Effectiveness of Internal Corporate Governance Mechanisms in Controlling Non-Performing Loans of an Emerging Economy

Abstract This study examines the effectiveness of internal corporate governance mechanisms (ICGMs) in managing non-performing loans (NPLs) in listed banks within an emerging economy, specifically Bangladesh. We focus on addressing dynamic endogenous bias, which has often been overlooked in prior studies. Using a panel dataset of 29 Dhaka Stock Exchange (DSE)-listed banks and 261 bank-year observations spanning from 2013 to 2021, we apply the system generalized method of moments (GMM) model to correct for potential endogeneity in estimating the impact of ICGMs on NPL management. Our results reveal that certain governance mechanisms, including board meetings and size of audit committee, play a significant role in controlling NPLs, while others, such as board size, board independence, and audit committee meetings, are found to have no meaningful effect. These findings suggest that reforms to the Code of Corporate Governance in Bangladesh are needed to enhance the effectiveness of credit risk management and improve accountability and transparency. By addressing dynamic endogeneity bias, this study contributes new insights into the effects of ICGMs on NPLs in the context of listed banks in Bangladesh. However, a key limitation of the study is the exclusion of non-listed banks, which also play a substantial role in the accumulation of NPLs in the country.