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University of Kirkuk Journal For Administrative
and Economic Science (2024) 14 (3): 358-375
ISSN:2222-2994 Vol. 14 No.3 358
Aziz Gulderan A. & Othman Wuria M. .The impact of bank governance on financial performance: a sample of
commercial banks in Erbil city. University of Kirkuk Journal For Administrative and Economic Science (2024) 14 3):358-375.
The impact of bank governance on financial performance: a
sample of commercial banks in Erbil city
Gulderan A. Aziz 1, Wuria M. Othman 2
1,2 University of Salahaddin - College of Administration and Economics1Erbil, Iraq
Gulderan.aziz@su.edu.krd 1
Wuria.othman@su.edu.krd 2
Abstract: Banks are one of the important players in the financial system in any
economy. This research paper seeks to examine the effects of banking governance on
specific financial performance indicators in a sample of commercial banks in Erbil.
Data collection was conducted using a random sampling method and a five-point Likert
scale questionnaire. Survey questionnaires were distributed to 82 bank officials, and the
data collected were analyzed using statistical software such as SPSS and Easy Fit to test
hypotheses through simple and multiple regressions. The study's results indicate that
corporate governance significantly impacts financial performance. Additionally, the
findings demonstrate a direct relationship between banking governance and
profitability, liquidity, and loan portfolio management. The authors recommend
implementing training programs for bank officials to improve their governance skills
and strengthening the application of bank governance to protect against financial fraud,
manipulation, corruption, crises, and bankruptcy.
Keywords: Corporate Governance and Bank Financial Performance.
SPSSEasy Fit
ISSN 2222-2995
University
of Kirkuk Journal For Administrative
and Economic Science
University of Kirkuk Journal For Administrative
and Economic Science (2024) 14 (3): 358-375
ISSN:2222-2994 Vol. 14 No.3 359
ahmad.hmood@hcu.edu.iq mail:-Corresponding Author: E
Introduction
The series of corporate scandals that swept through prominent companies in Europe and the USA,
such as (Societe Generale and Lehman Brothers), have prompted inquiries into the optimal
composition of boards for effectively monitoring and controlling management activities within
organizations. These companies' managements were involved in dubious and fraudulent accounting
practices, which their boards failed to detect in a timely manner. Fraud, mismanagement, and
inadequate monitoring of agents' activities led to a lack of transparency and accountability,
rendering these top companies vulnerable to failures. In response, regulatory corporate governance
reports and codes were introduced to establish regulations aimed at ensuring effective governance
and improving the financial performance of these firms.
Wilson (2006) highlighted that poor corporate governance can erode market confidence in a bank's
ability to manage its assets and liabilities, including deposits, potentially triggering a liquidity crisis.
The strength of a financial establishment's corporate governance mechanism determines its
vulnerability to uncertainties and eventual risks, thereby influencing whether some institutions fail
while others succeed. However, Drobetz et al. (2003) found that good corporate governance leads to
increased valuation, higher profits, higher sales growth, and lower capital expenditure.
The fundamental components of corporate governance structures include directors, accountability
and audit processes, directors' remuneration, shareholders, and annual general meetings (AGMs).
Cadbury (1992), Greenbury (1995), and Hampel (1998) emphasized the need for greater
transparency and accountability in areas such as board structure and operation, directors' contracts,
and the establishment of board monitoring committees. They also stressed the importance of the
monitoring role of non-executive directors.
1st: Problem of the Study
In the increasingly competitive and dynamic financial sector, effective bank governance has
emerged as a critical factor influencing the financial performance of commercial banks. Despite the
recognized importance of governance structures in safeguarding shareholder interests, promoting
transparency, and ensuring sustainable financial outcomes, there remains a gap in understanding
how these governance mechanisms specifically impact the performance of banks within localized
contexts, such as Erbil city. The unique socio-economic and regulatory environment in Erbil
presents distinct challenges and opportunities for commercial banks, making it imperative to
examine whether existing governance practices adequately support financial performance in this
region.
This study seeks to address the problem of understanding the relationship between bank governance
and financial performance among commercial banks in Erbil city. Specifically, it aims to investigate
whether governance mechanisms, such as board of management, risk management, and compliance,
are effectively aligned with the banks' financial goals. The study also seeks to explore the potential
barriers or facilitators within Erbil's banking sector that may influence this relationship, providing
valuable insights for policymakers, bank managers, and investors.
2nd: Objective of the Study
The research paper seeks to:
1. Investigate banking governance, its principles, and the key stakeholders involved.
2. Assess the effect of banking governance implementation on the financial performance of a
sample of commercial banks in Erbil.
University of Kirkuk Journal For Administrative
and Economic Science (2024) 14 (3): 358-375
ISSN:2222-2994 Vol. 14 No.3 360
3rd: Importance of the Study
1. Implementing governance in the banking sector will enhance bank management performance,
thereby boosting overall economic activity.
2. Governance helps in mitigating financial risks and eradicating administrative corruption in
banks.
4th: Hypotheses of the Study
1. H0: Banking governance has no impact on the financial performance of the sample of
commercial banks in Erbil.
2. H1: Banking governance impacts the financial performance of the sample of commercial
banks in Erbil.
3. H0: Banking governance has no impact on the financial performance indicators of the sample
of commercial banks in Erbil.
4. H1: Banking governance impacts the financial performance indicators of the sample of
commercial banks in Erbil.
5th: Research chart:
Based on the literature reviews and previous empirical studies, the research framework has been
synthesized. The model conveys the impact of bank governance on financial performance.
Figure illustrates the relationships, which have been constructed based on relevant theories and the
aforementioned hypotheses.
6th: Study Limitations
As defined by Creswell (2005), a limitation is weakness in the research that could potentially be
caused by any element that may block data collection within the study. However, the limitation of
the study can be listed as following:
Place scope: The study is focused on commercial banks operating in Erbil city.
Time scope: It is the time period during which the data collection process from the study
population and its transcription took place over the course of 2023-2024.
