Why Corporate Governance (CG) is an important tool in Financial Institutions (FIs)?
Why Corporate Governance (CG) is an important tool in Financial Institutions (FIs)?
Answer: A good corporate governance refers to the effective and proactive control of a bank‘s fate by its board and senior management, i.e. it implies control and management and means that the bank‘s top managers lead it in such a way that it can fulfil its corporate mission.
Corporate Governance (CG) is an important tool in Financial Institutions (FIs) because of:
Economic growth: FIs have a tremendously dominant position in a financial system, and are extremely important engines of bringing economic growth for which a banking system with good governance is extremely important.
To protect the interest of stakeholders: The FIs have the same legal structure and social standing like other corporate entities, because banks also have their stakeholders and have accountability to them, while their operational efficiency and integrity have impact on the relationship with the stakeholders.
Risk minimization: FIs are not only the financial intermediary but also act as the agency on behalf of the depositors to assess and monitor the behavior of the borrowers so that they can minimize the risk of default. Banks have specialization to diversify the risks through portfolio diversification so that they can return the depositors money as and when demanded.
Facilitate payment system: FIs are the agents of the payments system where they facilitate payments domestically and internationally, through various instruments such as bank accounts, fund transfers, credit cards, etc.
Source of Finance: FIs in developing economies are typically the most important source of finance for the majority of firms’ thereby augmenting and sustaining growth. This function can only be ensured through good CG.
Capital for industrialization: FIs are usually the main depository for the economy‘s savings that arranges capital for industrialization and economic prosperity. Unless there is sound CG in banks, this need cannot be accommodated.
Regulatory protection: the inefficient banks are not vulnerable to be forced out of the market because of regulatory protection. So, the FIs need stronger CG mechanisms than other business.
Accountability: Finally, FIs have to operate under specific regulators and supervision authorities which are not common for other business corporations, as such this special accountability requires the banks to ensure special corporate compliance different than other industries.