CORPORATE GOVERNANCE AND FIRM PERFORMACE: EVIDENCE

FROM NEPALESE COMMERCIAL BANKS

A Dissertation submitted to the Office of the Dean, Faculty of

Management, in partial fulfillment of the requirements for the Degree of
Master of Business Studies

by

Rajani Shrestha
Symbol No.: ……..
T.U. Registration No.:7-2-…………………
Nepal Mega College

Kathmandu
August, 2023
 CERTIFICATION OF AUTHORSHIP

I hereby corroborate that I have submitted the final draft of the dissertation entitled "
Corporate governance and firm performance: evidence from Nepalese commercial
banks". The work of this dissertation has not been submitted previously for conferral
of any degrees nor has it been proposed and presented as part of requirements for any
other academic purposes. The assistance and cooperation that I have received during
this research work have been acknowledged. In addition, I declare that all information
sources and literature used are cited in the reference section of the dissertation.

……………….

Rajani Shrestha

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 REPORT OF RESEARCH COMMITTEE

Mrs. Rajani Shrestha has defended the research proposal entitled "Corporate
governance and firm performance: evidence from Nepalese commercial banks "
successfully. The research committee has registered the dissertation for further
progress. It is recommended to carry out the work as per suggestions and submit the
dissertation for evaluation and viva voce examination.

……………………….. Dissertation Proposal Defended Date:

Dissertation Supervisor ……………………………………
Signature:………………..

……………………….. Dissertation Submitted Date:

Dissertation Supervisor …………………………………
Signature:………………..

Dissertation Viva Voce Date:

…………………………
………………………………………
Head of Research Committee
Signature:…………………

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 APPROVAL SHEET

We have examined the dissertation entitled " Corporate governance and firm
performance: evidence from Nepalese commercial banks" presented by Mrs. Rajani
Shrestha for the degree of Master of Business Studies. We hereby certify that the
dissertation is acceptable for the award of degree.

………………………….
Dissertation Supervisor

………………………..
Internal Examiner

………………………..
External Examiner

…………………………..
Chairperson, Research Committee

Date:

iv
 ACKNOWLEDGMENT

The Graduate Research Project entitled “Corporate governance and firm performance:
evidence from Nepalese commercial banks” to the Tribhuvan University faculty of
management for the partial fulfillment of the requirement of the Master in Business
Studies degree at Nepal Mega College. It would have been almost impossible to
complete without cooperation and help from different section of intellectuals.

I would like to express my gratitude to Dissertation Supervisor Dr. Surendra Mahato

and Yadap Chandra Neupane (Chairperson, Research Committee) of Nepal Mega
College for his valuable suggestion, guidance and continuous cooperation and
coordination has been instrumental in the process of preparing this research work.

I would like to express my gratitude and thanks to Mr. Madhukar Pandey (Vice
Principal) of Nepal Mega College, for their encouragement and valuable advice. I
would also like to express my gratitude to all faculty members of Nepal Mega College,
especially, staffs from MBS Program, library staffs as well as all known and unknown
people who supported as well as inspired me to complete this dissertation.

Thank you,
Rajani Shrestha

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 TABLE OF CONTENTS

Title page………………………………………………………………………………………...i
Certification of authorship ............................................................................................ii
Report of research committee .......................................................................................iii
Approval sheet .............................................................................................................. iv
Acknowledgment ............................................................................................................ v
Table of contents ........................................................................................................... vi
List of table ................................................................................................................. viii
List of figure.................................................................................................................. ix
Abbreviations ................................................................................................................. x
Abstracts ....................................................................................................................... xi
CHAPTER I ................................................................................................................... 1
INTRODUCTION ......................................................................................................... 1
1.1 Background of the Study ..................................................................................... 1
1.2 Statement of Problem .......................................................................................... 3
1.3 Research Questions .............................................................................................. 3
1.4 Objectives of the Study........................................................................................ 4
1.5 Hypothesis of the Study ....................................................................................... 4
1.6 Rationale of the Study ......................................................................................... 7
1.7 Limitation of the Study ........................................................................................ 7
1.8 Organization of the Study .................................................................................... 8
CHAPTER II ............................................................................................................... 10
LITERATURE REVIEW ............................................................................................ 10
2.1 Conceptual Review ............................................................................................ 10
2.2 Theoretical Review ............................................................................................ 21
2.2.1 Agency Theory ............................................................................................... 21
2.2.2 Stewardship Theories...................................................................................... 23
2.2.3 Stakeholders Theory ....................................................................................... 24
2.2.4 Resource Dependency Theory ........................................................................ 25
2.3 Empirical Reviews ............................................................................................. 26
2.4 Theoretical Framework ...................................................................................... 31
2.5 Research Gap ..................................................................................................... 31
CHAPTER III .............................................................................................................. 33

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RESEARCH METHODOLOGY ................................................................................ 33
3.1 Research Design ................................................................................................ 33
3.2 Population and Sample ...................................................................................... 33
3.3 Nature and Sources of Data ............................................................................... 34
3.4 Instrumentations ................................................................................................ 35
3.5 Data Collection Procedure ................................................................................. 35
3.6 Validity and Reliability ..................................................................................... 35
3.7 Analysis Plan ..................................................................................................... 36
3.8 Regression Analysis........................................................................................... 37
CHAPTER IV .............................................................................................................. 39
RESULT AND DISCUSSION .................................................................................... 39
4.1 Descriptive Statistic ........................................................................................... 39
4.1.1 Structure of return on assets ........................................................................... 39
4.1.2 Trend Analysis ................................................................................................ 47
4.2 Descriptive Analysis .......................................................................................... 52
4.2 Panel Unit Root Test Results ............................................................................. 54
4.3 Regression Analysis........................................................................................... 57
4.3.1 Random Model of ROA.................................................................................. 58
4.4 Discussion .......................................................................................................... 61
CHAPTER V ............................................................................................................... 64
SUMMARY AND CONCLUSION ............................................................................ 64
5.1 Summary ............................................................................................................ 64
5.2 Conclusion ......................................................................................................... 67
5.3 Implications ....................................................................................................... 67
REFERENCES ............................................................................................................ 70

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 LIST OF TABLE

Table 3.1 Sample of commercial banks ....................................................................... 34

Table 4. 1 Structure of return on assets........................................................................ 39
Table 4. 2 Structure of return on assets........................................................................ 40
Table 4. 3 structure of age of firm ............................................................................... 42
Table 4. 4 structure of audit committee ....................................................................... 43
Table 4. 5 Structure of board size ................................................................................ 44
Table 4. 6 Structure of firm size .................................................................................. 45
Table 4. 7 Structure of leverage ................................................................................... 46
Table 4. 8 Summary of descriptive analysis ................................................................ 53
Table 4. 9 Pannel root test of ROA .............................................................................. 54
Table 4. 10 Panel root test of return on equity............................................................. 55
Table 4. 11 Unit root test of age .................................................................................. 55
Table 4. 12 Unit root test of audit committee .............................................................. 56
Table 4. 13 Unit root test of board size ........................................................................ 56
Table 4. 14 Unit root test of firm Size ......................................................................... 56
Table 4. 15 Unit root test if leverage ........................................................................... 57
Table 4. 16 Hausman test of ROA ............................................................................... 58
Table 4. 17 Cross section random effects foe ROA..................................................... 58
Table 4. 18 Hausman test of ROE ............................................................................... 59
Table 4. 19 Cross section random effect for ROE ....................................................... 60
Table 5. 1 Finding of ROA and ROE .......................................................................... 66

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 LIST OF FIGURE

Figure 2. 1 Theoretical framework of the study .......................................................... 31

Figure 4. 1 Trend of return on assets and return on equity .......................................... 47
Figure 4. 2 Trend of age ............................................................................................... 48
Figure 4. 3 Trend of audit committe ............................................................................ 49
Figure 4. 4 Trend of board size .................................................................................... 50
Figure 4. 5 Trend of firm size ...................................................................................... 51
Figure 4. 6 Trend of leverage ....................................................................................... 52

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 ABBREVIATIONS

AC : Audit Committee

AGM: Annual General Meeting

BIFs : Banking and Financial Institutions

BOD: Board of Director

BS: Banking Size

CEO: Chief Executive Officer

EPS: Earning per Share

FY: Fiscal Year

GDP: Gross Domestic Product

GRP: Graduate Research Project

MBS: Master in Business Studies

NIBL: Nepal Investment Bank Limited

NRB: Nepal Rastrya Bank

OECD: Organization for Economic Co-operation and Development

ROA: Return on Assets

ROE: Return on Equity

SAFTA: South Association Free Trade Area

SBI: State Bank of India

SCB: Standard Chartered Bank

SD: Standard Deviation

USA: United State of America

WB: World Bank

WTO: World Trade Organization

x
 ABSTRACTS

Corporate governance is the way by which an organization is directed or controlled.

The relative effectiveness of corporate governance has a profound effect on how well a
business performs. General observation shows that business have prospered and
remained prosperous are those that have found ways to govern their affairs effectively.
Corporate governance is the system by which companies are directed and controlled.
Boards of directors are responsible for the governance of their companies. The
shareholders role in governance is to appoint the directors and the auditors and to
satisfy themselves that an appropriate governance structure is in place Corporate
governance is considered as the most efficient way of supervising the operations of a
firm and ensuring the main goal of a firm to maximize shareholders wealth is taken
care of. Corporate governance can also be used to reduce misconduct by organizations
and enforcement of policies and decisions aimed at securing rights of shareholders and
other stakeholders. The study aim was to establish the impact of corporate governance
on the firm performance of Nepalese commercial banks. Return on assets and return
on equity are the dependent variable for firm performance and firm size, leverage,
board size, age of the firm, and audit committee are the independent variables. Data
are collected from annual report of 10 commercial banks from 2013 to 2022. The data
collected were analyzed using descriptive analysis, trend analysis and regression
analysis tools. From the study, it can be concluded that corporate governance factors
have significant impact on the performance of commercial banks. The results showed
that age is significant effect on the return on assets of the banks however; audit
committee, board size, firm size and leverage have insignificant effect. Similarly, Age,
board size and leverage have significant effect on the return on equity of the banks
however audit committee and firm size have insignificant effect as per the regression.
The study also recommends that board of every financial institutions need to organize
the independent supervision team to monitor, evaluate and guide on maintaining the
quality of audit, information disclosure and also make sure that bank has adopted and
implemented sound corporate governance policies and practices in Nepal.

