CORPORATE GOVERNANCE AND

PROCYCLICALITY IN A BANKING
FINANCIAL FACTORS: EMPIRICAL
STUDY ON THE BANKS OF
BANGLADESH 2016-2017
Term Paper on Corporate Governance and Procyclicality in a Banking
Financial Factors: Empirical study on the banks of Bangladesh 2016-
2017
Accounting for Specialized Institutions
ACT 4104
Prepared by:
Tridib Debnath (17211004)
Scion Zaman (17211006)
S.M Shamsul Arefeen (17211028)
Sadat Wasif Ansary (17211030)
Imtiaz Ahmed (17211088)
Department of Accounting & Information Systems (Batch: 02)
Section: B

Prepared for:
Dilruba Afroze
Lecturer
Department of Accounting & Information System
Bangladesh University of Professionals

Date of Submission: 20th June 2020

ii | P a g e
LETTER OF TRANSMITTAL

Date: June 20, 2020

Dilruba Afroze
Lecturer

Department of Accounting & Information Systems

Faculty of Business Studies

Bangladesh University of Professionals

Subject: Submission of report on “Corporate Governance and Procyclicality in a Banking

Financial Factors: Empirical study on the banks of Bangladesh 2016-2017”

Ma’am,

This is my great pleasure to have the opportunity to submit the report on the “Corporate
Governance and Procyclicality in a Banking Financial Factors: Empirical study on the banks of
Bangladesh 2016-2017” as part of my course studies. The submission of this report is a compulsory
part for the fulfillment of my BBA Program at Bangladesh University of Professionals. The report is
prepared based on the ideas provided by you during the class time and from internet sources.
Through my best genuineness I have tried to uptake all the related issues in the report within
several limitations.

Therefore, I would like to place this report for your kind judgment and valuable suggestion.

Yours Sincerely,
Tridib Debnath
(17211004)
AIS 02, Section B

i|Page
DECLARATION

We hereby declare that, the term paper “Corporate Governance and Procyclicality in a Banking
Financial Factors: Empirical study on the banks of Bangladesh 2016-2017” is completely our
work. No part of it has been used for any further research or academic purposes in any other
institution. We also declare that we have used various internet sources as reference to prepare this
report. Therefore, this report is completely a unique and creative work.

ii | P a g e
ACKNOWLEDGEMENT
Firstly, we are very grateful and thankful to the Almighty.

We are really thankful to Lecturer Dilruba Afroze for the freedom she gave us in writing the report
topic. Her advices and our efforts played the important role about the report. We express our
profound indebtedness and gratitude for her valuable advice that helped immensely in preparing
this report.

In addition, we would also like to thank all the people who spent their valuable time to provide us
information to make the report pronounced in such trying times.

iii | P a g e
ABSTRACT

The Purpose: The purpose of this term paper is to analyze the present situation of 15 banks on
how liquidity, loan growth, capitalization and assets and relative to non-financial factors such as
political dependency, tenure, board size and fraction female in the bank

The Methodology: This paper reviews existing literature from the annual reports of 15
Bangladeshi Banks(2016 and 2017) which are AB Bank, Al-Arafa Bank, Bank Asia, Jamuna Bank,
National Bank, Mercantile Bank, Trust Bank, UCB, Uttara Bank, DBBL, Eastern Bank, IFIC bank,
Brac Bank, City bank and Dhaka Bank.

Research Findings: The analysis suggests that there was a major study limitation since the
variables do not completely interpret the dependents and there are other major factors which plays
in terms of determining the relationship between financial and non-financial factors.

Research limitations: Limitations include not enough testing of practices, accounting methods
followed in different enterprise, paper is based on researches done by other researchers and not
verifiable information.