1- LITERATURE REVIEW
A. Concept of Corporate Governance
Governance in banking dramatically changed in the 1990s because of significant changes of
ownership which emanated from mergers and acquisitions (Arouri et al., 2011). The recent financial
crisis that affected most of the developed countries originated from America before spreading to
other countries. This was because of the financial interconnectivities of financial institutions. The
chief cause of the subprime mortgages that lead to the financial crisis was because of excessive risk
taking. Excessive risk-taking hinges on agency problem. Agency theory posits that a large board
can be less efficient than a small board due to a rise in agency conflicts because of inefficient
communication and cooperation costs (Jensen, 1993). However, Pfeffer (1972) noted that board size
is positively linked to the performance of large firms. This is because large firms have a greater
need of more board members who may bring different experience and expertise especially when the
board is well diversified.
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B. Corporate Governance and Banking Sector
(1) The role of board of directors
Following Jensen and Mecking (1976) postulates about the Agency Theory, the separation of
ownership and control creates information asymmetries that may bring a transfer of wealth from
owners to managers. As Jensen (1983) or Fama and Jensen (1983) explains, the board of directors is
one of the major devices that limits agency costs and permits the survival of most corporations. As
these authors state, corporate’ boards monitor and ratify the decisions initiated at the top
management level, thus creating an effective separation between “decision management” and
“decision control”. As Fama (1980) and Fama and Jensen (1983) explain, the board of directors is
one of the most important internal control monitoring mechanisms of top internal managers in an
open corporation, where external directors play a key role in working in favor of shareholders’
interests, “carrying out tasks that involve serious agency problems” between internal-executive
directors and shareholders. As Fama and Jensen (1983) assert, the board is an effective mechanism
of the “decision control” role within a corporation when it is able to restrict the discretion of top
managers over the “decision management” role within the corporation. Agrawal and Knoeber
(1996) argue that together with external representation on corporate boards, concentrated
shareholders by institutions or by block-holders can also play a significant controlling role,
improving firm performance. However, as Kim et al. (2007) explain, although large owners might
play a relevant monitoring role over managers, large shareholders’ (institutional and blockholders)
interests may not be aligned with those of minority shareholders and therefore the composition of
the board of directors may be significantly affected by the ownership structure. As Kim et al. (2007)
explain, concentrated ownership is considered a governance mechanism as large owners may use
their power to appoint independent non-executive directors to control managerial decisions
effectively in order to reduce agency costs between owners and managers. However, as previously
stated, large shareholders’ interests do not always match with those of minority shareholders. Under
these circumstances the fundamental agency problem comes from the separation between minority
and large shareholders, where the latter dominate the “decision control” role within the company
(Shleifer and Vishny, 1997). The presence of large shareholders may lead to wealth expropriation
from minority shareholders, if large shareholders tend to appoint managers or directors that are
aligned with their own interests (Lim et al, 2007). Therefore, the composition of the board of
directors becomes a key control mechanism for minority shareholders. Independence becomes a
crucial requirement to control the costs of the different agency relationships within the firm. The
presence of a significant proportion of independent non-executive directors tends to guarantee an
objective control over pervasive managers and non-independent directors’ decisions. Therefore,
minority shareholders are expected to support the presence of a majority of independent directors in
the board. Conversely, managers will prefer the presence of executive directors and large owners
will tend to nominate non-executive directors, professionally or personally connected to them, the
so-called gray directors (Kim et al., 2007). Under these circumstances, the legal environment plays
an important role guarantying the protection of minority shareholders’ interests, promoting and a
minimum number of independent directors in the corporate boards. As Chen and Jaggi (2000) or
more recently, Coles et al. (2008) explain, the board of directors of a corporation has two main
roles: advising corporate boards on strategic decisions and monitoring executive directors and top
management decisions (Fama, 1980). In fact, together with the regulatory requirements, the
presence of independent non-executive directors depends on the costs and the needs of both
advising and monitoring within each firm (Linck et al., 2008). However, most of the literature
focuses on the monitoring role of independent directors where empirical results reveal how their
presence significantly affects transparency and improves firm performance, revealing that
independent directors work for the benefit of shareholders’ interests. For example, Rosenstein and
Wyatt (1990) find a positive stock price reaction to appointments of outside directors to corporate
boards; Weisbach (1988) finds that a poorly performing CEO is more likely to be replaced if the
University of Kirkuk Journal For Administrative
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firm has a majority of outside directors; Brickley et al. (1994) report a positive stock price reaction
to the adoption of anti-takeover mechanisms (poison pills) when there is a majority of outsiders in
the board; More recently, Black et al. (2006) find that the presence of independent directors affects
company value in emerging economies; Beasley (1996) looked at the relationship between board
composition and financial statement fraud, finding that those companies with higher presence of
independent directors on their board are less likely to be involved in financial fraud than those with
a lower proportion of independent directors. Hossain et al. (2001) find a positive relationship
between the presence of independent directors and firm value on New Zealand companies, while
other authors such as Dahya et al. (2002, 2005) find a similar effect on outside CEO appointments
and company performance. Overall, the presence of independent outside directors monitoring
company's decisions seem to be “good news” since corporate boards act in a more responsive
manner, favoring investors’ interests (Chen and Jaggi, 2002) reducing the potential costs of agency
relationship.
(2) Risk Management
Smith et al. 2020 defines risk management is identifying, analyzing and prioritizing risks and
response planning by applying economic resources to minimize the risks. Smith et al define risk as
an undesired outcome of investment. According to Leo et al 2013 risk management constitutes risk
identification, monitoring, assessment, testing, reporting and oversight. They argue that higher the
anticipated returns, the higher the risk. There are different types of risks in the banking sector;
operational, market, liquidity, technology and insolvency risk. Based on Leo et al research the main
risks in the banking sector are credit, operational and market risks. Effective risk management is
key to business performance.