Key word: Board size, firm size, age, leverage, audit committee

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 1

CHAPTER I

INTRODUCTION

1.1 Background of the Study

In every economy, the banking industry serves as a major financial intermediary. The
Asian countries' 1997–1998 economic crises brought attention to the significance of
corporate governance. In comparison to other businesses, banks' corporate governance
is more crucial (Adnan, 2015). Poor bank corporate governance can cause the market
to lose faith in a bank's competence, which can subsequently trigger an economic crisis
and expose the nation to systemic risk (Macro & Fernandez, 2008).

The macroeconomic problems caused by weak legal and regulatory frameworks,

inconsistent accounting and auditing standards, subpar banking practices, sparse and
unregulated capital markets, ineffective corporate board of director oversight, and little
regard for the rights of minority shareholders have all been made clear by the economic
crisis in East Asia and other regions. Recent studies have paid a lot of attention to
corporate governance challenges. Researchers can't come to an agreement on a single
definition because it relies on who is doing the defining. For instance, the concept of a
manager in the company may differ from the investor's definition of the term (Metrick
& Ishii, 2002). Companies that utilize a sound corporate governance model give
investors and other stakeholders more valuable information, reducing information
asymmetry and assisting the business in improving operations (Hsiang & Chinag,
2005). In order to ensure that businesses are administered for the advantage of investors,
corporate governance is said to be concerned with strategies to align the interests of
management and investors.

For the Nepalese financial system, good corporate governance is not a new idea. The
banking industry has been steadily embracing corporate governance. It stands for a key
problem facing the modern financial sector. The significance of such a matter
unquestionably depends on the function it plays in the economy and the financial
market. Corporate Governance is a systemic process that directs and controls businesses
to increase their ability to create wealth (Thapa, 2008). Maintaining adequate capital,
publishing financial information in a transparent manner, and managing operational,
credit, market, and environmental risks are only a few of the topics included in the study
 2

of corporate governance (Pokhrel, 2007). Typically, the board of directors is at the heart
of corporate governance. Its interaction with the other key players—typically the
management and shareholders—is crucial. According to several experts, having more
independent non-executive members on a board may help with agency issues and make
the board more successful (Choe & Lee, 2003).

According to Shleifer and Vinhny (1997), corporate governance is how lenders to

corporations assure that they will receive a return on their investment. In today's
competitive and regulated environment, good corporate governance practices offer a
way to acknowledge the ambition of explaining risks while simultaneously enhancing
performance.

Establishing an objective foundation for building long-term trust between a firm and its
stakeholders is what corporate governance is all about. It eliminates the issue of agents'
and principals' competing interests. It is resolved by rationalizing and monitoring a
company's risks, reducing top management's liability through clearly outlining the
decision-making process, assuring the accuracy of financial reporting, and eventually
supplying the level of confidence required for an organization to function properly.
Organizations all across the world were obliged to establish stringent criteria for
corporate governance as a result of scandals like Enron, WorldCom, and Tyco, among
others. Various facets of corporate governance benefit managers in various ways. The
size of the board of directors and other factors affecting their effectiveness may be
discussed in several studies (Maskay, 2004).

Corporate governance changes are crucial for developing nations like Nepal in order to
increase capital market savings and make a sustained attempt to attract foreign direct
investment and foreign portfolio management. In particular, every bank was found to
have serious corporate governance issues, according to the Nepalese central bank.
Despite providing guidelines to improve corporate governance in 2005, the outcomes
remained unchanged. Corporate governance has been a problem since the start of the
previous decade. A stable financial system is essential for economic growth that is
sustainable. Nepal is going through a difficult time of change. Good corporate
governance measures in the banking sector are now absolutely necessary. For the
working board to ensure business integrity, which can support good economic growth,
it needs members who are knowledgeable, competent, and independent. Corporate
 3

governance in the banks of many emerging economies has greatly improved as a result
of increased competition brought on by the arrival of foreign competitors (Mundul,
2013).

The arrival of foreign competitors into the Nepalese market in the form of joint venture
banks has intensified the already fierce competition in the country's financial sectors.
As excellent corporate governance is a source of competitive advantages and essential
to economic and social progress, Nepal's financial sectors will inevitably modify the
way they operate (Pradhan & Adhikari, 2013).This study evaluates the type of corporate
governance used in Nepali organizations. Many businesses in Nepal are family-owned,
following the custom of many south Asian businesses, and are run by inexperienced
family members in roles such as managers, accountants, and other high management
positions (Pradhan & Adhikari, 2013).

1.2 Statement of Problem

While extensive study on corporate governance has been conducted in respect to other
Asian nations like Malaysia about the relationship between corporate governance and
performance (Abdullah, 2004), there is none in the case of Nepal. While the World
Bank only conducted an earlier study on the observance of standards and codes (ROSC)
on corporate governance in Nepal in 2005, no research has been done to determine the
relationship between corporate governance and bank performance. Consequently, the
theme was chosen due to two key sources of inspiration.

One was due to an important and emerging idea, particularly in the banking industry,
which may ultimately lead to overall economic progress. Another reason was that there
wasn't much research on Nepal, which made it difficult to come up with something
novel. This study will present the results of a recent study on the corporate governance
requirements for banks and other financial institutions in Nepal as well as an analysis
of the correlation between a few corporate governance variables and performances. The
following are some of the key inquiries that today's corporate world poses as the
foundation for this research study:

1.3 Research Questions

Based on above problem along with the knowledge gap in the literature calls the
research to investigate the following question:
 4

 Does board size affect a company's performance in any way?

 Is there a relationship between business size and the financial performance of
Nepal's commercial banks?
 Does aging impact the firm's performance?
 Does leverage have any effect on how well a company performs?
 Is the performance of the company impacted by the audit committee?

1.4 Objectives of the Study

The following specific objectives are part of the study's overall goal to determine the
relationship between corporate governance and company performance in Nepalese
commercial banks to assess the Components of Capital Structure to attain long term
profit.

 To investigate how board size affects company performance.

 To determine how bank size affects Nepal's commercial banks' financial
performance.
 To ascertain how a bank's age affects its financial performance
 To determine how leverage affects the financial health of Nepal's commercial
banks.

1.5 Hypothesis of the Study

Board size and firm performance

There are two schools of thinking about the relationship between board size and firm
performance. According to the first school of thought, the firm will succeed more if the
board is smaller (Lipton & Lorsch, 1992). According to the second school of thought,
the firm performs better the bigger the board is (Klein & Coles, 2008). A large board
size also tends to be better for business performance because they have more access to
the market and can obtain more information (Dalton, 1999). Due to the complicated
and competitive corporate climate, these studies claim that a large board will assist and
advise management more effectively (Klein, 1998). According to the agency theory,
smaller boards are advised in order to reduce agency costs through effective
management control, but larger boards may result in more possible interactions and
disputes amongst group members (Yoshikawa & Phan, 2003). However, there is a
different school of thought that supports larger boards and contends that larger boards
 5

can encourage managers to track lower debt costs because creditors perceive larger
boards as having better financial accounting process monitors and higher performance
(Anderson, 2004). Topak (2015), however, discovered no connection between a board's
size and performance of a company. The idea for Nepal's board of directors, which has
members in the range of 5 to 9, was inspired by the writings of (Lipton & Eden, 2000).
Meanwhile, some authors contend that there is a beneficial correlation between board
size and firm success (Zahra & Pearce, 1989). There is, however, a claim that there is
no connection between board size and a company's performance.

H1: There is significant impact of board size on firm performance.

Age and firm performance
Many empirical research studies show that the age of a firm is an important factor
behind a bank’s performance. Generally, old banks are more transparent than new
banks: they have developed their goodwill and built confidence among their customer,
which helps them to earn higher profits than new banks (Antonious, Guney, & Paudyal,
2008). In addition, old banks have learned what governance mechanism works best for
their institutions. It has shown that young ventures have a higher failure rate than young
once. However, some researcher has argued that the liability of newness mainly
depends upon the industry lifecycle (Agarwal & Sarkar, 2002). Thus, the impact of a
firm’s age on performance is a pragmatic question. In this research, age of a firm is
calculated as the difference between last period of study and the date of incorporation.
The age of corporate firm has been used by numerous studies in terms of number of
years a firm has been established (Boone et al., 2007). They asserted that firm age is a
relevant indicator of expected growth opportunities. For instance, Claessens et al.,
(2002) confirmed that matured and larger firms have more liquid trading, better
disclosure, well diversified, managing portfolio in reducing risk but less growth
opportunity. However, young and smaller firms have better growth opportunity but
greater exposure to adverse market conditions. Evans (1987) concluded that older and
larger firms have greater skill and experience, but less dynamic and flexible with market
environment. Older firms are unable to make quick response to grab market change
(Borghesi et al., 2007). Young firms are expected to earn less profit that aged firms due
to less experienced in the market, actually, they are trying to recover their cost
(Lipczinsky & Wilson, 2001).

H2: There is significant impact of age of the firm on firm performance.

 6

Leverage and firm performance

If firm could not supply the fund internally then it should go into the market and raise
the capital by issuing long term securities. The long term securities are either equity
capital or long term debt. In this regard, firm may raise its financing requirement from
long term debt to uplift the firm’s business, is leverage. Weill (2003) revealed that
leverage is one of the proxies of corporate performance. The study shows that there is
negative association between leverage and corporate performance in Italy whereas
positive association in France and Germany. Majumdar and Chhibber (1999) tested the
relationship between leverage and corporate performance in Indian firm’s results that
there is negative and significant relationship between leverage and corporate
performance. Essentially, it involves borrowing money to invest in securities over and
above the money contributed by shareholders.

H3: There is significant impact of leverage ratio on firm performance.