Keywords: Growth rate, dependent variable, independent variable, accounting, liquidity, loan
growth, capitalization, political dependency, tenure, board size, fraction female.

iv | P a g e
Contents
LETTER OF TRANSMITTAL ................................................................................................ i
DECLARATION ................................................................................................................ ii
ACKNOWLEDGEMENT ................................................................................................... iii
ABSTRACT ...................................................................................................................... iv
INTRODUCTION .............................................................................................................. 1
FINDINGS ........................................................................................................................ 2
ANALYSIS ........................................................................................................................ 6
CONCLUSION .................................................................................................................. 6

v|Page
INTRODUCTION
The current status of banking sectors in Bangladesh has seen shortfalls and these are increasing
due to some factors. This banking industry mainly focuses on profit and loss but there is also some
key indicator that are responsible for the key changes in banks. The factors like loan growth,
capitalization, Liquidity and assets can be positively or negatively corelated with some non-
financial factors such as political dependency, tenure, board size, fraction female. Loan Growth
means the average of the increases in the bank’s total loans less allowance for loan losses at the
end of the four fiscal quarters of a Year as reported in the balance sheets included in the Company’s
quarterly and annual reports on forms 10-Q and 10-K. Market capitalization is the aggregate market
value of a company represented in the respective amount. Since it represents the “market” value
of a company, it is computed based on the current market price (CMP) of its shares and the total
number of outstanding shares. It is commonly referred to as "market cap," where “cap” represents
capitalization - a financial term used for indicating the size of the company. Liquidity refers to the
ease with which an asset, or security, can be converted into ready cash without affecting its market
price. These are positively or negatively correlated with non-financial factors.

1|Page
FINDINGS
Banking scenario in Bangladesh always had its ups & downs throughout the years. There have
always been many significant factors that plays important role upon the fluctuation of banks assets.
The study has been done on 15 registered banks in Bangladesh. The data variables consist of;

Loan Capitalization Liquidity Assets Political Tenure Board Fraction

Growth Dependence Size female
AB Bank 0.04 0.7 0.062 10.28 0 1 12 0.083
Al arafa 0.232 0.188 0.123 26.88 0 1 20 0
Bank asia 0.199 -0.457 0.063 28.73 0 4 13 0.154
Jamuna Bank 0.342 0.96 0.06 10.62 0 2 20 0.05
National 0.128 -1 0 8.44 0 2 14 0.142
Bank
Mercantile 0.195 1 0.07 12.14 0 2 11 0
Bank
Trust Bank 0.087 0.9637 0.012 9.41 0 1 12 0
UCB 0.1842 0.9151 0.0503 10.16 0 1 20 0.1
Uttara Bank 0.099 1 0.0552 23.4 0 3 16 0
Dutch 0.052 0.79 0.68 37.6 0 1 7 0
Bangla
Eastern Bank 0.168 0.833 0.066 32.8 0 1 11 0.091
IFIC Bank 0.112 0.76 0.051 29.8 0 1 8 0
Brac Bank 0.178 0.522 0.0636 34.99 0 3 7 0.1428
City Bank 0.0605 0.189 0.0961 29.09 0 0 11 0.1818
Dhaka Bank -0.0754 -0.013 0.0734 29.55 0 1 17 0.0588
Table 1: Data set for the year 2016
Loan Capitalization Liquidity Assets Political Tenure Board Fraction
Growth Dependence Size female
AB Bank 0.072 0.12 0.056 10.05 0 2 12 0.083
Al arafa 0.103 0.019 0.1245 32.11 0 2 20 0
Bank asia 0.207 0.113 0.062 29.27 0 4 10 0.2
Jamuna 0.215 0.67 0.05 12.81 0 3 20 0.05
Bank
National 0.184 -1 0 8.69 0 3 14 0.142
Bank
Mercantile 0.323 1 0.07 14.8 0 3 11 0
Bank
Trust Bank 0.2964 0.9851 0.046 8.61 0 2 11 0
UCB 0.1668 0.94341 0.0202 10.16 0 1 20 0.05
Uttara Bank 0.2641 1 0.0154 23.89 0 4 15 0
Dutch 0.105 0.83 0.7 40.2 0 2 7 0
Bangla
Eastern 0.172 0.85 0.0625 36.2 0 2 11 0.091
Bank
IFIC Bank 0.307 0.78 0.066 31.9 0 1 8 0.125

2|Page
 Brac Bank 0.18 0.337 0.0631 33.85 0 4 8 0.125
City Bank 0.0543 0.033 0.0863 29.88 0 1 5 0
Dhaka Bank -0.1059 0.007 0.0513 31.95 0 2 17 0.0588
Table 2: Data set for the year 2017

Loan Growth Growth rate of loans and advances.

Capitalization Percentage of net income that has been added to
capital as retained earnings after all the
adjustments and appropriations.
Liquidity Percentage of liquid assets to total assets.
Assets Percentage of total assets to paid up capital.
Table 3: Explanation of financial factors

Political Dependence Political influence of the chairman.