Although risk managers have established regulations to limit business exposure to risks, risk cannot
be wholly avoided by the banks. Most risks require capital to manage, making them more draining
to businesses. According to Samimi and Amir 2020, banks can achieve risk management through
communication, evaluation, control and monitoring of the risks. They further argue that assessing
the most vital risk in the banks can help make quick risk management its top priority. For instance,
in the banking industry, credit risks have been the most significant risks facing them. Businesses
should set capital aside for the management of anticipated risks and unforeseen risks. According to
Leo et al 2014, risk management ensures the profitability of the business by reducing the losses
which could be accrued from the risks. Smith et al 2020 postulate that risk management team
should anticipate the risks associated with their industry and provide imminent solutions. Smith et
al further argues that risk management in the banking industry is achieved through the use
quantitative methods of risk management. Banking industry needs more proficiency in the
management of risks as it deals with broad economic sectors. Similarly, they prove that the desire to
increase returns is accompanied by an increase in risks. Risk management ensures that bank venture
into profitable risks by advising on the probability of risk occurrence.
(3) Auditory Compliance
Compliance Auditing entails the process whereby organizations comprehensively review their
transactions in line with regulatory guidelines. It is a means used to determine whether an audit
process or transaction has or has not followed applicable rules (Kantiolm, 1998). According to
Fargason (1993), compliance auditing refers to a comprehensives review of an organization’s
adherence to regulatory guidelines. If rules are violated, the auditor determines the cause and
recommends ways to prevent future deviations. The rules being tested can be those created by the
organization for itself through the corporate bye-laws, policies, plans and procedures; or can be
those imposed on the organization through external laws and regulations (Kanholm, 1998).
According to Stephen (2002), compliance audit deals with the responsibility of the organization to
audit whether the activities of the company are in accordance with the relevant laws, regulations
and authorities that govern the company. This involves reporting on the degree to which the audited
entity is accountable for its actions and exercises good public governance. More specifically, these
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elements may involve auditing to what extent the audited entity follows rules, laws and regulation,
budgetary resolutions, policy, established codes, or agreed upon terms, such as the terms of a
contract or terms of a funding agreement. Gary (1997), said that ‘‘compliance audit is an audit
undertaken to confirm whether a firm is following the terms of an agreement (such as a bond
indenture), or the rules and regulations applicable to an activity or practice prescribed by an
external agency or authority’’. In addition, Gray (1997) opined that ‘‘the growth of compliance
auditing is fundamentally a 21st century phenomenon’'. Its emergence as a distinct type of auditing
coincides with the rapid growth of business after the industrial revolution and the concurrent growth
in efforts by firms and governments to direct and control business practices. Specifically, according
to Feldesman et al (1999), compliance audit highlights the unique role auditing plays when
identifying events or incidents that may affect an organization’s ability to achieve its objectives.
Compliance audit is important in corporate business decision-making processes. It helps top
executives prevent operating losses resulting from adverse regulatory initiatives, such as litigation,
fines and other punitive.
C. Financial Performance
(1) Profitability of commercial bank
In the banking industry, profitability means the bank’s ability to generate earnings in comparison to
its expenses and incurred costs during a specific period of time. It shows the capacity of the bank to
handle associated risk while increasing their capital. It also indicates the effectiveness of
management and competitiveness amongst banks. There are various measures to determine bank
profitability such as return on capital employed, return on asset, return on equity, net profit margin,
cost of income ratio, net interest margin, risk-adjusted return on capital, price-earnings ratio, total
share return, return on invested equity, cash flow to assets etc. However, Brealey, Myers, Allen, and
Mohanty (2012) recommends the important measures of bank profitability to be as return on asset
(ROA), return on equity(ROE) and net profit margin. Profitability is a key factor for commercial
banks as one of the major goals of commercial banks is to increase their profitability (Duffie &
Singleton, 2012). All the activities within bank seems to affect their own profitability directly or
indirectly. There are several categories to determine bank’s profitability in the literature. However,
these can broadly be categorized into two groups which are internal determinants and external
determinants (Staikouras & Wood, 2011). Internal determinants are influenced by decisions of bank
management and policy objectives which is controlled by the management (Staikouras & Wood,
2011). It reflects the sources and uses of capital in the bank as well as liquidity management and
expenses management (Guru, Staunton, & Balashanmugam, 2002). External determinants refer to
factors outside the bank which is beyond the control of management (Staikouras & Wood, 2011).
Some credit-related factor like the amount of non-performing loan is beyond the control of
management. In addition, some management decisions are influenced by external regulations,
hence, some external determinants are also included in the model specification.
(2) Bank profitability indicators
As bank profitability is an important aspect of the research, a thorough discussion of the appropriate
measure of bank profitability is presented. As discussed earlier, there are various measures of bank
profitability and the choice of the specific measure will depend on the objective of the research and
practice of the sample banks. For this research, the return on asset (ROA) and return on equity
(ROE) are the measures that will be used as indicators of bank profitability. ROA and ROE are not
only traditional measures of performance but also the most important measures of bank profitability
in the literature.
(3) Return on Asset (ROA)
Return on Asset (ROA) is the ratio of net income to total assets which measures net income earned
per dollar of assets. It reflects how well the management is utilizing the bank’s real investment
University of Kirkuk Journal For Administrative
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resources to generate profit (Vong & Chan, 2009). Thus, it shows how efficient and profitable a
bank’s management is, on the basis of its total asset. Mathematically, ROA is expressed as,
For banks with similar risk profiles, ROA is a useful static for comparing bank profitability as it
avoids distortions produced by differences in financial leverage (Bhattarai, 2014). From an
accounting perspective, ROA is a comprehensive measure of overall bank performance (Jr Sinkey
& Sinkey Jr, 1992). ROA has been widely used as a metric of bank profitability while examining
the relationship between credit risk management and bank performance in earlier studies such as
that of Alshatti (2015), Berríos (2013), Bhattarai (2014), Kaaya and Pastory (2013), Kurawa and
Garba (2014), Nawaz et al. (2012), Ndoka and Islami (2016), Ogboi and Unuafe (2013), Adeusi et
al. (2014), Poudel (2012), Zou and Li (2014), Zubairi and Ahson (2014) etc. thus, providing us an
argument for using return on asset (ROA) as an indicator of bank profitability.
b Return on Equity (ROE) Return on Equity (ROE) is the ratio of net income to total equity capital
which measures the return to shareholders on their equity. It measures how well the management is
utilizing the shareholder’s invested money to generate profit (Athanasoglou, Brissimis, & Delis,
2008). ROE is one of the most important measures for evaluating efficiency and profitability of
bank’s management based on the equity that shareholders have contributed to the bank. The
equation for ROE is written as,
Generally, a bank with higher ROE has a tendency to be able to generate more return to their
shareholders. The higher the bank’s ROE compared to its competitors, the better the bank is.