Audit committee and firm Performance
Fama & Jensen (1983) reveal on the transparency that audit committee maintains in the
business. According to them, audit committee could observe the financial reporting
process; select the auditors with terms and conditions and delegation of power of
attorney. In Nepal, company registration office laid the foundation of appointing audit
committee for the firm which has more than Rs 30 million investments. An audit
committee is entitled to ensure that a corporate firm has sufficient internal controls,
effective accounting policies, and independent accounting policies to avoid fraud,
embezzlement, enhance morality, and produce timely financial report. Directors and
audit committees that are independent from management should improve the firms'
reporting system and the quality of reported earnings because they are not subject to
potential conflicts of interest that reduce their monitoring capacity (Siagian &
Tresnaningsih, 2015). An independent audit committee is one of the important
mechanisms in this respect. It is expected to satisfy the need of both internal and
external users of financial statements, and prior studies have documented the
importance of the independence of audit committee members for maintaining the
integrity and quality of the corporate financial reporting process (Islam et al., 2013).

H4: There is significant impact of audit committee on firm performance.

Firm size and firm performance
 7

There are many indicators that show how important firm size is to corporate governance
and business performance. To determine a firm's size, total assets are analyzed. The
management efficiency increases with company size. Ramzan (2017) demonstrates a
significant positive association between company size and return on assets (firm
size). Performance). As a result, it is assumed that larger firms perform better as a
whole.

H5: There is significant impact of firm size on firm performance.

1.6 Rationale of the Study

The capital structure of a company has a greater impact on the growth and profitability
of the business. Maintaining a healthy financial position is made easier by having an
appropriate capital structure. It is generally agreed that a business is in good financial
shape if it has a debt-to-equity ratio that is manageable. In addition to this, it ensures
the efficiency of the business. This study is significant not only for managers and
shareholders but also for students and the researchers themselves. The managers of the
company can benefit from this study by developing a capital structure that leads to an
increase in the company's profitability. In order to mitigate risk, it instructs managers
to keep a debt-to-equity ratio that is appropriate for the company.

It further guides the managers in choosing the most optimal capital structure framework
in order to maximize long-term profits. When it comes to shareholders, this study
provides them with the ability to evaluate the financial standing of a company, which,
in the end, help them select companies that are profitable. In addition to that, this still
serve as a guide for students who are interested in studying in a similar field. In a similar
vein, the results of this study may provide the researchers with the ability to apply the
knowledge in various fields. In a nutshell, the purpose of this study is to highlight both
the advantages and disadvantages of a sampled bank.

1.7 Limitation of the Study

There are some limitation while conducting the study in order to accomplishment the
objectives. The major limitation of the study are as follows:

 Reliability of the secondary data depends upon the annual report and reliability of
primary data based on their response.
 8

 The sample size is restricted to only three bank out of total commercial banks in
Nepal.
 The secondary data cover only ten years from Financial Year 2068/69 to 2077/78.
 There were 20 commercial banks in Nepal but the study covers only three
commercial banks and does not cover entire commercial banks of Nepal.
 The descriptive and Analytical research design was used in this study to describe
the problem, and analytical research was used to determine the relationships
between the variables.
 This study is conducted to partial fulfillment of required of Masters of Business
Studies rather than solve the problem.

1.8 Organization of the Study

There will be five chapters in the report, excluding the introduction and appendix. Title
page, approval page, acknowledgement, table of contents, list of tables and figures,
acronyms, and abstract are all included in the preparatory part.

Chapter I: Introduction
Introduction, problem statement, study objective, importance, study limitations, and
study organization are all included in the first chapter.

Chapter II: Literature Review

Review of pertinent literature and theoretical framework are the topics of this chapter.
It offers pertinent definitions and research findings on the subject from other scholars,
journals, papers, and works of a similar nature. Additionally, this chapter offers a
theoretical and empirical analysis of prior research that forms the basis for the entire
book.

Chapter III: Research Methodology

The subject of this chapter is research methodology. Introduction, research design,
study site description, justification for choosing the study region, study population and
sample, types of data and methods for organizing, processing, and analyzing them are
all included.

Chapter IV: Results and Discussion

The sort of analysis utilized to process the data collected for the research is defined in
this chapter. The chapter comprises a descriptive analysis that includes a graph, tables,
 9

and the study's findings as well as statistical tests and hypotheses that examine the
potential relationships between the dependent and independent variables. The test
results assist in drawing a conclusion to the study, providing independent findings, and
interpreting study findings.

Chapter V: Summary and Conclusion

The study's final chapter is this one. It contained a summary of the study's findings, a
conclusion, and recommendations. This chapter is built around the analysis and
conclusions of the results. This chapter includes the research's implications and goals.
The chapter also contains a discussion of the research's future significance.
 10

CHAPTER II

LITERATURE REVIEW

This chapter reviews earlier studies on the corporate governance of financial

organizations in commercial banks. The overview of prior research is covered in this
section in order to pinpoint the most recent body of information that has an impact on
corporate performance. Because returns on assets and return on equity are essential
ratios that can be used to gauge a firm's efficiency, it is crucial in corporate finance to
understand the effects of firm-specific variables on the performance of the company. A
review of earlier research on the connection between corporate governance and firm
success follows the paper. Theoretical framework and the subject matter hypothesis are
offered based on these established foundations. This section's goal is to find any
potential holes in the research that has been done using corporate governance and
financial performance as the key variables.

2.1 Conceptual Review

Corporate Governance

Wheelen (2006), corporate governance is the connection between the top management,
board of directors, and shareholders in deciding the strategy and performance of the
company. Corporate governance is becoming more necessary as a result of the rise in
company issues brought on by increased global competition (Ahmad & Muzaffar,
2020). Since the expansion of financial markets (globalization), the idea of corporate
governance has become increasingly significant around the world. Before making an
investment, it is thought that foreign capital takes into account the country' solid
corporate governance policies. Corporate governance attempts to make it easier to
monitor and manage business operations effectively. Its core values include fairness,
transparency, and increased disclosures to safeguard the interests of many stakeholders
(Arora & Bodhanwala, 2022).

Through sound decision-making, corporate governance systems are anticipated to

improve the performance of the company (Shivani et al., 2021). The function of
directors and auditors toward shareholders and other stakeholders is defined by
corporate governance. For shareholders, corporate governance is important because it
fosters more investor confidence in the business. Corporate governance ensures that a
 11

firm behaves responsibly towards society and the environment for other stakeholders
such as employees, consumers, suppliers, the community, and the environment (Kolk
& Pinkse, 2014). Corporate governance thus encompasses considerations of social and
environmental responsibility in addition to board accountability. Corporate governance
was first created to safeguard the interests of shareholders, but over time, it has come
to be valued by other stakeholders and society as a whole (Jizi et al., 2018).

Improved corporate governance plays a significant role in raising the firm's value.
Because of the different corporate governance frameworks brought about by diverse
social, economic, and regulatory environments, the influence of corporate governance
varies from country to country. With regard to financial leverage, the same is true.
Because different nations have varied tax rates and tax legislation, financial leverage
has varying effects on the firm's value internationally (Rouf, 2015).

Corporate governance, according to Bairathi (2013), is "something far bigger to include

a fair, efficient, and transparent Studies to reach specific well-defined objectives. It is
not only corporate management. It is a system for organizing, managing, and
controlling a business with the aim of achieving long-term strategic goals to satisfy
shareholders, creditors, employees, customers, and suppliers, as well as to adhere to
legal and regulatory requirements, in addition to meeting the needs of the local
environment and community. Corporate governance is a method for managing and
regulating commercial enterprises. The corporate governance structure outlines the
rights and responsibilities of each stakeholder in a firm as well as the specific policies
and procedures that must be followed when making business decisions. Based on this,
a framework is developed that outlines the company's objectives, methods for achieving
them, and metrics for measuring performance (Kocmanova et al., 2015). Corporate
governance principles that are correctly implemented inside an organization may boost
profits and returns, enhance its competitiveness and credibility, and strengthen relations
with important stakeholders including investors, business partners, employees, and
customers, among others (Todorovic, 2017).

The significance of corporate governance has gained more and more attention in recent
months. The various financial crises that have occurred are the result of bad company
governance. As a result, corporate governance is regarded as one of the most important
factors for both large and small commercial enterprises. Additionally, corporate
governance in the banking industry is crucial since this industry supports business
 12

allocations and risk management, which plays a crucial role in the economy (Magar et
al., 2019). Poor bank corporate governance can cause the market to lose faith in a bank's
competence, which invites systemic risk and causes an economic crisis in the nation
(Brown & Caylor, 2006). In contrast, sound corporate governance enhances property
rights, lowers transaction costs and capital costs, and promotes the growth of the capital
market. Given the crucial role that banks play in emerging economies' financial systems
and the extensive banking reforms that these economies have enacted, corporate
governance is a crucial problem (Arun & Turner, 2002).

Corporate governance policies can increase the growth of the private sector and the
capital market as well as the investment climate. In a similar vein, strengthening the
function of the board of directors is a tactical instrument for sustainable business
development to address challenges, obligations, and issues surrounding sustainable
development. In emerging economies, good corporate governance is increasingly vital
for success and outpacing the competition. (Muzaffar & Ahmad, 2020). A effective
corporate governance policy will have a significant positive impact on management at
all levels, assist the organization in preventing management-level corruption, enhance
company values, add value for shareholders, and lower investment and financial risks.
As a result, when considering a company for investment, a good, sound, and healthy
corporate governance policy is crucial (Shen et al., 2006).

The growing economic crises around the world have focused experts' attention on
corporate governance issues for more than three decades. The governance literature has
taken into account a variety of corporate governance metrics and examined how these
metrics affect firm performance (Bhagat & Bolton, 2022).Recent economic and
financial research has paid a great deal of attention to the effect of corporate governance
on firm performance. Financial scandals that shook the American economy in the early
and late 2000s as well as the Asian financial crisis of the late 1990s have served as the
catalyst for this attention. Despite several studies on the topic, there is still substantial
disagreement over the connection between corporate governance and business
performance, and in the near future, the connection between corporate governance and
the performance of commercial banks. (Wepukhulu, 2020).

Efficiency, innovation, and quality management are important for an organization's

economic success, but so is adhering to corporate governance standards. Corporate
governance standards implementation enhances a company's financial performance and
 13

has a beneficial effect on internal firm efficiency in developed economies (Tadesse,

2004). However, inadequate disclosure standards and a lack of openness make
corporate governance mechanisms less effective. However, the long-term benefits of
excellent corporate governance systems in boosting a firm's performance and
sustainability have been confirmed by the global financial crisis and significant
corporate scandals (Ehikioya, 2013).

