. The values of coefficient and R2 in the model are -0.698 and 0.493 respectively where the
correlation is negative. Hence, it has been found that if the proportion of civil service holders as professional
experience increases as board members than return on equity of thebank decreases deteriorating the
profitability and efficiency of banks. From table-04 of appendix, it has been evidenced that only civil service
holders as board members matter to explain non- performing loan (NPL) with p value of 0.051 which is
statistically significant at 10 percent significance level. The value of coefficient is 0.605 that signifies positive
correlation between proportion civil service holders in BoD as board members and percentage NPL.

Therefore, it has been evidenced that civil service holders as board members stimulate NPL. Coefficient of
determinant, R2 is 0.648 which indicates that 13 independent variables under observation in the regression
model 1 explains percentage of NPL by 64.8 percent. In terms of testing the impact of BoD characteristics
on capital adequacy ratio of banks, it has been found that only civil service holders among all the 12
dependent variables matter statistically significantly to explain CAR at 10 percent level as the p value is
0.053. The value of correlation coefficient is -0.655 which signifies that there is negative correlation between
percentage of civil service holders as board members and CAR of the bank. Therefore, it has been
evidenced that civil service holders as board members stimulate capital shortage of banks.CAR of the
regression model 1 is explained 57.8 percent by the independent variables under observation as the value
of coefficient of determinant, R2 is 0.578.

5. CONCLUSION AND RECOMMENDATION

The empirical evidence of descriptive statistics of the research paper depicts that under the characteristics
of board composition, all the banks are complying with the regulatory requirement remaining within the
stipulated range of the board size in Bangladesh that starts with minimum 5 members. But, regulatory
requirements in the countries as China where the world’s biggest and well reputed banks are operating
shows that their required minimum board size starts from two digit. No depositor director has been found
in any bank under observation to protect the right of the depositors that is why the variable has been
ignored. Only 12 percent board members are independent directors in the banking sector of Bangladesh
which is far behind from the international best practices as evidence shows that 42 percent board members
are independent directors in world’s 5 biggest banks.

Current tenure and experience of board members are similar to the international practices under the
category. Under the characteristics of educational qualification of board members, it has been found that
there is a dominance of master degree holders (57percent). Around 89 percent of board members in state
owned banks are master degree holders. Only 10 percent board members are PhD holders in banking
sector where 23 percent board members are bachelor degree holders. International best practices also
show dominance of master degree holders (50 percent) in BoD but they have PhD holders as board
members amounting 20 percent. Characteristics of professional qualification evidenced that state owned
banks are highly dominated by civil service holders (53 percent) as board members. Private commercial
banks are dominated by businessman (47 percent ) where foreign commercial banks are dominated by
bankers (38 percent) as board members. Dominance of businessman exists in overall banking industry as
30 percent board members has this professional qualification. International best practices show dominance
of both businessman (31 percent) and bankers (30 percent) as professional qualification of board members

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 JABE, Volume 18, Number 2, 2018 ISSN: 1542-8710
 
in BoD. From the regression analysis, it has been significantly evidenced that if size of board members
increases in BoD than it maximizes return on assets. Besides, if proportion of civil service holders as board
members increase in BoD than it minimize return on equity. Evidence of the research shows that increased
proportion of civil service holders in BoD risespercentage of non- performing loan. At last, it has also been
found that higher proportion of civil service holders in BoD results lower capital adequacy ratio.

The research paper empiricallysuggests that the minimum size of BoD prescribed by regulation needs to
be increased from existing 5 board members to stimulate proper decision making in BoD minimizing
concentration of ownership and family control resulting maximization of bank’s profitability and efficiency. It
is the urgent need of the banking sector to increase the proportion of independent directors and instigate
the depositor directors in BoD as per international best practices.

State owned banks are operated by highly experienced (37 years) and highly qualified (89 percent masters
degree holders) civil service holders (53 percent) since long but these banks are out performing banks.
Besides, it has been evidenced from the study that they have significant impact on the banking performance
indicators of private commercial banks and foreign commercial banks to deteriorate their performance.
Hence,it is the high time to investigate the reasons for such inconsistency taking consideration into the
independence of the directors in decision making rather than their qualification.