Therefore, the stockholders of the banks always prefer higher ROE however this could sometimes
be a threat to the bank (Saunders & Cornett, 2011) because an increase ROE implies that net
income is increasing faster relative to total equity. Further, a huge drop in equity capital may result
in a violation of minimum regulatory capital standards which tends to increase the risk of solvency
for the banks (Saunders & Cornett, 2011). A number of previous empirical studies (Aduda and
Gitonga (2011), Afriyie and Akotey (2012), Alshatti (2015), Berríos (2013), Ndoka and Islami
(2016), Adeusi et al. (2014), Zou and Li (2014), Zubairi and Ahson (2014)) examining the
relationship between credit risk management and bank performance have used ROE as a metric of
profitability. Thus, the second measures of profitability used in the study is ROE. In this study, the
dependent variables use to measure the effectiveness of management in utilizing assets and
shareholder’s equity of commercial banks are the ROA and ROE respectively.
(4) Liquidity
Liquidity in the absolute sense means money, while liquidity in the technical sense means the
ability of an asset to convert into cash quickly and without losses. It can be said that liquidity
represents the ability to meet obligations owed, whether these obligations are contracted or
uncontracted (incidental). Therefore, liquidity is A relative concept of the relationship between cash
and assets that quickly convert into cash and without loss on the one hand and maturing liabilities
on the other hand (Abdul Hamid and Kazem, 2020). Liquidity expresses the facility’s ability to
meet its current obligations on their due dates, and the strength or weakness of the facility’s
liquidity is linked to the extent of its availability. The net cash flow from operating activities is
positive. If the net cash flow can be used by the facility’s management either in expanding cash
from operating activities, it means a surplus. This means that the facility must search for investment
activities or in repaying debts. However, if it is negative, Of its investments or by borrowing (Jabr
and Abdel Hamid, Sources for Financing the Deficit, either by selling part of it (2017). By banking
liquidity, we mean what the bank owns of the cash mass in the fund and current accounts, in
University of Kirkuk Journal For Administrative
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addition to the securities in circulation (treasury bills, certificates of deposit, and commercial
papers). To meet daily withdrawal movements by customers on deposits and current accounts
(Qaidi and Ben Khaznaji, 2016). Liquidity in the banking system means the difference between the
resources available to it and the funds used in various types of assets. Banks are in a state of
abundant liquidity when the available funds are in excess of the bank’s ability to lend, so that the
bank is forced to invest the surpluses in liquid assets such as securities or in the form of bank
balances or idle balances with the central bank (Ahmed, 2013). It becomes clear to the researcher
From the above, liquidity is a relative issue, with two variables: the first variable is liquid assets,
and the second variable is depositors’ withdrawals and credit requests. Naturally, liquid assets differ
in their degree of liquidity, that is, in the possibility of converting them into cash without losses. On
the other hand, depositors’ withdrawals Their deposits, along with the increase in credit requests,
make liquidity in banks a sensitive and dangerous issue. At a time when any creditor in any
industrial, agricultural, or real estate company could be asked to deposit money, we find that the
matter becomes dangerous. Therefore, the bank’s lack of liquidity may expose it to collapse
(Kazim, 2014). Therefore, liquidity has three dimensions that must be taken into account, which
include time (i.e. the speed of converting the asset into cash), risk (i.e. the possibility of a decline in
the value of the assets to be liquidated), and cost (i.e. loss or The financial sacrifice that may exist
in the process of converting assets into cash (Abdel-Sada et al., 2008).
(5) Corporate Governance and Bank's Financial Performance
(Levine. R, 2004) mentioned that when "banks apply good governance, banks will efficiently
mobilize and allocate funds, this lowers the cost of capital to firms, boosts capital formation, and
stimulates productivity growth". Corporate failures are a consequence of terrible corporate
governance. The establishment of great corporate governance over the globe defends the effect of
this failure. Most studies presumed that corporate governance systems are to be connected and
related to firm performance (Avgouleas, E., 2009), discovered a positive connection between firm
particular corporate governance and firm valuation, investors and firms utilizing corporate
governance reports lessen risk and enhance business sector estimation of firms. Corporate
governance is relied on to influence bank's cost of capital, risk taking, valuation, execution and
conduct. (Levine. R., 2004) Agency Theory (Jensen and Mackling, 1976) recommends that solid
corporate governance prompts better execution and accounting results. It has a significant part to
play in the improvement of the banking sectors. It also brings about bank's comprehensive results in
less cost of funds, higher company's market value, and higher productivity. Poor corporate
governance may help banks to fail, which will posture critical public expenses, lead market loss of
trust in the capacity of banks to legitimately deal with its assets and liabilities which will prompt
liquidity risk, (Capel, J ., 2011). Earlier research studies which are centered on features of corporate
governance demonstrated that is has a positive effect over bank's success. Discoveries demonstrate
that a small board of directories of maximum 8 members can help enhance banks execution (Jensen,
1993). There are studies led after some time in different nations ( France, Germany, UK, Malaysia,
Switzerland and Hong Kong) recommend leadership structure demonstrated a positive connection
with the firm execution, (Franks and Mayer, 2001). Then again, earlier writing concentrated on
evaluating size as mechanism of corporate governance demonstrate a negative connection between
board size and firms value, (Yermack, 1996). An alternate study was directed demonstrated that
with the increment of variety of banks transactions, this makes new difficulties in banks corporate
governance. Additionally, studies demonstrate that board of directories; official administration and
shareholders have high critical relations on the performance of firms, (Boot and Schmats, 2000).