For emerging economies, corporate governance changes are particularly important

since they improve the efficiency of corporate structures, enable them to compete with
multinational businesses, and boost investor trust (Reed, 2002). Corporate governance
in the banks of many emerging economies has greatly improved as a result of increased
competition brought on by the arrival of foreign competitors (Mundul, 2013). Corporate
governance has made managers of businesses more conscious of their obligations to the
organization and the country (Ahmad & Muzaffar, 2020).

In emerging economies that are plagued by ineffective processes, corruption, and

bureaucratic influence on policy execution, (Dharmapala and Khanna 2017) place
emphasis on the necessity of enforcing legislative reforms. A surprising number of
earlier research have focused on the effect of company governance on financial success.
Very little research has been done on how corporate governance reforms have affected
corporate disclosures and reporting. This setting provides an intriguing instance for
examining how changes and reforms have improved corporate governance disclosures
in Indian enterprises.

Investor confidence has increased as a result of the recognition of corporate governance

as a key driver of economic efficiency and prosperity. It covers a wide range of issues
that result from interactions between business management, governmental agencies,
shareholders, and other stakeholders. Since 2001, there has been a resurgence in interest
in the corporate governance practices of contemporary firms, mostly as a result of the
high-profile failures of several significant corporations, the majority of which involved
accounting fraud. No firm can be too big to fail, as evidenced by the recent failure of
numerous well-known institutions around the world (Klirova, 2001).

Poor corporate governance culture was a recurring theme in these egregious failures, as
evidenced by poor management, fraud and insider abuse by management and board
members, inadequate asset and liability management, and lax rules and monitoring,
 14

among other things. As a result, numerous instances, including the well-known Enron
case in the United States of America, Baring Bank in the United Kingdom, Parmalat in
Italy, One Tel in Australia, the financial crisis in South East Asian nations, and a
number of others, attest to the importance of good governance in both the public and
private sectors of the economy (Sigdel & Koirala, 2019).

Mwanakatwe (2005) further stated that due to the banking industry's function as the
custodian of public finances and the high level of responsibility associated with that
job, banks are more accountable. In addition, he pointed out that banks are a type of
financial intermediary and have a position of trust in the economy. Banks are
particularly sensitive to poor corporate governance due to these heavy commitments.
He presented evidence to back up his claims, including the idea that sound corporate
governance in the banking industry may boost investor trust and draw in additional
capital.

Bank corporate governance in developing nations is crucial for a number of reasons.

First, banks are significant engines of economic growth and hold a strong position in
the financial systems of developing economies. Second, for the majority of businesses
in developing nations, banks serve as their primary source of financing. Third, banks
serve as the primary repository for the nation's savings in developing nations. Fourth,
by privatizing/disinvesting in their banking systems and diminishing the influence of
economic regulation, several developing economies have lately liberalized their
banking systems. As a result, bank managers in these economies now have more
freedom to govern their institutions. (Adhikari, 2018).

A sample of 22 UK listed companies from the years 1981 to 2002 were used in
Michcel's (2013) study to assess the effect of board size on business performance.
Because UK boards perform a poor monitoring function, any negative effects of high
board sizes are likely to reflect problems with the board's advisory rather than
monitoring function. This makes the UK an interesting institutional situation.
According to the study, board size significantly lowers profitability, Tobin's Q, and
share returns. This result is consistent with econometric models that account for various
endogeneity types. The analysis found no proof that the business factors that influence
board size in the UK are linked to a better relationship between board size and firm
success. On the other hand, it was discovered that for large enterprises, which typically
 15

have larger boards, the negative relation is stronger. Overall, our data are consistent
with the claim that the effectiveness of large boards is compromised by issues with poor
decision-making and communication.

The audit committee has an effect on financial and stock performance, according to
Hamdam and Adel (2017). Performance during operations is unaffected. The purpose
of the study is to look into the effects of audit committee characteristics, such as size,
independence, and financial experience, on performance, which includes operating,
financial, and stock performance. With a total of 212 observations made between the
study's sample years of 2008 and 2013, 106 financial companies listed on the Amman
stock exchange market were included in the study sample.

Evidence from microfinance institutions in Tanzania in a study on the effects of

business size and age on performance Fabian (2017) investigated how the age and size
of a corporation affected the effectiveness of microfinance organizations in Tanzania.
The study makes use of 30 active microfinance institutions nationwide and panel data
spanning five years. The study's results indicate that business size, as determined by
total assets and the number of borrowers, has a favorable influence on the operation of
microfinance institutions in the nation. On the other hand, the study discovered that the
efficiency, sustainability, and profitability of the Microfinance institutions examined
are adversely correlated with business size as evaluated by the number of
employees.The study's findings also demonstrate that the profitability of microfinance
institutions is positively impacted by the age of the firms, which indicates firm
experience. The study draws the conclusion that microfinance performance and income
generation capability are influenced by business size and age as a result of these
findings.

One of the most important decision-making subgroups in contemporary corporations is

the board of directors. Corporate boards are in charge of making strategic choices about
mergers and acquisitions, as well as the hiring, firing, paying, and promoting of
executives. Additionally, corporate boards can improve how contemporary firms
interact with the outside world, facilitating access to resources like funding and
commercial contracts (Sarhan, 2022).

A relevant set of corporate governance practices are suggested by the study on the effect
of corporate governance on the performance of listed financial institutions in Sri Lanka.
 16

Return on equity and Return on assets were two important variables that shaped the
company's performance. In contrast, the size of the board, the frequency of meetings,
and the company's audit committee are utilized as variables to assess corporate
governance (Danoshana & Ravivathani, 2023).

Corporate Governance Practices in Nepalese Banks

The government's decision to liberalize the financial sector in the 1980s made it
possible for foreign banks to establish joint venture banks in Nepal. Numerous banks
and non-banking financial institutions emerged as a result of the government's financial
sector liberalization program (Revolvy, 2021). The first commercial bank in Nepal with
government and general public ownership, Nepal Bank Ltd., was established in 1937,
marking the beginning of the country's financial system's historyAfter 19 years since
the first commercial bank was founded, Nepal Rastra Bank (NRB), the central bank,
was created in 1956. Rastriya Banijya Bank, another commercial bank and a
government of Nepal venture, was founded ten years after NRB. With the government's
liberal policy, the 1980s saw a significant structural change in financial sector rules,
regulations, and institutional advancements for the banking industry. The government
placed a strong emphasis on the private sector's contribution to financial sector
investment. In order to preserve the stability of the economy and financial system, the
principal recommendations of the OECD and Basel Committee on Banking Supervision
are being implemented by Nepalese banks (Adhikari, 2018).

Within 20 years of the beginning of the financial sector reform, Nepal had a significant
increase in the number of financial institutions. The banking industry in Nepal has
expanded geographically and institutionally in recent years. Currently, Nepal has 28
commercial banks (Monetary Policy, 2023-20). In order to execute strategic,
transparent reporting systems in an ethical manner and under controlled conditions,
corporate governance should be strengthened by establishing clear strategies and a well-
defined organizational structure (Kharouf, 2000).

All different kinds of corporate entities must practice good corporate governance. The
Asian countries' 1997–1998 economic crises brought attention to the significance of
corporate governance. Good bank governance is essential for the survival of an
economy in developing nations like Nepal (Poudel & Hovey, 2017). The arrival of
foreign competitors into the Nepalese market in the form of joint venture banks has
 17

intensified the already fierce competition in the country's financial sectors. As effective
corporate governance is a source of competitive advantages and essential to economic
and social progress, Nepal's financial sectors will inevitably modify the way they
operate (Pradhan et al., 2019).

Enhancing corporate governance in developing market countries like Nepal can help
achieve a number of important public policy objectives. Good corporate governance
contributes to the growth of the capital market by enhancing property rights, reducing
transaction costs and capital expenditures, and reducing the susceptibility of emerging
countries to financial crises. However, poor company governance practices can
undermine investor confidence and discourage outside investment. The importance of
corporate governance has recently received attention from an increasing body of
academic study (NRB, 2005). Improvements in corporate governance quality have a
positive, significant, and quantitatively relevant impact on conventional measures of
real economic activity, such as GDP growth, productivity growth, and the ratio of
investment to GDP. The growth effect is particularly pronounced for industries that are
most dependent on external finance (Sigdel & Koirala, 2019).

Significance of Corporate Governance in Banking Sector

A bank's ability to operate may be questioned by the market due to poor corporate
governance, which can potentially trigger an economic crisis. A fair and transparent
business environment and the ability to hold corporations accountable for their actions
are ensured by good corporate governance. On the other hand, poor corporate
governance results in fraud, waste, and corruption (Marco & Fernandez, 2008). In the
context of Nepal, one of the earlier studies showed that firms with 'A' class auditors
appointed had higher rates of return and higher market prices per share. As total assets
increased, so did these rates of return and market prices of shares, according to the
study. However, as a firm's leverage increases, the firm's rate of return and share price
tend to decline (Pradhan & Adhikari, 2013).

There may be issues with moral hazard because there isn't enough transparency and
control. It is a well-known truth that greater transparency contributes to greater equity
for other stockholders. The purpose of this study is to investigate the connection
between corporate governance and bank performance in Nepal's banking industry.
Return on equity (ROE) and return on assets (ROA) are two metrics used to assess a
 18

bank's performance. According to Chagain et al. (2019), corporate governance factors

include the firm's size (total assets), leverage, audit committee, board makeup, and
institution/public.

Due to its policy of being outwardly focused and joining the WTO and SAFTA, the
Nepalese economy is now naturally connected with the global economy. In addition,
the second phase of the financial sector reform program in Nepal is preparing the
banking system for a new commercial and economic environment. The Nepalese
government and central bank are aiming to create a strong, open, and competitive
financial system. All corporate institutions must practice good corporate governance.
Furthermore, it is a fundamental component of the banking system because banks and
other financial institutions depend on the money of other people (Ghimire & Acharya,
2019). Bank corporate governance in developing nations is crucial for a number of
reasons. First, banks are significant engines of economic growth and hold a strong
position in the financial systems of developing economies. Second, for the majority of
businesses in developing nations, banks serve as their primary source of financing.
Third, banks serve as the primary repository for the nation's savings in developing
nations. Fourth, by privatizing/disinvesting in their banking systems and diminishing
the influence of economic regulation, several developing economies have lately
liberalized their banking systems. As a result, bank managers in these economies now
have more freedom to govern their institutions. (Adhikari, 2018).