Tenure Tenure of board chairman as per the year.
Board Size Size of the board of directors.
Female Fraction Percentage of female directors in the board.
Table 4: Explanation of governance factors
Here the values on table 1 and table 2 has been calculated and analyzed by the members from the
annual reports of the respective banks.

Loan Capitalization Liquidity Assets Political Tenure Board Fraction

Growth Dependency Size Female
Mean 0.133 0.49 0.102 23.62 0 1.6 13.27 0.07
Median 0.128 0.76 0.063 29.27 0 1 12 0.06
SD 0.098 0.599 0.163 11.42 0 1.06 4.5 0.07
Min -0.0754 -1 0 8.61 0 4 7 0
Max 0.342 1 0.68 40.2 0 15 20 0.18

Table 1.1: Descriptive statistics of the year 2016

Loan Capitalization Liquidity Assets Political Tenure Board Fraction
Growth Dependency Size Female
Mean 0.18 0.45 0.1 23.62 0 2.4 12.6 0.062
Median 0.182 0.67 0.062 29.27 0 2 11 0.05
SD 0.121 0.566 0.169 11.42 0 1.06 4.91 0.06
Min -0.1059 -1 0 8.61 0 1 5 0

3|Page
 Max 0.323 1 0.7 40.2 0 4 20 0.2

Table 2.1: Descriptive statistics of the year 2017

Loan Capitalization Liquidity Assets

Growth
Multiple R 0.504540642 0.721145976 0.488858 0.576087
R Square 0.254561259 0.520051519 0.238982 0.331876
Adjusted R -0.04361424 0.328072126 -0.06543 0.064627
Square
Standard Error 0.10038555 0.491026279 0.167808 0.382953
Observations 15 15 15 15
Table 1.2: Regression Statistics for the year 2016

Loan Capitalization Liquidity Assets

Growth
Multiple R 0.343337304 0.636945059 0.490612 0.52509
R Square 0.117880504 0.405699009 0.2407 0.27572
Adjusted R -0.23496729 0.167978612 -0.06302 -0.01399
Square
Standard Error 0.125495288 0.516558758 0.174332 0.50389
Observations 15 15 15 15
Table 2.2: Regression Statistics for the year 2017
For the regression statistical analysis, the financial factors (Table 3) have been considered as the
dependent variable and the governance factors (Table 4) has been considered as the independent
variable. As the data value stands there was seen no relationship or political dependence of the
chairman has been observed. Thus, a dummy variable (0) has been input to interpret the scenario.
As per table 1.2 and 2.2 the multiple R analysis suggests that the independent variables had
significant relationship with capitalization, and rather moderate relationship with the other
financial factors. The data set that has been considered for the analysis moderately fits with the
dependent variables. There has been significant standard error in the analyzed observations which
can be from both human error and also from different factors that has been kept unchecked in the
reports of the observations.
Coefficients Standard t Stat P-value Lower 95% Upper 95%
Error
Intercept -0.01496858 0.096816482 -0.15460784 0.880206414 -0.230689152 0.200751978
Political 0 0 65535 #NUM! 0 0
Dependence
Tenure 0.036109808 0.025745162 1.402586145 #NUM! -0.02125398 0.093473604
Board Size 0.007017421 0.005986467 1.172214126 0.268280162 -0.00632125 0.020356101
Fraction female -0.03714711 0.41185718 -0.09019415 0.929913914 -0.95482209 0.880527874
Table 1.3: Regression Stat of loan growth for the year 2016