The impact of corporate governance on firm execution has been a lot of incredible enthusiasm to
economists and financiers as Maher and Anderson expressed that it has no extraordinary effect on
firm execution so why financiers and economists concerns a great deal with this subject, (Maher
and Andersoon, 1999). Allen and storm expressed that even with the vicinity of powerless corporate
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governance the solid product market rivalry may match director's objective with the goal of being
efficiently productive (McGee, R. W., 2008).
In the US market studies finished up that it demonstrates that corporate governance instruments
have positive effect on firm execution for instance it was observed that banks with solid
shareholders rights have higher gainfulness rate than feeble shareholders. A few late studies showed
that board autonomy is not emphatically identified with bank execution in banking sector, while
board sized is certain identified with the execution of banks. A study in Pakistan shows the results
propose that there was an effect of corporate governance changes on the banks performance and
efficiency and had a positive effect.
(6) Methodology
The study includes only commercial banks because their operating and financing functions are
almost homogenous. The study includes several commercial banks. However, the convenient
sampling method is used for the selection of 7 commercial banks for the period 2023–2024. Other
banks such as specialized, foreign banks and few private sector banks are excluded, as the services
/functions performed by these banks are heterogeneous or different, few private commercial banks
lack the information related to the variables included in the analysis. To complete the practical side
of the research and analysis of the impact of corporate governance on the Bank Financial
performance of a sample of banks, a questionnaire form was designed, and to verify its validity, it
was presented to a group of specialists from the university professors, as shown in Appendix (1),
and the questionnaire was distributed to a random sample consisting of (90) individuals working in
commercial banks in the Erbil city of the Kurdistan Region of Iraq, of which (85) questionnaires
were retrieved and (82) of which were valid for analysis through the ready-made statistical program
SPSS and the program EasyFit, and the analysis was as follows. The personal characteristics of the
sample covered by the questionnaire were described by specifying the categories, frequencies, and
percentages of some personal information of the respondents, which included position, gender, and
age, which are summarized in Table (1):
Table (1): Frequency distribution according to personal information
Percent
Number
Classes
The information
8.5%
7
Member
Position in the
financial institution
51.2%
42
Committee
23.2%
19
Board
17.1%
14
Staff
48.8%
40
Male
Sex
51.2%
42
Female
1.2%
1
20-25
Age
14.6%
12
26-30
24.4%
20
31-35
28%
23
36-40
18.3%
15
41-45
13.4%
11
46+
100%
82
Total
Through Table (1), we note that the general information of the research sample was for positions in
the financial institution, distributed between 8.5% for the position (Member), 51.2% for the position
(Committee), 23.2% for the position (Board), and finally the position (Staff), with a ratio of 17.1%.
Sex: The largest percentage of respondents were females, at 51.2%, compared to males, at 48.8%.
Regarding age, it was distributed between 1.2% for the age group (20-25) years, 14.6% for the age
group (26-30) years, 24.4% for the age group (31-35) years, 28% for the age group (36-40) years,
18.3 % for the age group (41-45 years) and finally by 13.4% for the age group (46 years and
above).
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(7) Study variables
The study variables were measured by representing the independent variable “Corporate
Governance Issues” with the general average into (20) items divided into four dimensions, where
the first dimension represents “Board Role and Composition” which included six items, the second
dimension “Transparency and Disclosure” which included five items, The third dimension,
“Auditing and Compliance” included four items, and the fourth dimension, “Risk Management,”
which included five items. The dependent variable, “Financial Performance Indicators” represents
the general average of (24) items, divided into three dimensions, where the first dimension
represents “Profitability” which includes nine items, the second dimension, “Liquidity” which
consists of nine items, and the third dimension, “Loan Portfolio.” It included six items, using a five-
point Likert scale (strongly disagree = 1, disagree = 2, neutral = 3, agree = 4, and strongly agree =
5)
Testing the reliability of the internal consistency:
Before analyzing the questionnaire variables, the extent of internal consistency and consistency of
the respondents’ answers regarding its variables and the questionnaire, in general, must first be
measured (Omar et al. 2020) through the Cronbach's alpha coefficient shown in the following table
Table (2): Cronbach's alpha test
Variables
Cronbach's
alpha
Number of
items
Independent Variable (Corporate Governance Issues)
Dependent Variable (Financial Performance Indicators)
Questionnaire items
The Cronbach's alpha reliability coefficient for all questionnaire items for the measurement tool has
a high degree of reliability because it is greater than 60% (the lowest value was 84.3%). Thus, this
means there is internal consistency for the questionnaire variables items, and the overall
questionnaire items in general, as the Cronbach Alpha coefficient reached 93.1%
Testing the distribution of questionnaire data:
It can be ensured that the data follows a normal distribution through the use of the Kolmogorov-
Smirnov Test (abbreviated as K.S.) and the Chi-Square Test (Ali et al. 2023), based on which the
appropriate test for the research hypotheses will be determined, i.e., testing the following
hypothesis
Null hypothesis: the questionnaire variables have a normal distribution.
Alternative hypothesis: the questionnaire variables do not have a normal distribution
The statistical program (EasyFit) was used to test the above hypothesis at a level of significance
(0.05), and the most important results of the two tests are summarised in Table(3):
Table (3): Test of normal distribution of questionnaire data
Chi-Square Test
Kolmogorov-Smirnov Test
Variable
Tabulated
Value
p-value
Statistics
Tabulated Value
p-value
Statistics
Independent
Dependent
From Table 3, we notice that the K.S. test shows that the independent and dependent variables
follow a normal distribution because the statistic values were equal to (0.1103 and 0.1388),
respectively, which are less than their tabulated value, which is equal to (0.1478). This is confirmed
by the p-values equal to (0.252 and 0.077), respectively, which are greater than the significance
level (0.05). The chi-square test also shows that the two variables follow a normal distribution
because the statistical values were equal to (8.868 and 8.494), which are equal to (0.252 and 0.077),
respectively, which are greater than the significance level less than its tabular value, which is equal
University of Kirkuk Journal For Administrative
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ISSN:2222-2994 Vol. 14 No.3 368
to (11.070). This is confirmed by the p-values, which are equal to (0.114 and 0.131) and greater
than the significance level .