According to a number of research findings, businesses around the world do better

commercially when they have effective governance processes. Adopting best practices
in corporate governance increases access to external finance, lowers capital costs,
boosts operational performance, boosts company valuation, boosts share performance,
and lowers the likelihood of corporate crises and scandals. (Lama & Khadka, 2019).
World Bank adherence norms and rules (2005), corporate governance is becoming
increasingly important in Nepal. As part of a larger campaign to overhaul the financial
industry, the central bank has increased corporate governance norms for banks and
other financial institutions. Standards for accounting and auditing are being created.
The reform process should deepen and quicken if a number of draft legislations are
passed and put into effect. However, there are several, serious flaws in the legal system.
Important organizations with limited resources and power are the securities board and
corporate registrar. Most significantly, the economy has been damaged and the passing
 19

of draft legislation has been postponed due to political unpredictability and the current
state of security (Sigdel & Koirala, 2019).

Relationship between Corporate Governance and Financial Performance

We will now review some of the earlier research on the performance of financial
institutions' corporate governance structure and its many components. The purpose of
this study is to investigate the connection between corporate governance and bank
performance in Nepal's banking industry. Return on equity (ROE) and return on assets
(ROA) are two metrics used to assess a bank's performance. According to Shah et al.
(2019), corporate governance factors include the firm's size (total assets), leverage,
audit committee, board makeup, and institution/public.

In order to study the relationship between corporate governance and performance from
an econometric perspective, one would need to develop a system of simultaneous
equations that outlines the relationships among the aforementioned variables (Bhagat
& Bolton, 2023) after reviewing the interactions between corporate governance,
corporate performance, corporate capital structure, and compensation structure. Bank
stockholders, managers, BODs, and other employees all play key roles in implementing
corporate governance, which ultimately affects how well the bank performs. Corporate
governance is a complex process that banks and other financial institutions must follow.
Similar to this, a lot of research has been conducted, followed by much discussion over
whether corporate governance at banks and other financial institutions has an impact
on those organizations' financial performance, whether positive or negative, and vice
versa. Results from several researchers conflict with one another.

According to corporate governance theory, corporate governance and firm performance

are positively correlated. Since corporate governance standards vary between nations
and related business cultures are diverse, empirical research have found mixed results
(Turan & Bayyurt, 2017). Previous studies have highlighted the beneficial impact of
corporate governance on efficiently operating banks and financial success in works like
Beck et al. (2006). While other research, such as that by Dalton et al. (2003), verified
ambiguous or perhaps lacked proof of such a relationship. However, these diversified
outcomes are held responsible for the inconsistent financial performance and wide-
ranging sample. Similar to this study, Klapper and Love (2003) looked into 14 emerging
stock markets and found that one needed to have strong corporate governance
 20

provisions despite having a weak legal system. Additionally, they discovered a strong
correlation between improved corporate governance and both improved operating
performance and higher market valuation.

However, there are a number of real-world examples that show how better corporate
governance standards in banks will result in more effective operations and superior
performance. Corporate performance and corporate governance have a favorable link,
according to research done in Korea by Black et al. Finally, using strong governance
techniques, according to Love and Rachinsky (2006), may help to lessen the frequency
of related parties transactions and other self-interested dealings. Therefore, these little
transactions can increase performance and decrease capital costs. On the other hand, it
separates and changes the management and supervisory board roles, which results in
more effective operations. Similar to how they performed their research, they
discovered some evidence of a positive relationship between corporate governance and
performance in both Ukraine and Russia, utilizing samples of 50 banks in Ukraine in
2004 and 107 banks in Russia (50 surveyed in 2003 and 81 in 2006). However, it had a
stronger correlation with ROA, ROE, and net interest income, whereas in Russia, it was
ROA and a lower level of non-performing loans.

Similar to this, it is possible to determine the impact of corporate governance variables

on banks' performance by addressing various corporate governance issues. However,
prior to 2000, the majority of studies had a narrow focus on a single aspect of the
corporate governance mechanism, such as the role of directors or stockholders, while
ignoring other factors that could be crucial in determining what constitutes a good
corporate system in banks or any other firms. However, one may currently analyze the
literature that takes into account various corporate governance mechanisms, such as
board characteristics, ownership structure, shareholder rights, and how CEO pay
influences the success of any business.

It is assumed in this study, consistent with prior governance literature, that internal
corporate governance mechanisms affect banking firms in the same way they affect the
performance of non-financial firms because banking firms' primary goal is to increase
the value for their shareholders, which is similar to that of non-financial firms (Adams
& Tehran, 2008).
 21

2.2 Theoretical Review

2.2.1 Agency Theory

The interaction between the principals, such as shareholders, and the agents, such as
firm executives and managers, is referred to as agency theory. According to this theory,
the company's shareholders, who serve as its owners or principals, employ the agents.
The directors or managers, who act as the shareholders' agents, receive instructions
from the principals on how to administer the company (Clark, 2004). According to
agency theory, managers or employees inside an organization may act in their own best
interests. Shareholders under the agency theory anticipate that the agents will act and
decide in the principal's best interests. On the other hand, the agent might not always
act in the principals' best interests (Padilla, 2002). The agent could give in to self-
interest, opportunistic behavior, and a lack of alignment between the principal's goals
and the agent's objectives. Even risk understanding varies in how it goes about things.
Despite these shortcomings, agency theory was initially developed as a division
between ownership and control (Bhimani, 2008).

In fact, agency theory may be used to examine how the ownership and management
structures relate to one another. The agency model, however, can be used in situations
where there is a split to bring the management's and owners' objectives into alignment.
According to Jensen and Meckling (1976), the agency theory employee model
emphasizes self-interest, individualism, and constrained rationality, where rewards and
punishments appear to take precedence. The principal-agent dilemma, which arises
when bank management and directors' incentives are not in line with those of the
company's owners, presents a significant corporate governance difficulty for banks
(Kern et al., 2004).

The agency theory, which explicitly states that a corporate body's ownership is
separated from its management and control, gives birth to the question of corporate
governance (Adhikari, 2018). This could lead to management having differing risk
preferences from the company's owners and other stakeholders, such as creditors,
employees, and the general public. Without regulatory involvement, matching the
interests of these groups may be challenging, if not impossible, due to significant
transaction costs and institutional impediments (Sigdel & Koirala, 2019).
 22

According to this theory, the best way to serve the interests of shareholders is to
combine the roles of board chair and CEO in order to give the CEO more authority and
responsibility as a steward (agent) of the company (Lamichhane, 2020). According to
this notion, managers are accountable for a network of relationships, including
suppliers, employees, and business partners, in addition to the interests of shareholders.
Corporate governance refers to the rules and practices that businesses use to achieve
their missions, goals, and aspirations for their investors, customers, suppliers, various
regulatory bodies, and the community at large. Governance's purpose is to increase
shareholder value.

The relationship between principals (like company shareholders) and agents (like
company directors) is defined by agency theory. This notion states that the company's
owners employ the agents to carry out tasks. The directors or managers, who are
representatives of shareholders, are given the task of managing the company by the
principles. The shareholders anticipate that the agents will act and choose in the
principal's best interests. On the contrary, it is not required that the agent decide in the
principals' best interests. The agent could give in to self-interest and opportunistic
behavior and fail to live up to the principal's expectations. Separation of ownership and
control is the main component of agency theory. The theory prescribes that people or
employees are held accountable in their tasks and responsibilities. Rewards and
Punishments can be used to correct the priorities of agents.

According to this philosophy, individuals or workers should be held accountable for

their duties and commitments. Instead than only meeting the needs of shareholders,
which may be challenging the governance system, employees must build a good
governance structure (Abdullah & Valentine, 2013). The agency theory's portrayal of
an employee is more of an individualistic, self-interested, and bounded rationality,
where rewards and punishments appear to take precedence (Bocean & Barbu, 2007).
However, the ownership characteristics of each nation affect the agency problem. If
investors in nations with dispersed ownership arrangements disagree with the
management or are dissatisfied with the business's performance, they can choose to
leave the company, which will be indicated by a decline in share prices. In contrast,
nations with concentrated ownership systems and sizable dominating shareholders
frequently exert control over managers and expropriate smaller shareholders to benefit
from private control (Yusoff & Alhaji, 2016).
 23

2.2.2 Stewardship Theories

According to Davis (1997), a steward is someone who enhances utility functions by

protecting and protecting shareholders' wealth through business performance. Stewards
are business leaders and managers who work for the shareholders to protect and
maximize returns on their investments. Instead than emphasizing the individualistic
viewpoint, stewardship theory emphasizes the top management's duty as stewards,
integrating their objectives into the organization. Stewardship theories, a company's
management or executives are the owners' stewards, and both parties have similar
objectives. As agency theories would suggest, the board should therefore not be overly
controlling. The board should support CEOs by giving them more authority, which will
raise the possibility of higher performance. Stewardship theories promote board and
executive partnerships that include instruction, mentorship, and joint decision-making.
Additionally, stewardship theory recommends merging the CEO and chairman roles in
order to cut agency costs and increase their function as stewards within the firm. It was
clear that the interests of the stockholders would be better protected. It was empirically
found that the returns have improved by having both these theories combined rather
than separated (Abdullah & Valentine, 2013).

According to this theory, businesses are social entities that have an impact on a wide
range of stakeholders' welfare. Stakeholders are defined as associations or individuals
that engage with a company and have an impact on or are impacted by the
accomplishment of the company's goals (Donaldson & Preston, 1995). The capacity of
an organization to add value for all of its stakeholders serves as a yardstick for success.
Where, the steward theory, a steward maximizes and preserves shareholders' wealth
through corporate performance. Stewards are corporate leaders and managers who aim
to protect and maximize shareholder returns. When organizational success is realized,
the stewards feel satisfied and inspired. It places emphasis on the responsibility of
employees or executives to behave with greater independence in order to maximize
profits to shareholders. The workers faithfully perform their jobs and take ownership
of them.

