The Effect of Corporate Governance on Bank Performance Evidence From UAE

Abstract

Banks in UAE vary in their sizes, growth, market share, levels of market competition, complexity of financial instruments, etc. that impact their profitability. This reflects their management activities and, more generally, the way they develop and implement banking strategies that ensure growth and value creation and balancing out interests of all stakeholders involved. The researcher has a desire to have an in-depth understanding of banks in UAE. Considering how the banks are risk tolerant, manage different operations and departments, formulate strategy, and incorporate appropriate corporate culture, the researcher attempted to know the effect of corporate governance on banks performance. The area of this research is not easy to find a comprehensive topic in, at least not in the Middle East. The motivation behind this paper is to explore the UAE national banks' practices of corporate governance. The researcher analyzed corporate governance framework in UAE banks to study whether it help develop a sustainable risk/reward strategy for the banking industry in UAE. In order to examine the relationship between corporate governance and performance in UAE banks, the researcher prepared a detailed questionnaire to and collected data from the respondent. The research hypothesis was there is no correlation between the indicators of CG and the indicators of profitability in UAE commercial banks for 2017. The importance of this study revolves around the fact that the relationship between stakeholders and return levels are highly related to the finance and banking sector, and governance structure of any bank is fundamental to its existence; therefore, the role of CG is of great importance, and conducting practices and processes and formulating appropriate actions that could adapt to any risk level and provide the right alternative set of actions is important. The researcher attempted to study and test the causes that CG has on the bank performance. This causal study type of research leads us to classify it mainly into the explanatory type. Even though there is a description at the beginning about CG and profitability of banks, the ultimate goal is to test the impact of CG on banks profitability. The researcher employed the CG Index, descriptive statistics, correlation matrix, and multivariate regression to analyze the relationship between CG implementation and UAE banks' performance and test the hypotheses. Findings of the study revealed that several banks in UAE handle CG in a “checklist” approach, different from other regions which apply governance into practice. CG also handles the non-financial aspects. An important CG model has been developed by COSO that helps banks achieve their performance objectives in a management-adjusted way. It is assumed under normal conditions that the CG enhances bank performance. However, this depends on the quality of corporate governance implemented. The variables taken into account that would have a positive effect on performance were all the control variables. The regression models that were used to test the hypotheses did not support it. The effect of CG indexes showed that CG does not automatically result in better performance. Validity tests showed that model has to be improved, considering some moderate evidence on ROE. Forty percent of the variation in the ROE and a small amount of variation in ROA and PM are explained by the predictor variables used. An important CG model has been developed by COSO that helps banks achieve their performance objectives in a management-adjusted way. It is assumed under normal conditions that the CG enhances bank performance.