Measuring study variables The study included two variables, one independent and the other
dependent, which were measured and descriptive statistics were given as follows:
Independent variable: Corporate Governance Issues: The research assumes that corporate
governance includes (20) items summarized in Table (4):
Table (4): Descriptive statistics for the items of the independent variable
Standard
Deviation
Degree of
agreement
Mean
Items
S
1.Board Role and Composition
1.08235
79.27
3.9634
The Board of Directors approves and supervises the strategic objectives of
the Bank.
.80844
83.17
4.1585
The Board of Directors verifies the financial statements that represent the
financial position of the Bank
.85125
78.78
3.9390
The Board of Directors ensures that the remuneration policies are
commensurate with the Bank's long-term strategic objectives.
.91361
76.59
3.8293
The Board of Directors works to protect the rights and interests of
shareholders and depositors by directing and controlling the executive
directors in charge of managing the bank's internal operations.
.94345
74.63
3.7317
Members of the Board of Directors have free access to information on time
to carry out their duties.
.96934
73.41
3.6707
The Board of Directors and Disclosure assures communication activities
with shareholders, stakeholders and depositors
Mean of First Dimension
2. Transparency and Disclosure
1.12732
76.83
3.8415
Regular monthly and up-to-standard reports are made available to members.
1.22947
73.17
3.6585
Information on decisions taken by managers is communicated to
shareholders and stakeholders promptly.
1.12277
73.41
3.6707
The bank has a web page and is constantly updated under the title of
disclosure of periodic and annual reports
1.09720
72.20
3.6098
The structure and qualifications of the members of the Board of Directors,
directors and committees, the structure of incentives and the remuneration
policies of shareholders are disclosed
1.00233
73.90
3.6951
There is an audit committee in the bank to maintain the integrity of the
financial statements
Mean of Second Dimension
3. Auditing and Compliance
.99502
71.22
3.5610
There is an independent audit committee (internal and external) that sits
monthly.
1.04087
73.66
3.6829
There is an internal policy that guides the activities and reporting channels
of the internal controller
.94544
78.29
3.9146
There is a reputable external supervisory body that provides monthly reports
on the bank.
.95297
78.54
3.9268
Monthly audit reports are submitted by internal and external auditors
Mean of Third Dimension
4. Risk Management
1.25354
72.44
3.6220
The financial institution has a modern risk management policy.
1.25570
71.95
3.5976
There is a loan recovery task force with a detailed loan recovery timeline
and procedures
.99441
74.63
3.7317
All employee files contain performance appraisal and monitoring forms that
are regularly updated
1.08152
72.93
3.6463
All collateral (real property) is checked monthly at the level of the Land
Office
1.10131
77.07
3.8537
All loan files are accompanied by business plans in case of commercial
loans or a detailed project
Mean of Fourth Dimension
1.0384
75.30
3.7652
Overall Mean
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Table (4) shows that the overall mean of the independent variable (Corporate Governance Issues)
was (3.7652), which is higher than the hypothetical average (3) by (0.7652), which indicates the
agreement of the sample studied with the paragraphs of the independent variable, with an agreement
degree of 75.3% and a limited standard deviation of (1.0384) indicates the convergence of the
opinions of the sample studied and their lack of dispersion regarding the items measuring the
independent variable. The first dimension (Board Role and Composition) obtained an average of
(3.8821), which is higher than the default average (3) by (0.8821), with an agreement score of
77.64% and a limited standard deviation of (0.9281). The second dimension (Transparency and
Disclosure) received an average of (3.6951), which is higher than the default average (3) by
(0.6951), with an agreement score of 73.9% and a limited standard deviation of (1.1158). The third
dimension (Auditing and Compliance) obtained an average of (3.7713), which is higher than the
default average of (3) by (0.7713), with an agreement score of 75.43% and a limited standard
deviation of (0.9836). The fourth dimension (Risk Management) received an average of (3.6903),
which is higher than the default average of (3) by (0.6903), with an agreement score of 73.8% and a
limited standard deviation of(1.1373).
Dependent variable: Financial performance indicators: The research assumes that financial
performance indicators include (24) items summarised in Table (5):
Table (5): Descriptive statistics for the dependent variable items
Standard
Deviation
Degree of
agreement
Mean
Items
S
1.Profitability
3.63365
84.15
4.2073
The bank has achieved acceptable profits in recent years
1.16276
72.20
3.6098
The cost of the service (loan interest, transfer and deposit
fees) is reduced thanks to high profits
.99985
74.15
3.7073
The bank has efficiency in making its investment decisions
through the profits previously achieved
1.07425
75.85
3.7927
The bank achieves a high return on equity periodically that
puts it in a better financial position
1.04412
70.98
3.5488
The financial institution fulfils all its social obligations
through realized profits
1.14185
76.59
3.8293
Financial institution's profits are steadily increasing
reflected in lower transaction costs
1.09039
69.02
3.4512
Loan interest is paid on time and the actual is always equal
to or greater than the expected amounts
7
1.08589
72.20
3.6098
Profits are increasing thanks to income-generating assets
such as buildings
8
1.02872
71.95
3.5976
All invoices, creditors, bonuses, etc. are paid on time.
9
Mean of First Dimension
2. Liquidity
1.26835
69.02
3.4512
All member deposits are available upon request and on time
10
1.25899
70.73
3.5366
A Bank reserve account exists to meet instant credit
requests and savings withdrawals
11
1.38109
70.00
3.5000
The organization targets and meets peak cash demands
without stress
12
1.22585
71.95
3.5976
The institution lends only up to 70% of its savings while the
rest and shares are held as reserves in the bank's reserve
accounts.