Highlighting the opportunistic behavior of other parties (not management) who take
advantage of inadequate contracts and information asymmetries.
 24

2.2.3 Stakeholders Theory

Any group or person that has the potential to influence or be affected by the
accomplishment of the organization's goals is a stakeholder, according to the
stakeholder theory. Suppliers, employees, and business partners are among the
relationships that stakeholders’ theorists contend managers in businesses must manage
(Wheeler et al., 2003). The accountability of management to a wide range of
stakeholders was incorporated into stakeholder theory. It asserts that managers in firms
have a network of relationships to look out for, including those with customers, partners
in commerce, and suppliers. All stakeholder interests have intrinsic value, and no set of
interests is regarded to be more important than the others in the theory, which
concentrates on managerial decision-making. Stakeholder theories are predicated on the
idea that other groups have an interest in a firm or corporation in addition to
shareholders. According to stakeholder theories, a corporation's clients or consumers,
suppliers, and local communities all have a stake in it. They may be impacted by a
company's success or failure. Managers therefore have a specific responsibility to make
sure that all stakeholders, not just shareholders, get a fair return on their investment in
the company. Stakeholder theories support some type of corporate social responsibility,
which is a responsibility to conduct business ethically even if doing so reduces a
company's long-term profit (Jones et al., 2002). The board has a duty to protect the
interests of all stakeholders in that situation by making sure that corporate or
Organizational procedures take local communities' sustainability into consideration.
According to this theory, which focuses on managerial decision-making, all
stakeholders' interests are intrinsically valuable, and no group of interests is presumed
to be more important than any other (Abdullah & Valentine, 2013).

Since they are the firms' actual owners, shareholders are the only ones recognized under
business law in the majority of nations. Due to this, the company has a fiduciary
obligation to prioritize its clients' requirements and maximize returns. In more
contemporary business models, the organization transforms the contributions of its
shareholders into forms that may be sold to customers, including those of its employees,
suppliers, and investors. This model takes into account the requirements of customers,
suppliers, employers, and investors. According to stakeholder theory, the parties
participating in the aforementioned situation should include governmental
organizations, political parties, trade associations, trade unions, local communities,
 25

affiliated firms, potential employees, and the general public. In some circumstances, it
may be possible to classify rival businesses and potential customers as stakeholders in
order to boost market efficiency (Yusoff & Alhaji, 2016).

2.2.4 Resource Dependency Theory

The focus of resource dependency theory is on the part director's play in obtaining or
supplying crucial resources to a business through their connections to the outside world
(Hillman, 2000). Indeed, Johnson (2006) agrees that the appointment of representatives
of independent groups as a means of acquiring access to resources essential to business
success is emphasized by resource dependency theorists. The Resource Dependency
Theory concentrates on the function of the board of directors in providing the firm with
access to resources. It claims that through their connections to the outside world,
directors are crucial in securing or supplying vital resources to an organization. The
availability of resources improves organizational performance, a firm's ability to
compete, and its ability to survive. The directors provide the company with resources
like knowledge, expertise, connections to important stakeholders like vendors,
customers, public policy makers, and social groups as well as credibility. Directors can
be divided into four groups: community influencers, business experts, support
specialists, and insiders.

Directors provide the company with resources like knowledge, expertise, connections
to important stakeholders like suppliers, purchasers, public policy makers, and social
organizations as well as credibility. Directors can be divided into four groups:
community influencers, business experts, support specialists, and insiders. First, the
insiders are current and past leaders of the company who offer knowledge on the
organization itself in general strategy and direction as well as in specialized fields like
finance and law. Second, the professionals in business strategy, decision-making, and
problem-solving are current or former top executives and directors of other significant
for-profit companies. Third, support specialists in their respective fields of expertise
include lawyers, bankers, insurance company representatives, and public relations
professionals. The leaders of social or community organizations, academic professors,
clergy, and political figures are the last group to have a significant influence in the
community (Abdullah & Valentine, 2013).
 26

Resource-dependence theories advocate for significant financial, human, and intangible

support for the executives while recommending board interventions. Professional board
members, for instance, can train and coach CEOs in a way that enhances organizational
performance. In order to provide resources to the group, board members might also use
their personal networks of allies. According to resource-dependence theories, the
majority of decisions should be made by executives with some input from the board.
Highlighting how the effectiveness of coordination processes and the firm's
relationships with the business environment are determined by the quality of the
distinctive resources of the organization, including principally the governance
institutions (Klepclarer, 2021).

2.3 Empirical Reviews

The key conclusions from some earlier empirical corporate governance literature can
be summed up as follows:

Hussain et al. (2023), board independence, board meetings, board size, concentrated
ownership, institutional ownership, and audit committee all have a big impact on how
well a company performs. Additionally, Market Value of Equity is determined to be the
most appropriate indicator of firm performance.

Impact of corporate governance on bank performance Using the Nigerian bank as a

representative sample, it was discovered that the size of the board of directors and the
number of shareholders had a favorable effect on the return on equity and return on
assets. The quality of the assets, equity suppliers, and managers all had an impact on
bank performance, according to the study (Narwal & Jindal, 2019).

Fratini and Tettamanzi (2019) used a regression model to analyze the relationship
between corporate governance and performance in Italian firms. They found that board
size has a positive and statistically significant relationship with firm performance,
indicating that larger board size firms perform better.

Numerous research on corporate governance and business performance or bank

performance have been done. According to Romanon (2005), there is a significant
inverse relationship between banks' performance in terms of ROE and ROA and the
proportion of independent directors on the audit committee. Contrarily, corporate
 27

governance is a means by which lenders to corporations can guarantee they will receive
a return on their investment (Goldman & Barlev, 1974).

According to several studies, there is a strong correlation between board composition

and firm performance. The ability of a company to grow ROA is influenced by its
business environment and the techniques it employs to deal with it. Whether a company
may pursue a greater ROA by boosting profit margin through product differentiation
initiatives or by increasing asset turnover through cost leadership strategies, for
example, depends on the extent to which it is subject to capacity or competitive
restrictions (Stickney & Sellingy, 1986). Singh and Davidson's (2003) research
establishes a detrimental relationship between board size and business performance.

The establishment of corporate board rules improves a company's performance,

according to research on the relationship between the corporate board and firm financial
performance. The board mechanism does have an impact on performance, according to
a study that was carried out with the same goal of developing a variable to quantify
corporate governance. Some studies indicate that when there is poor corporate
governance, there is also poor performance. A comparison of the effects of corporate
governance on a company's financial Performance between the US (a developed nation)
and Pakistan (an underdeveloped nation) led to the conclusion that their connection was
good (Shah, 2013).

Deepak (2016) showed that, from the perspective of investors, corporate class funds
should have a smaller board, the CEO serving as the board chairman, and more
independent directors. The findings regarding the impact of corporate governance are
in line with the stewardship theory.

The purpose of this study is to confirm the findings of Ongore (2015), who conducted
research on the relationship between corporate governance practices and the
performance of commercial banks in Kenya. Ongore (2015) discovered that corporate
governance practices have a positive relationship with bank performance.

All explanatory variables, with the exception of board diversity and board meeting
frequency, are positively correlated with return on equity in state banks and private
banks, according to Ajanthan and Balaputhiran's (2017) observations of the effects of
board size, board diversity, outside directors' percentage, and board meeting frequency
 28

on bank performance. According to the study's findings, board diversity significantly

lowers return on assets.

However, Kahl and Belkaoui (1981) looked into the total amount of disclosure made
by 70 institutions spread across 18 nations. Their findings suggested that there was a
positive correlation between bank size and level of disclosure and that the degree of
disclosure varied among the nations they looked at. According to corporate governance
theory, corporate governance and firm performance are positively correlated. However,
due to the fact that corporate governance standards vary among nations and associated
business cultures are diverse, different findings were found in empirical investigations
(Sengur, 2015).

Finance providers to corporations use corporate governance to guarantee they will

receive a return on their investment. A sound corporate governance policy can benefit
management at all levels, assist the organization in preventing management-level
corruption, enhance company values, increase shareholder value, and lower investment
and financial risks. Consequently, it is crucial to have a robust, sound, and healthy
corporate governance policy. A factor to consider when investing in a business (Bohora
et al., 2019). Positive correlations were also discovered in a different study that used
asset turnover, ROA, and ROE to examine the relationships between corporate
governance and firm performance (Karamustafa, 2013).

According to corporate governance principles, the financial system is guaranteed to be

transparent, accountable, and professional. This raises the financial system's credibility
and acceptability with its stakeholders, including its shareholders, employees, current
and potential investors, customers, lenders, governments, and the general public.
Because banks deal with public funds, public trust is crucial (Gorkhali, 2014). The
effect of corporate governance on business performance was examined, and it was
discovered that independent board directors typically improve firm performance while
board size has a negative impact on performance (Nyamongo & Temesgen, 2017).

The ownership structure contributed the most to corporate governance principles, while
audit firm size contributed the least. Overall, there was a positive correlation between
the application of corporate governance principles and the market value of listed
companies in the Amman stock exchange, according to Dwiri (2019), who looked into
the impact of corporate governance on the firm's market value.
 29

According to theory, strong corporate governance should make it easier for local
businesses to access international capital, foreign businesses, and loan facilities
(Yilmaz & Buyuklu, 2020). Financial performance and its connections to corporate
governance standards can be measured in a variety of ways. The most chosen metrics
can be divided into two categories: market-based metrics like Tobins Q and pbv ext.
and accounting-based metrics like ROA, ROE, and EBITDA ext. (Sengur, 2015).

By performing a linear regression analysis, Toumar (2008) looked into the connection
between corporate governance—specifically, ownership structure, board makeup, and
board size—and bank performance. The findings demonstrated that the ownership
structure and board composition had a significant influence on the performance of the
bank. According to the findings, banks with institutional majority ownership perform
the best, and when both managers' and board members' ownership claims in the bank's
shares boost the bank's performance. Efficiency improves during performance.
Surprisingly, the effectiveness of the bank is unaffected by the size of the board of
directors.

