Revisiting the relationship between board structure and bank performance in Ethiopian commercial banks

Abstract

This study examines the relationship between board structure and the performance of 15 Ethiopian commercial banks from 2010 to 2022. Using panel data analysis, the study assesses the impact of board size and gender diversity on performance, measured by return on equity (ROE) and net interest margin (NIM). The results indicate that board size does not significantly affect performance, while higher gender diversity is positively associated with higher ROE. Moreover, economic growth positively influences ROE, while remittances exhibit a negative correlation. After controlling for endogeneity, macroeconomic factors impact ROE but not NIM. The findings shed light on the complex governance-performance dynamics in developing banking systems, contributing valuable empirical evidence from multiple theoretical perspectives. The study suggests selective board size expansion and leveraging diversity. However, limitations include the exclusive focus on commercial banks and the relatively short timeframe. Overall, this analysis enhances our understanding of the study’s focus on board structure-performance connections within the Ethiopian banking sector, emphasizing the need for context-specific research in this domain.

Keywords:

• panel model
• board structures
• performance of commercial banks
• fixed effects
• random effect
• Ethiopia

Public Interest Statement

What makes for an effective bank board? As customers, we want banks to be profitable yet prudent, balancing performance and risk management. This research examines how board size and gender diversity affect financial outcomes at Ethiopian commercial banks from 2010-2022. Contrary to common wisdom, we find banks with larger boards did not perform better - more directors can lead to inefficiencies. However, greater gender diversity improved return on equity, suggesting varied perspectives strengthen oversight. Our study highlights the need for nuanced governance tailored to local contexts, rather than one-size-fits-all policies. As regulators push for lean, independent boards, they should consider potential costs of overly prescriptive requirements. The right board mix could fortify banks against instability while responsibly serving customers and communities. With insights from Ethiopia’s fast-growing banking sector, this research illuminates important governance considerations for banks worldwide seeking the elusive formula to thrive in turbulent times.

Acknowledgments

The author is responsible for any errors or omissions in the paper.

Availability of data and materials

Upon request, the data and materials will be made available.

Disclosure statement

The author states that there are no competing interests to declare.

Additional information

Funding

The author did not receive any research funding for this paper

Notes on contributors

Dereje Fedasa Hordofa

Dereje Fedasa Hordofa is a Lecturer at Dire Dawa University, Ethiopia. He is an esteemed member of the Ethiopian Economic Association (EEA), reflecting his dedication to contributing to the field of economics. Before his role as a Lecturer, Dereje gained valuable experience as a Customer Service Officer at Bank of Abyssinia (BOA) from 2017 to 2018, where he honed his skills in the financial sector. Currently, Dereje’s research interests revolve around crucial areas such as Income Inequality, Financial Development, Development Economics, and Bank Performances. His dedication to these topics showcases his commitment to understanding and addressing key economic issues that can impact society and contribute to its development. As a researcher and lecturer, Dereje aims to bring valuable insights to the academic community and policymakers, fostering positive change and progress in the economic landscape of Ethiopia and beyond.