4|Page
 Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 1.173470004 0.473568525 2.477930738 0.032658347 0.118293575 2.228646434
Political Dependence 0 0 65535 #NUM! 0 0
Tenure -0.07499557 0.125929989 -0.59553388 #NUM! -0.35558507 0.205593926
Board Size -0.01647023 0.029282229 -0.56246533 0.586185937 -0.08171511 0.048774633
Fraction female -5.15624752 2.014559851 -2.55949086 0.028397959 -9.6449666 -0.66752845
Table 1.4: Regression stat on capitalization for the year 2016
Coefficients Standard Error t Stat P-value Lower Upper
95% 95%
Intercept 0.363305327 0.161841752 2.244818303 0.048605237 0.002699 0.723911
Political Dependence 0 0 65535 #NUM! 0 0
Tenure -0.02247241 0.043036496 -0.52217106 #NUM! -0.11836 0.073419
Board Size -0.01345793 0.010007184 -1.34482753 0.208387192 -0.03576 0.008839
Fraction female -0.70411869 0.688474589 -1.02272284 0.33054294 -2.23814 0.829898
Table 1.5: Regression stat on liquidity for the year 2016
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 36.06117025 10.01380114 3.601147032 0.004838684 13.74903088 58.37330962
Political Dependence 0 0 65535 #NUM! 0 0
Tenure 0.226668682 2.662841389 0.085122863 #NUM! -5.70651674 6.159849037
Board Size -1.09269635 0.619184766 -1.76473358 0.108071486 -2.47232578 0.286933498
Fraction female 4.962057739 42.59869621 0.116483794 0.909575259 -89.9537523 99.8778678
Table 1.6: Regression stat of assets for the year 2016
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 0.142130986 0.119970471 1.184716413 0.263521696 -0.125179881 0.409441853
Political Dependence 0 0 65535 #NUM! 0 0
Tenure 0.033292015 0.033568423 0.991765818 #NUM! -0.041503093 0.108087122
Board Size -0.00363566 0.006934531 -0.52427711 0.611508572 -0.019086714 0.011815482
Fraction female -0.10774858 0.556483115 -0.19362473 0.850346569 -1.347670232 1.132173066
Table 2.3: Regression Stat of loan growth for the year 2017
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 0.813303954 0.493817724 1.646971976 0.130584546 -0.28699504 1.913598411
Political Dependence 0 0 65535 #NUM! 0 0
Tenure 0.025867169 0.13817302 0.187208538 #NUM! -0.28201506 0.333735844
Board Size -0.01382466 0.028543644 -0.48355654 0.639114042 -0.07741669 0.049796737
Fraction female -4.14641475 2.290573869 -1.81026399 0.1003685 -9.25012806 0.957305157
Table 2.4: Regression stat on capitalization for the year 2017
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 0.333346433 0.166656855 2.000196348 0.073364027 -0.037988181 0.704681046
Political Dependence 0 0 65535 #NUM! 0 0

5|Page
 Tenure -0.00353151 0.04663154 -0.07573227 #NUM! -0.107433059 0.100370034
Board Size -0.01348568 0.009633097 -1.39993167 0.191785235 -0.034949554 0.0079782
Fraction female -0.92016558 0.773037941 -1.19032395 0.261409392 -2.642601419 0.802270322
Table 2.5: Regression stat on liquidity for the year 2017
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 35.51865748 10.99744172 3.22972 0.009025233 11.01483031 60.02248465
Political Dependence 0 0 65535 #NUM! 0 0
Tenure -0.07796056 3.077147019 -0.02533538 #NUM! -6.934271386 6.778350267
Board Size -0.93045666 0.63567395 -1.46373254 0.173979832 -2.34682647 0.485913179
Fraction female 0.273598603 51.01164131 0.005363454 0.995826092 -113.3874213 113.9346185
Table 2.6: Regression stat of assets for the year 2017

ANALYSIS

The analysis suggests that there was a major study limitation since the variables do not completely
interpret the dependents and there are other major factors which plays in terms of determining the
relationship. In completion of the study the team recognized there to be a significant non-disclosure
issue regarding the annual reports where many relevant information are not to be found. There is
an inconsistency present regarding the valuation methods among the observations. The data set
itself isn’t sufficient enough to reflect the relationship of the variables. But the analysis also
suggests that changes in the independent variables will also bring in significant changes in terms
of the financial factors.

CONCLUSION
The paper was conceptualized from the paper “Corporate governance and procyclicality in a
banking crisis: Empirical evidence and implications” which was provided by the respected faculty.
In the formation of this paper a major factor that was missing from the parent paper was the bailout
of banks. Bangladesh has not seen many bailout scenarios and the observations taken for the study
did not consist of such scenario, which was a major gap for the formulation. Despite the team has
worked to bring out the relationship that was shown in the prime study. The existence of the errors
is due to the lack of human experience regarding such works but the study has given a realistic
view of how such factors play major role regarding the observations.

6|Page
v| P a g e