Corporate governance key to banks\\\' efficiency

Corporate governance in banks has gained importance against the backdrop of financial services being offered by them and their significant exposure to probable risks and difficulties.  From a narrow approach, corporate governance (CG) can be viewed as a mechanism through which concerned shareholders are assured that managers will act in their interests. From a broader approach, it can be viewed as a set of relationships among a company's management, its board, its shareholders, and other stakeholders. CG also provides a structure through which the objectives of the company are set and the means of attaining those objectives and monitoring performance are determined (OECD, 1999).

Now why is CG important for the banking sector? One straight answer is that it points to the nature of banks' business. A bank plays the role of an intermediary between depositors and borrowers. It channels surplus funds to the deficit areas. Public trust and confidence are critical for proper functioning of the banking sector. That is why effective corporate governance practices are essential for achieving and maintaining public trust and confidence. Poor corporate governance can erode market's confidence in the ability of a bank to properly manage its assets and liabilities, including deposits. This could debilitate a bank or prompt its liquidity crisis. And any bank failure can trigger significant consequences such as 'contagion risk'.

Here comes the role of a regulatory framework of CG. The Organisation of Economic Cooperation and Development (OECD) introduced a set of principles of governance in June 1999. They were considered the first and the most important five international principles of corporate governance, which have been reviewed in April 2004 by adding the sixth important principle. Along with this, the Basel Committee issued guidance to help ensure adoption and implementation of sound corporate governance practices by banking organisations. The Basel Committee on Banking Supervision is a committee of banking supervisory authorities which was established by the central bank governors of the G-10 countries in 1975. It usually meets at the Bank for International Settlements in Basel, Switzerland, where its permanent Secretariat is located. The Basel Committee has recognised eight principles which emphasise qualification and role of the board of directors and the role of senior management. It has also taken stock of the role of other stakeholders (like shareholders, depositors, auditors, government, employees etc.) to promote corporate governance.

 At present, there are four state-owned banks, four specialised banks, nine foreign private banks, 27 local private banks (excluding Islamic banks), and eight Islamic banks in Bangladesh. They play a vital role in the country's economy. Corporate governance should be implemented by these banks not only for their own welfare but also for the greater good of the economy.

The writer is a student of MBA, 15th Batch, the Department of Finance, the University of Dhaka. fnasreen.du@gmail.com