The Moderating Role of Leverage

on the Effect of Institutional

Corporate Governance on
Banking Sector Stability

Dr. Lawrence Wahua

 Background 1

Countries' Factors Malaysia Indonesia Turkey

Major Legal System: Common Law Civil Law Civil Law

Financial System: Market-based Bank-based Market-based

Constitutional Constitutional Constitutional

Monarchy with Republic with Republic with
Political System: Federal Parliament Unitary Presidential Unitary Parliament
Theoretical Framework:
(Gillan, 2006)
 Problems
Malaysia, Indonesia, and Turkey have histories of chronic bank failures and
financial crises (Demirguc-Kunt & Detragiache, 2005).
Weak national corporate governance institutions are responsible for bank
failures and financial crises (Mitton, 2002; Joh, 2003; Rajan & Zingales, 2003)
Excessive banks leverage is responsible for banks failures (Avgouleas, 2015)
This work fills the gap in existing literature as MIT-Countries are
understudied in the triple-themes of country-level institutional governance,
excessive leverage, and banking sector stability
 Objective
To investigate the effects of differences in MIT-Countries
political, financial, and legal systems on DTBs capital adequacy
and profitability when:

The mediating impact of leverage is not controlled

The mediating impact of leverage is controlled
 Question

Do political, financial and legal systems of MIT-Countries have

significant effects on DTBs capital adequacy and profitability
when the mediating impact of leverage is controlled, and when it
is not controlled?
 Research Method
Design : MANOVA & ANCOVA
Type : Parametric & comparative
Theoretical framework : Stakeholders & institutional theories
Sampling Technique : Census (population = sample = 214)
Instrumentation : Secondary data analysis technique
Data Analysis Software : SPSS (Version 21)
 Findings (1)
Hypothesis Variables R. Squared Sig. Decision
Malaysia Political System 0.382 0.018
Political system has significant effect on
Indonesia Political System 0.191 0.118
DTBs capital adequacy.
Turkey Political System 0.987 0.001 Mixed
Malaysia Political System 0.559 0.002 Results
Political system has significant effect on
Indonesia Political System 0.238 0.077
DTBs profitability.
Turkey Political System 0.94 0.001
Financial system has significant effect on Market Based Financial System 0.389 0.013
Accepted
DTBs capital adequacy. Bank-Based Financial System 0.982 0.001
Financial system has significant effect on Market Based Financial System 0.425 0.008
Accepted
DTBs profitability. Bank-Based Financial System 0.909 0.001
Legal system has significant effect on Common Law Legal System 0.534 0.002
Accepted
DTBs capital adequacy Civil Law Legal System 0.992 0.001
Legal system has significant effect on Common Law Legal System 0.668 0.001
Accepted
DTBs profitability Civil Law Legal System 0.967 0.001
 Findings (2)
Hypothesis Variables R. Squared Sig. Decision
Malaysia Political System 0.078 0.355
Political system has sig. effect on DTBs capital adequacy when the
Indonesia Political System 0.289 0.058 Rejected
impact of leverage is controlled.
Turkey Political System 0.001 0.932
Malaysia Political System 0.096 0.302
Political system has sig effect on DTBs profitability when the impact
Indonesia Political System 0.245 0.086 Rejected
of leverage is controlled.
Turkey Political System 0.001 0.992
Financial system has sig effect on DTBs capital adequacy when the Market-Based System 0.243 0.073
Rejected
impact of leverage is controlled. Bank-Based System 0.28 0.052
Financial system has sig effect on DTBs profitability when the impact Market-Based System 0.277 0.053
Rejected
of leverage is controlled. Bank-Based System 0.121 0.224
Legal system has sig effect on DTBs capital adequacy when the Common Law System 0.018 0.645
Rejected
impacts of leverage is controlled. Civil Law System 0.001 0.95
Legal system has sig effect on DTBs profitability when the impacts of Common Law System 0.135 0.196
Rejected
leverage is controlled. Civil Law System 0.001 0.983
 Implications of the Findings
Relevance of the political system theory (Prestine, 1991; Roe, 1998)
Parliamentary democracy is rooted in Turkey for more than a century (Lewis,
1994); semi-democracy is what is tenable in Malaysia (Case, 1993); and
Indonesia is under a guided democracy (Lang, 2014).
Financial system affects banks stability (Oima & Ojwang, 2013;Rajan, 1992).
Legal systems affect banks stability (Moya & Powell, 2001; Levine, 1998
 Recommendations
Countries should ensure that their DTBs speedily adopt positive strategies of
pegging their leverage ratio to 25% as recommended by the Bank of
International Settlement (Central Bank of central banks) in 2011.

This work should be replicated in countries: Islamic vs non-Islamic;

developed vs developing, and across economic groups like ECOWAS, OIC,
OPEC, BRICS, D-8, ASEAN, etc.
END OF PRESENTATION

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