Al-Manaseer et al. (2016) conducted an empirical investigation on the effects of

corporate governance factors on the performance of Jordanian banks, including board
size, board composition, chief executive officer (CEO) status, and foreign ownership.
According to the study, there is a link between two aspects of corporate governance—
the performance of Jordanian banks and the number of outside board members.
Performance has a negative link with board size and the separation of the CEO and
chairman roles. The study also showed that banks profit more from size in providing
services than in making loans.

By putting corporate governance concepts into practice, the audit committee is crucial
to increasing business value. According to the corporate governance standards, the audit
committee should function independently and with professionalism. In order to reduce
agency issues, the audit committee keeps an eye on processes that enhance the quality
of information flows between shareholders and managers. (Gill & Obradovich, 2017).

Owino and Kivoi (2020) used the Generalized Method of Movements to analyze the
impact of the strength of auditing and reporting standards, the effectiveness of the board
of directors, and the protection of minority shareholders on the performance of licensed
banks. They claimed that while the protection of minority shareholders has a negative
 30

impact on bank performance, the strength of auditing and reporting standards has a
positive impact.

Corporate governance principles that are correctly implemented inside an organization

may boost profits and returns, strengthen its competitiveness and credibility, and
improve relations with important stakeholders including investors, business partners,
employees, and customers, among others (Narwal & Jindal, 2019). Good corporate
governance contributes to economic stability, which lessens the vulnerability to
financial crises, by improving businesses' overall performance and expanding their
access to outside finance. It lowers transaction costs and capital costs. The interaction
between the management, board of directors, controlling shareholders, monitoring
shareholders, and other stakeholders is a source of corporate governance difficulties
(Narwal & Jindal, 2019).

Large institutions have a crucial role in corporate governance, especially in nations with
limited legal protection of shareholders' interests due to institutional and historical
factors (Lamichhane, 2020). The OECD has highlighted a different opposing viewpoint
on the importance of independence in sound corporate governance. It suggests that
effective corporate governance depends primarily on the separation of powers between
a company's managers, directors, and majority and minority shareholders. Under the
self-governing control of the board of directors and an external auditor, this study holds
the manager accountable. Good economic outcomes can lead to good economic and
political governance, and effective corporate governance is important for business
profitability and can be ensured by accountability (Sigdel & Koirala, 2019).

Improved corporate governance plays a significant role in raising the firm's value.
Because of the diverse corporate governance frameworks brought about by various
social, economic, and regulatory environments, the influence of corporate governance
varies from country to country (Obradovich & Gill, 2017).

It was asserted that corporate governance practices that are effective in the West will
not be effective in the Indian context unless the supply of loan capital is privatized due
to the structure of capital markets in India, where both short-term and long-term lending
institutions are government-owned (Rajgopalan & Zhang, 2013).

The study found a negative and statistically significant relationship between Jordanian
banks' performance (ROE and EPS) and BZ (number of members of directors of the
 31

bank), which is consistent with hypothesis 1(Th). Al-Matari et al. (2016) used empirical
evidence to investigate imperially the impact of corporate governance dimensions
(Board size, Board Composition, Chief Executive Officer (CEO) Status, and Foreign
Ownership) on the performance of Jordanian banks.

Bhattarai (2021) looked at the relationship between corporate governance and the
financial performance of Nepalese commercial banks and found that the audit
committee and the percentage of independent directors have a favorable impact, but the
size of the board has a negative impact on those results.

2.4 Theoretical Framework

Conceptual framework also known as research framework consists of the dependent

and independent variable. To accomplishment of the objectives following capital
structure is taken as independent variable and the profitability of the commercial banks
is taken as dependent variable:

Firm Size

Board size
Return on Assets
Return on Equity
Leverage

Age

Audit Committee

Independent variables Dependent Variables

Figure 2. 1 Theoretical framework of the study

2.5 Research Gap

Corporate governance is a topic of significant importance in the global financial

landscape, as it plays a pivotal role in shaping the behavior and performance of firms
(Gompers, Ishii, & Metrick, 2003). Extensive research conducted worldwide has
established a compelling connection between robust corporate governance practices
and improved firm performance (Yermack, 1996; Shleifer & Vishny, 1997). However,
 32

within the context of Nepalese commercial banks, which operate in a distinct economic
and regulatory environment, there exists a conspicuous research gap. Existing literature
primarily focuses on corporate governance in developed economies, leaving
unanswered questions about the applicability and effectiveness of corporate governance
mechanisms in emerging markets like Nepal.

Nepalese commercial banks face challenges and opportunities that may differ from
those of their counterparts in developed economies. For instance, the ownership
structure of Nepalese banks often includes a mix of government, private, and foreign
ownership (Adhikari & Bhattacharyya, 2021). Additionally, cultural factors and the
historical context can influence corporate governance practices (Acharya & Kafle,
2019). Therefore, a dedicated investigation into the relationship between corporate
governance and firm performance within Nepalese commercial banks is essential to
provide context-specific insights.

However, there has been a growing body of literature exploring the relationship
between corporate governance practices and firm performance in various international
contexts (Bebchuk et al., 2021; Gupta & Sharma, 2019), there remains a notable dearth
of empirical studies specifically examining this nexus within the context of Nepalese
commercial banks. Given the unique economic, cultural, and regulatory environment
of Nepal, it is essential to investigate how corporate governance mechanisms, such as
board composition, ownership structure, and transparency, impact the financial
performance and stability of Nepalese commercial banks. Addressing this research gap
can provide valuable insights into the effectiveness of corporate governance practices
in emerging markets like Nepal and offer practical recommendations for enhancing the
financial performance and sustainability of banks in the region.
 33

CHAPTER III

RESEARCH METHODOLOGY

The methodology and design of the research are covered in this chapter. It outlines the
methodological steps used to carry out the study and solve the research challenge. It
also lays out the overarching strategy for the study and offers the fundamental
foundation around which it is built. As a result, this chapter provides an explanation of
the methodology used in this study. It does so in parts that cover the research goal and
design, description of the sample, instrumentation, data collection methods, validity and
reliability, and analytic plan. Additionally, this chapter establishes rules for chapter
four.

3.1 Research Design

In order to address the problems related to the relationship between the impact of
corporate governance and the firm performance of the commercial banks in the setting
of Nepal, this study uses a descriptive research design. The descriptive study design is
used to gather information and look for sufficient details about how corporate
governance affects the performance of commercial banks. It is used to illustrate the
precise findings and provide more information about the sample's characteristics. Ten
years' worth of secondary data were taken into consideration for this descriptive study
design's analysis of the effects of corporate governance on the performance of Nepal's
commercial banks.

This study also uses a causal comparative design in addition to the descriptive research
design. This layout makes it easier to see how the variables are related to one another
causally. In order to perform cause and effect research, independent variables (age, the
size of the audit committee, the board, leverage, and the firm) are taken into account as
causes, while dependent variables (ROA and ROE) are taken into account as effects.
The statistical tests used in this study include regression, mean, median, standard
deviation, and others. The quantitative data were analyzed and interpreted using
EViews and Microsoft Excel.

3.2 Population and Sample

This study includes a sample of five joint venture banks and five domestic commercial
banks in Nepal, whose data are collected for the ten years from the period of 2012/13 to
 34

2021/22 to examine the effects of various corporate governance variables on financial

performance of commercial banks. Presently, Nepal has 20 commercial banks. There are
20 commercial banks, of which 7 are joint ventures, 3 are wholly or partially owned by the
government, and 17 are domestic institutions. Additionally excluded were banks with
operating histories of less than ten years in the economy and banks with a history of mergers
or acquisitions throughout the sample period. The bank's history of mergers and
acquisitions revealed significant changes in asset value, return on assets, return on equity,
and other metrics that may provide the desired outcomes. The following is a list of the
Sample banks used in the study.

Table 3.1
Sample of commercial banks
S.N. Joint Venture Banks S.N. Domestic Commercial Banks

1 Nepal SBI Bank Limited. 1 Kumari Bank Limited

2 Everest Bank Limited 2 Nepal Investment Mega Bank Limited

3 Nabil Bank Limited 3 Siddhartha Bank Limited

4 Himalayan Bank Limited 4 Laxmi Sunrise Bank Limited

5 Standard Chartered Bank Limited 5 Machhapuchhre Bank Limited

3.3 Nature and Sources of Data

The study used secondary data that was collected from 10 different Nepalese
commercial banks during a ten-year period, from 2012–13 to 2021–18. The following
variables were included in the study: age, the size of the audit committee, the size of
the board, the size of the company, and leverage. Numerous yearly reports of numerous
banks that have been published are the primary source of data. Commercial banks with
more than ten years of service to the Nepalese economy and no history of mergers or
acquisitions are used to select the institutions. The knowledge learned from various
courses as well as other sources has been used to examine the data and information
gathered and draw conclusions. Finally, based on the research's findings and
conclusion, recommendations have been offered.
 35

3.4 Instrumentations

The information is gathered from a variety of sources, including Wikipedia, articles,

journals, published annual reports from the relevant institutions, investopedia.com, and
bank websites. The data was presented using MS-Excel, and the analysis was performed
using Eviews software. EViews software uses descriptive statistics and regression
methods to create meaningful relationships between dependent and independent
variables.

3.5 Data Collection Procedure

The study used secondary data that was collected from 10 different Nepalese
commercial banks during a ten-year period, from 2012–13 to 2021–22. The following
variables were included in the study: age, the size of the audit committee, the size of
the board, the size of the company, and leverage. Numerous yearly reports of numerous
banks that have been published are the primary source of data. Commercial banks with
more than ten years of service to the Nepalese economy and no history of mergers or
acquisitions are used to select the institutions. The knowledge learned from various
courses as well as other sources has been used to examine the data and information
gathered and draw conclusions. Finally, based on the research's findings and
conclusion, recommendations have been offered.

