Academic journal article International Review of Management and Business Research

Banks Commitment to Corporate Governance and Their Performance: A Case of Jordanian Banks

Academic journal article International Review of Management and Business Research

Banks Commitment to Corporate Governance and Their Performance: A Case of Jordanian Banks

Article excerpt

Introduction

This study seeks to understand how Jordan banking sector is affected by the Corporate Governance (CG) requirements released by Basle Committee on Banking Supervision (BCBS) and Organization for Economic Cooperation and Development (OECD) and to investigate the effect of the application of CG codes on the performance of Jordanian banks.

Corporate governance is not about power, but about ensuring that decisions are made in the best interest of the organization1. Corporate governance is more broadly defined as a set of relationships between a company's management, its board, its shareholders and other stakeholders. It is an instrument to obtain business collectivity and transparency and to promote economic growth. It especially protects investors due to well-functioning financial markets. With the globalization, mobilization of capital, and integration of financial markets forced countries for effective corporate governance standards (Buiten, 2012). And this concept of CG became more significant and controversial, due to accounts of fraud, accounting scandals, inside trading, excessive compensation, and other failures of the governance, particularly in the developing countries (Benea, 2012).

Therefore, corporate failures prompted interest in the link between corporate governance and firm performance. The relation between corporate governance and firm performance has been the subject for many extensive studies in the last decade (Buiten, 2012). Researchers suggest that CG reforms in the non-financial sector may not be appropriate for banks and other financial sector firms (Adams & Mehran, 2003). This is based on the view that no single CG structure is appropriate for all industry sectors, and that the application of governance models to particular industry sectors should take account of the institutional dynamics of the specific industry. CG in the banking and financial sector differs from that in the non-financial sectors because of the broader risk that banks and financial firms pose to the economy (Alexander, 2004). Although CG in developing economies has recently received a lot of attention, yet corporate governance of banks in developing economies as it relates to financial performance has almost been ignored by researchers (Ayorinde et al., 2012).

This research will examine the extent to what do banks in Jordan engage in corporate governance issues on the national level. To come into that end, the current study investigates the level of adopting and implementing the CG practices by the Jordanian banks through examining the surveys of the corporate governance. Results of this research would shed some light on level of acceptability of the banks to behave responsibly.

The Research Problem and Questions

Banks and other financial institutions are a main reason of the world's recent financial crisis. The deterioration of their asset portfolios largely due to distorted credit management was one of the main structural sources of the crisis Fries et al., 2002). To a large extent, this problem was the result of poor and lack corporate governance codes in many countries and mainly in banking institutions and industrial groups. Schjoedt (2000) observed that this poor corporate governance, in turn, was very much attributable to the relationships among the government, banks and big businesses as well as the organizational structure of businesses (Ranti, 2011).

As Jordan considered part of developing countries, this study serves as a model to explore the extent to which a purse banks contribute to the general conditions of the CG system and the requirements of the country. Therefore, this research study addresses the following research questions:

1. To what extent do Jordanian banks apply the CG codes?

2. Does the application of CG codes affect the Banks performance.

3. What factors (e.g. Returns on Assets, Return on Equity, Earning per Share and Price Earning) affects the CG application? …

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