As private commercial banks are dominated by businessman who are mostly from RMG and textile
industries, special attention have to be given by the regulators on proper lending decision of large loans to
proper industry rather than nepotism based name lending by the directors.Most of the default borrowers
came from RMG and textile industry according to the disclosure of top 100 defaulters in 2017 by government
(Tribune Desk, 2017). BoD structure of the banking industry in Bangladesh seems not well organized as it
is far more behind the international best practices, that is why it has been evidenced that only few
characteristics of BoD contribute for stimulating banking performance.

Finally, proper amendments in law in with respect to BoD characteristics taking consideration into their
implications and proper enforcement of the amendments have to be ensured strictly for better performance
and good corporate governance in the banking sector of Bangladesh.

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 JABE, Volume 18, Number 2, 2018 ISSN: 1542-8710
 
APPENDIX

Table:01
Variable Description
Dependent Variables
Banking Performance Indicators
ROA Percentage calculated by dividing bank’s net income by total asset.
ROE Percentage calculated by dividing bank’s net income by shareholders equity.
NPL Percentage of total loan which the borrower is not repaying within due date.
CAR Percentage of bank’s risk weighted credit exposure maintained as statutory
minimum capital requirement
Explanatory Variables or Independent Variables
Board Composition
Size Total number of board members in board of directors (BoD) of a bank
Tenure Average current tenure in year without any interval as a board member of any bank
Independent Percentage of independent directors in BoDof each bank under observation
Experience Average experience of board members in each bank
Educational Qualification
PhD Percentage of PhD holder in BoD of each bank under observation
Masters Percentage of masters degree holder in BoD of each bank under observation
Bachelor Percentage of bachelor degree holder in BoD of each bank under observation
Professional Qualification
CA Percentage of chartered accountant in BoD of each bank under observation
Civil Percentage of civil service holders(officials of different ministries and other
government organizations) in BoD of each bank under observation
Banker Percentage of banker in BoD of each bank under observation
Faculty Percentage of faculty member in BoD of each bank under observation
Businessman Percentage of businessman in BoD of each bank under observation
Others Percentage of board member other than the above mentioned professional
qualification in BoD of each bank under observation

Table: 02
Coefficientsa
Unstandardized Standardized
Coefficients Coefficients Collinearity Statistics
Model B Std. Error Beta Sig. Tolerance
1 (Constant) 21.021 26.226 .434
Size .385 .190 .497 .058 .588
Tenure .046 .253 .048 .857 .515
Independent -.008 .044 -.047 .851 .582
PhD -.224 .264 -.772 .408 .043
Masters -.221 .257 -1.701 .403 .009
Bachelor -.251 .280 -1.681 .383 .010
Experience -.007 .107 -.018 .951 .419
CA .038 .082 .120 .648 .535
Civil -.074 .050 -.553 .160 .250
Banker -.006 .059 -.027 .925 .430
Faculty .057 .131 .132 .667 .392
Others -.002 .033 -.014 .956 .555
Businessman -.008 .037 -.067 .842 .318
a. Dependent Variable: ROA
Durbin- Watson: 2.161, Sig. Level : 10%.
R = 0.632
R2 = 0.399

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 JABE, Volume 18, Number 2, 2018 ISSN: 1542-8710
 
Table: 03
Coefficientsa
Unstandardized Standardized
Coefficients Coefficients Collinearity Statistics
Model B Std. Error Beta Sig. Tolerance
1 (Constant) 167.897 131.774 .220
Size .308 .954 .073 .751 .588
Tenure .381 1.272 .072 .768 .515
Independent .033 .219 .034 .882 .582
PhD -1.285 1.327 -.809 .347 .043
Masters -1.359 1.292 -1.915 .308 .009
Bachelor -1.661 1.409 -2.031 .255 .010
Experience -.355 .540 -.176 .519 .419
CA -.363 .410 -.209 .387 .535
Civil -.508 .251 -.698 .059 .250
Banker -.115 .296 -.102 .703 .430
Faculty .308 .656 .130 .644 .392
Others -.145 .166 -.203 .394 .555
Businessman .017 .187 .028 .927 .318
a. Dependent Variable: ROE
Durbin- Watson: 1.636, Sig. Level : 10%.
R = 0.702
R2 = 0.493