13
1.18361
75.85
3.7927
There is a cash limit (maximum safe amount) at all bank
branches
14
1.25738
71.46
3.5732
There is daily monitoring of liquidity to ensure the balance
of liquidity and profitability
15
1.06828
73.17
3.6585
There is a different investment account from the current
bank accounts in which the excess liquidity is deposited
16
1.23953
70.49
3.5244
When the demand for loans increases, investments in real
estate properties are stopped even when there is excess
liquidity in the bank
17
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1.25228
72.68
3.6341
There is an investment committee that puts all the excess
liquidity into profitable projects.
18
Mean of Second Dimension
3. Loan Portfolio
1.20248
75.12
3.7561
The number of overdue loans and the amounts you pay at
the enterprise is declining over time
19
1.21741
75.61
3.7805
There is a modern loan policy that has significantly reduced
bad debt.
20
.95013
75.12
3.7561
The cost of recovering the loan is much lower than the
interest on the loan
21
1.03565
76.10
3.8049
The loan redemption team has achieved great success in late
loan collection
22
1.11497
78.78
3.9390
All loan application files contain duly registered mortgages
23
.75049
85.12
4.2561
No false collateral documents in the bank's loan files
24
Mean of Third Dimension
Overall Mean
Table (5) shows that the overall mean of the dependent variable (financial performance indicators)
reached (3.7048), which is higher than the hypothetical average (3) by (0.7048), which indicates the
agreement of the sample studied with the paragraphs of the dependent variable, with an agreement
degree of 74.1% and a limited standard deviation. It reached (1.2362) indicating the convergence of
the opinions of the sample studied and their lack of dispersion on the items measuring the
dependent variable. The first dimension (profitability) received an average of (3.7060), which is
higher than the default average (3) by (0.7060), with an agreement score of 74.12% and a limited
standard deviation of (1.3624). The second dimension (liquidity) obtained an average of (3.5854),
which is higher than the default average (3) by (0.5854), with an agreement score of 71.71% and a
limited standard deviation of (1.2373). The third dimension (loan portfolio) received an average of
(3.8821), which is higher than the default average (3) by (0.8821), with an agreement score of
77.64% and a limited standard deviation of (1.0452).
Classification of financial performance indicators according to importance in the bank
The ratios of the three financial performance indicators are summarized in order of importance in
the following table:
Table 6: Classification of financial performance indicators according to importance in the bank
N.
indicators
First
Second
Third
1
Profitability
72%
20.7%
7.3%
2
Liquidity
37.8%
50%
12.2%
3
Loan portfolio
29.3%
20.7%
50%
Table 6 shows the percentages of classification of financial performance indicators according to
importance, where the first indicator (profitability) received 72% of the first classification, 20.7% of
the second classification, and 7.3% of the third classification, while the second indicator (liquidity)
obtained 37.8% of the first classification, 50% of the second classification and 12.2% of the third
classification. The third indicator (loan portfolio) received 29.3% of the first classification, 20.7%
of the second classification and 50% of the third classification
• Testing the study hypotheses
The questionnaire tested the following hypotheses:
First hypothesis:
Null hypothesis: Corporate Governance Issues do not affect the financial performance of a sample
of commercial banks in the city of Erbil.
Alternative hypothesis: Corporate Governance Issues affect the financial performance of a sample
of commercial banks in the city of Erbil.
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Corporate Governance Issues represent the independent variable, while financial performance
represents the dependent variable. On this basis, the hypothesis will be tested by estimating a simple
linear regression model (Ali, 2022). The results are summarized in Table (7):
Table (7): Analysis of the model of the impact of Corporate Governance Issues on financial performance
Financial Performance
Regression
Coefficients
p-value
t
F
p-value
2
R
Corporate Governance
Issues
Constant
-0.606
0.079
-1.779
163.057
0.000
0.671
Slope
1.145
0.000
12.769
Through Table (7), we notice that Corporate Governance Issues explain 67.1% of the changes
occurring in financial performance, and the p-value of the regression slope test is close to (0.000),
which indicates its significance and the importance of the presence of the Corporate Governance
Issues variable in the estimated model. We also note that the F-value The calculated value is
(163.057), which is greater than its tabulated value, which is below the level of significance (0.05),
and the degrees of freedom (1 and 80), which amounted to (3.971). This means that the estimated
model is suitable for the data, and this is confirmed by the p-value, which is close to (0.000), which
is less than the level of significance. (0.05) Therefore, the null hypothesis will be rejected and the
alternative hypothesis will be accepted, which states that there is a statistically significant effect of
Corporate Governance Issues on the financial performance of a sample of commercial banks in the
city of Erbil, which has been tested and its results circulated to the research community as a whole,
and a simple linear regression model.
ˆ0.606 1.145
ii
yx= − +
Second hypothesis:
Null hypothesis: Corporate Governance Issues do not affect the three financial performance
indicators.
Alternative hypothesis: Corporate Governance Issues affect the three financial performance
indicators.
Corporate Governance Issues represent the independent variable, while the three financial
performance indicators (profitability, liquidity, and loan portfolio) represent the dependent variable.
On this basis, the hypothesis will be tested by estimating a simple linear regression model for each
indicator. The results are summarized in Table (8):
Table (8): Analysis of the model of the impact of Corporate Governance Issues on the three financial performance
indicators
Financial
Performance Indexes
Regression
Coefficients
p-value
t
F
p-value
2
R
profitability
Constant
-
-1.221
Slope
liquidity
Constant
-
-
Slope
loan portfolio
Constant
Slope
Through Table (8), we notice that Corporate Governance Issues explain 50.5% of the changes
occurring in the profitability index, and the p-value of the regression slope test is close to (0.000),
which indicates its significance and the importance of the presence of the Corporate Governance
Issues variable in the estimated model. We also note that the F-value The calculated value is
(81.602), which is greater than its tabulated value, which is below the level of significance (0.05),
and the degrees of freedom (1 and 80), which amounted to (3.971). This means that the estimated
model is suitable for the data, and this is confirmed by the p-value, which is close to (0.000), which
is less than the level of significance. (0.05) Therefore, the null hypothesis will be rejected and the
alternative hypothesis will be accepted, which states that there is a statistically significant effect of
Corporate Governance Issues on the profitability index for a sample of commercial banks in the city
University of Kirkuk Journal For Administrative
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ISSN:2222-2994 Vol. 14 No.3 372
of Erbil, which was tested and its results were generalized to the research community as a whole,
and a simple linear regression model:
1
ˆ0.586 1.140
ii
yx= − +
Corporate Governance Issues explain 61.8% of the changes occurring in the liquidity index, and the
p-value of the regression slope test is close to (0.000), which indicates its significance and the
importance of the presence of the Corporate Governance Issues variable in the estimated model. We
also note that the calculated F-value is equal to (129.581), which is greater than its tabular value is
below the level of significance (0.05) and the degrees of freedom (1 and 80) amounted to (3.971).