Table: 04
Coefficientsa
Standardized Collinearity
Unstandardized Coefficients Coefficients Statistics
Tolerance
Model B Std. Error Beta Sig.
1 (Constant) -71.918 78.081 .370
Size .344 .566 .114 .551 .588
Tenure -.340 .754 -.091 .657 .515
Independent -.060 .130 -.088 .649 .582
PhD .523 .787 .463 .515 .043
Masters .648 .766 1.286 .409 .009
Bachelor .766 .835 1.317 .372 .010
Experience .324 .320 .225 .325 .419
CA .129 .243 .105 .602 .535
Civil .313 .149 .605 .051 .250
Banker .109 .175 .137 .541 .430
Faculty -.085 .389 -.050 .830 .392
Others .043 .098 .084 .671 .555
Businessman -.102 .111 -.236 .368 .318
a. Dependent Variable: NPL
Durbin- Watson: 1.339, Sig. Level : 10%.
R = 0.805
R2 = 0.648

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 JABE, Volume 18, Number 2, 2018 ISSN: 1542-8710
 
Table: 05
Coefficientsa
Standardized
Unstandardized Coefficients Coefficients Collinearity Statistics
Model B Std. Error Beta Sig. Tolerance
1 (Constant) 30.727 53.461 .573
Size .061 .387 .032 .876 .588
Tenure .469 .516 .199 .377 .515
Independent -.050 .089 -.116 .581 .582
PhD -.023 .539 -.033 .966 .043
Masters -.188 .524 -.597 .724 .009
Bachelor -.205 .572 -.563 .725 .010
Experience -.055 .219 -.061 .804 .419
CA .150 .166 .195 .378 .535
Civil -.212 .102 -.655 .053 .250
Banker .139 .120 .279 .261 .430
Faculty .046 .266 .044 .864 .392
Others .015 .067 .046 .830 .555
Businessman -.048 .076 -.178 .534 .318
a. Dependent Variable: CAR
Durbin- Watson: 1.648, Sig. Level : 10%.
R = 0.760
R2 = 0.578

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AUTHOR’S PROFILE:

Sharmin Akter Eva has completed her MBA degree in Banking and Insurance from Dhaka University in
2011. Currently, she is serving as research associate in Voice of South Bangladesh. She has participated
in several national and international conferences. The author has several research papers in the areas of
money laundering, management theories, urban transformation etc.

Mohammad Saiful Islam has completed his MBA degree in Banking and Insurance from Dhaka University
in 2011. He is a former banker. Currently he is serving as Lecturer (Banking) in Leading University,
Bangladesh. The author has been awarded “Reviewers’ Choice Award” in 2016 from Bangladesh Institute
of Bank Management for his research paper under the category of “Financial Inclusion and Digital Financial
Services”. He has also become finalist (top 12) of the reality show titled “Young Leaders Program- 2016”
organized by Channel i and powered by Incepta. The author has several research papers in the areas of
readymade garments industry, economic growth, branding, ADP implementation, electronic money,
management theories, river restoration etc. He has participated in different national and international
conferences.

Mohammad Shibli Shahriar has been serving as a university faculty since 2001. He is currently serving
as Associate Professor and Head in the Department of Entrepreneurship at Daffodil International University.
He has got 10 research papers and 12 research monographs published both locally and internationally. A
qualified faculty and certified master trainer from UK, Shibli loves to inspire people to find happiness and
success in life.

Rozina Akter is a Senior Lecturer, Department of Business Administration, Daffodil International University,
Dhaka, Bangladesh. She completed MBA from University of Dhaka, Bangladesh. She teaches Finance &
Banking. She has been teaching for more than 4 years. She is doing research for more than 4 years and
has a strong knack for research. She has more than 4 research publications in several reputed national
and international peer reviewed journals. She is the member of Editorial Boards of several International
Journals and Conferences. She presented research papers in more than 4 national and international
conferences.

Shakil Ahmad - Research interests of Shakil Ahmad are centered on the broad area of the Finance,
Modern Finance, Banking, Economics, Business, Social Studies, Technology and Innovation. He is
generally interested in the economic policy, finance and innovation and how these can help with socio-
economic development. Recently, he has become increasingly interested in linking and combining
innovation studies and theories with public policy literature.

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