This means that the estimated model fits the data, and this is confirmed by the p-value, which is
close to (0.000), which is less than the level of significance (0.05). Therefore, the null hypothesis
will be rejected and the alternative hypothesis will be accepted, which states that there is a
statistically significant effect of Corporate Governance Issues on the liquidity index for a sample of
commercial banks in the city of Erbil, was tested and its results were generalized to the research
community as a whole, and the simple linear regression model:
2
ˆ1.624 1.384
ii
yx= − +
Corporate Governance Issues explain only 35.8% of the changes occurring in the loan portfolio
index, and the p-value of the regression slope test is equal to (0.000), which indicates its
significance and the importance of the presence of the Corporate Governance Issues variable in the
estimated model. We also note that the calculated F-value is equal to (44.649), which is Greater
than its tabular value, below the level of significance (0.05), and the degrees of freedom (1 and 80),
which amounted to (3.971). This means that the estimated model fits the data, and this is confirmed
by the p-value, which is close to (0.000), which is less than the level of significance (0.05).
Therefore, it will be rejected. The null hypothesis and acceptance of the alternative hypothesis,
which states that there is a statistically significant effect of Corporate Governance Issues on the loan
portfolio index for a sample of commercial banks in the city of Erbil, was tested and its results were
generalized to the research community as a whole, and a simple linear regression model:
3
ˆ0.890 795
ii
yx=+
Results:
1. Dimension One: The study revealed that the second item, which states "The Board of Directors
verifies the bank's financial statements," ranked first with a mean score of 4.1585. This indicates
that most of the sample agrees on this item, highlighting the importance of the Board of
Directors' role and their commitment to managing the bank and ensuring efficient performance.
2. Disclosure and Transparency Dimension: The first item, stating "Monthly reports will be
prepared regularly," ranked first with a mean score of 3.8415. The last item, "There is an audit
committee in the bank to maintain the integrity of the financial statements," ranked second. This
indicates that the banks in the study sample emphasize the application of banking governance
principles by regularly preparing financial reports and having an internal audit committee to
ensure the integrity of financial operations.
3. Audit and Compliance Dimension: The last item, which states "Monthly audit reports are
submitted by internal and external auditors," ranked first with a mean score of 3.9268. This
shows that financial statements are audited by both internal and external auditors to ensure
integrity in banking operations.
4. Risk Management Dimension: The last item, stating "All loan files are accompanied by
business plans in the case of commercial loans," ranked first with a mean score of 3.8537. This
indicates that the management of the banks in the study sample has a specific work plan and
program for managing loans.
5. Profitability Dimension: The first item, stating "The bank has made profits in recent years,"
ranked first. This demonstrates that banks have achieved profits as a result of applying banking
governance.
University of Kirkuk Journal For Administrative
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6. Liquidity Dimension: The fifth item, stating "There is a cash ceiling, i.e., the maximum safe
amount," ranked first with a mean score of 3.7927. This indicates that the surveyed banks
emphasize having a liquidity ceiling to ensure the bank is in a safe liquidity position and to
balance profitability and liquidity.
7. Loan Portfolio Dimension: The last item, stating "There are no false guarantee documents in
the bank's loan files," had a mean score of 4.2561. This indicates the absence of unsound files
and that the bank follows prudent management in granting loans.
8. Impact of Banking Governance on Financial Performance: There is a statistically significant
impact of banking governance on financial performance, with a positive relationship indicating
that applying governance principles will increase financial performance by 1.145.
9. Impact on Profitability Index: There is a statistically significant impact of banking governance
on the profitability index, with a positive relationship indicating that applying governance
principles will increase profitability by 1.140.
10. Impact on Liquidity Index: Results show a statistically significant impact of banking
governance on the liquidity index, with a positive relationship indicating that applying
governance principles increases liquidity by 1.384.
11. Impact on Loan Portfolio Index: Results indicate a statistically significant impact of banking
governance on the loan portfolio index, with a positive relationship indicating that applying
governance principles will increase the loan portfolio by 795.
Recommendations:
1. Encouragement by the Central Bank: The central bank should encourage commercial banks to
optimally and effectively apply banking governance principles in line with the economic
environment.
2. Establishment of a Supervisory Body: Establish a supervisory body under the central bank to
monitor and oversee the implementation of banking governance in commercial banks.
3. Enhancing Internal Control and Audit Procedures: Strengthen internal control and audit
procedures as early warning tools for financial risks, which will help diagnose and address
issues.
4. Training Programs: Conduct training programs for commercial bank employees in the field of
governance to effectively qualify staff.
5. Mandatory Governance: Enforce mandatory governance in commercial banks among all
parties to ensure the consistency of information, accountability, disclosure, and transparency.
6. Strengthening Governance Application: Emphasize the importance of strengthening the
application of banking governance to protect banks from financial fraud, administrative
corruption, crises, and bankruptcy.
7. The future researches are encouraged to undertake other banks like Islamic banks or other
industries like manufacturing, tourism, rather than just focus on domestic-based banks. It can
broaden the scope and quality of the research.
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ISSN:2222-2994 Vol. 14 No.3 374
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