3.6 Validity and Reliability

Data are organized and evaluated in the proper format throughout the analysis phase of
the study. Data was gathered, classified, and documented in Microsoft Excel and E-
Views after data collection. Data were processed in a way that made them legitimate
and consistent with the information gathered about the intent. Several statistical
approaches were applied to the data analysis to test the hypothesis. The data were
analyzed and explained using Microsoft Excel and EViews. Several graphical tools,
including tables, charts, and diagrams, are used to convey dataSeveral instruments, such
as mean, median, and standard deviation etc. are completed in order to derive
conclusions from the responses gathered. There are two sub parts to the data analysis
techniques used in the study. The primary portion covers secondary data analysis
techniques. This comprises descriptive statistics, such as mean, median, maximum,
minimum, standard deviation, etc., that describe the type of data. The second section
 36

covers several statistical significance tests for model validation, including regression
models. The table below provides a summary of the report's analysis strategy.

3.7 Analysis Plan

Data are organized and evaluated in the proper format throughout the analysis phase of
the study. Data was gathered, classified, and documented in Microsoft Excel and E-
Views after data collection. Data were processed in a way that made them legitimate
and consistent with the information gathered about the intent. Several statistical
approaches were applied to the data analysis to test the hypothesis. The data were
analyzed and explained using Microsoft Excel and EViews. Several graphical tools,
including tables, charts, and diagrams, are used to convey data Several instruments,
such as mean, median, and standard deviation etc. are completed in order to derive
conclusions from the responses gathered. There are two sub parts to the data analysis
techniques used in the study. The primary portion covers secondary data analysis
techniques. This comprises descriptive statistics, such as mean, median, maximum,
minimum, standard deviation, etc., that describe the type of data. The second section
covers several statistical significance tests for model validation, including regression
models. The table below provides a summary of the report's analysis strategy.

Statistical Tools

Statistical tools are equally important to meet the objectives of the study. This help us
to analyze the relationship between two or more variable. For this research following
statistical tools are used. They are as follows:

Average/ Mean

Average, in general, is calculated by adding all the numbers of all observations and
dividing by the total number of observations. It is in fact, a value which is represented
to stand for whole group of which it is part, as typical of all the value in the group.

Sum of total numbers (Ʃx)

𝐴𝑀 (𝑋̅) =
Number of samples (n)
 37

Standard Deviation

The standard deviation (σ) is another measure of investment risk. It is absolute measures
of dispersion. The smaller the standard deviation the lower will be the degree of risk of
the stock. In other words, a small standard deviation means a high degree of uniformity
of the observation as well as homogeneity of a series and vice versa. The formula for
calculating the standard deviation is:

√Ʃ(x − x̅)2
𝑆𝐷 =
n

3.8 Regression Analysis

Multiple regressions are commonly used to better understand the relationship between
several independent or predictor variables and a dependent variable. Regression
analysis is a statistical method used in statistical modeling to determine the
relationships between variables the model that was applied to determine the relationship
between independent and dependent variables. The least square regression model was
employed in the study to determine which of the hypotheses was supported by the data
and which was not. The following regression model can be created to show how
independent factors affect ROA and ROE

ROA is the dependent variable in Model 1. The model below shows how the age, audit
committee, board size, firm size, and leverage affect the ROA:

ROA = β0 + β1X1 + β2X2 + β3X3 + β4X4 + β5X5+ ∈

Where,
β0 = Regression constant with ROA

β1 = Coefficient of the age with ROA

β2 = Coefficient of the audit committee with ROA

β3 = Coefficient of the board size with ROA

β4 = Coefficient of the firm size with ROA

β5 = Coefficient of the leverage with ROA

X1 = Age
X2 = Audit Committee
 38

X3 = Board Size
X4 = Firm Size
X5 = Leverage
∈ = Error term
Model 2:
Model 2 taken ROE as dependent variable. The impact of the age, audit committee,
board size, firm size and leverage on the ROE is presented in the model below:

ROE = β0 + β1X1 + β2X2 + β3X3 + β4X4 + β5X5+ ∈

Where,

β0 = Regression constant with ROE

β1 = Coefficient of the age with ROE

β2 = Coefficient of the audit committee with ROE

β3 = Coefficient of the board size with ROE

β4 = Coefficient of the firm size with ROE

β5 = Coefficient of the leverage with ROE

 39

CHAPTER IV

RESULT AND DISCUSSION

This chapter contains systematic presentation, analysis, discussion and interpretation of

the data required to accomplish the objectives of the study. Various statistical tools
described in previous chapter have been used for this purpose. This chapter is divided
into five sections. The first section deals with structure and pattern analysis of data,
second section deals with descriptive statistics, third section deals with stationary test
results fourth section deals with regression analysis of ROA and ROE.

4.1 Descriptive Statistic

This section deals with the analysis of structure and pattern of corporate governance
factors affecting banks financial performance.

4.1.1 Structure of return on assets

Table 4. 1
Structure of return on assets
Banks 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Mean S.D.
SBI 1.05 1.03 1.01 0.83 1.19 1.51 1.64 1.59 1.57 1.97 1.33 0.36
NIBL 1.7 2.2 2 1.6 2.6 2.3 1.9 2 2.1 2 2.04 0.28
SCB 2.56 2.7 2.55 2.8 2.67 2.51 1.99 1.98 1.84 2.61 2.42 0.34
HBL 1.91 1.19 1.91 1.76 1.54 1.3 1.34 1.94 2.19 1.67 1.67 0.32

MBL 0.7 0.35 0.05 0.16 0.49 1.12 1.26 1.51 1.89 1.47 0.9 0.63
Nabil 2.55 2.37 2.43 2.8 3.25 2.89 2.06 2.32 2.7 2.61 2.59 0.33
EBL 1.73 2.09 2.1 2.11 2.39 2.25 1.85 1.61 1.83 1.97 1.99 0.24
SBL 1.22 1.06 1.28 1.12 1.43 1.74 1.51 1.69 1.54 1.59 1.41 0.23
KBL 1.41 1.59 1.23 1.1 1.03 1.1 1.06 1.69 1.29 1.26 1.27 0.22
LBL 1.22 1.66 1.76 1.5 1.5 1.47 1.04 1.35 1.52 1.55 1.45 0.2
Mean 1.6 1.62 1.63 1.57 1.8 1.81 1.56 1.76 1.84 1.87
S.D. 0.61 0.72 0.75 0.83 0.87 0.62 0.38 0.28 0.4 0.45
Source: Calculation using Excel
Table 4.1 shows that Nabil bank has highest average return on assets of 2.59% followed
by Standard Chartered Bank (2.42 percent), Nepal Investment Bank (2.04 percent),
 40

Everest Bank (1.99 percent), Himalayan Bank (1.67 percent), Laxmi Bank (1.45
percent), Siddhartha Bank (1.41 percent), SBI Bank (1.33 percent), Kumari Bank (1.27
percent) and Machhapuchhre Bank (0.9 percent). The average return on assets
computed across the year is fluctuated widely over a period of time. The sample banks
have more ROA in the year 2022 with the mean of 1.87% and least ROA in the year
2019 with the mean of 1.56%.

According to the table, return on assets varies widely within the individual banks also.
In some years it has increased and in some years it has decreased. It increased from
1.05% to 1.97% for SBI, from 1.7% to 2% for Nepal Investment Bank, from 2.56% to
2.61% for Standard Chartered Bank, from 0.7% to 1.47% for Machhapuchhre Bank,
from 2.55% to 2.61% for Nabil Bank, from 1.73% to 1.97% for Everest Bank, from
1.22% to 1.59% for Siddhartha Bank, from 1.22% to 1.55% for Laxmi Bank. Similarly,
it decreased from 1.91% to 1.67% for Himalayan Bank and from 1.41% to 1.26% for
Kumari Bank. The variation in return on assets as indicated by SD is lowest for Laxmi
Bank followed by Kumari, Siddhartha, Everest, NIBL, Himalayan, Nabil, Standard
Charterd, SBI and Machhapuchhre Bank. When the ROA is compared over a period of
time for individual banks, it is noticed that ROA has increased in majority of the
selected commercial banks in recent years.
Table 4. 2
Structure of return on assets
Banks 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Mean S.D.
SBI 18.6 16.1 16.2 15 20.3 22.9 21.5 22.2 14.9 15.8 18.33 3.1
NIBL 23.1 28 25.7 20.1 31.7 27.6 24.8 26 19.1 14.7 24.07 5
SCB 33.6 32.2 30.4 28.4 26.4 26.3 21.7 17.2 12 18.7 24.67 7.1
Himalayan 24.1 14 22.4 20.7 17.8 15.8 16 21.9 21.6 14.2 18.84 3.7

Machhapuchhre 7.25 4.55 0.5 1.44 5.3 14.1 16.2 18.1 14.1 12.1 9.35 6.3

Nabil 33.9 30.3 29 30.3 32.8 27.9 22.7 25.6 25.6 20.9 27.9 4.2
Everest 29 30.2 25.6 27.2 32.5 29 23.3 20.6 26 16 25.92 4.9
Siddhartha 17.1 15.1 15.6 15.1 19.2 23.4 20.5 20.1 21.2 22.5 18.97 3.1
Kumari 16.1 17.7 11.4 11.6 11 11.5 11.8 18.1 9.6 9.88 12.86 3.2
Laxmi 16.9 20.4 17.8 15.9 15.4 16 11 12.9 13.2 14.4 15.36 2.7
Mean 22 20.8 19.5 18.6 21.2 21.4 18.9 20.3 17.7 15.9
S.D 8.46 9.03 9.12 8.73 9.46 6.5 4.89 3.96 5.76 3.86
 41

Source: Calculation using SPSS

Table 4.2 shows that Nabil bank has highest average return on equity of 27.9% followed
by Everest Bank (25.92 percent), Standard Chartered Bank (24.67 percent), Nepal
Investment Bank (24.07 percent), Siddhartha Bank (18.97 percent), Himalayan Bank
(18.84 percent), SBI Bank (18.33 percent), Laxmi Bank (15.36 percent), Kumari Bank
(12.86 percent) and Machhapuchhre Bank (9.35 percent). The average return on equity
computed across the year is fluctuated widely over a period of time. The sample banks
have more ROE in the year 2013 with the mean of 21.95% and least ROE in the year
2022 with the mean of 15.9%.

According to the table, return on assets varies widely within the individual banks also.
In some years it has increased and in some years it has decreased. It increased from
7.25% to 12.06% for Machhapuchhre Bank and from 17.08% to 22.49% for Siddhartha
Bank. Similarly, it decreased from 18.58% to 15.8% for SBI Bank, from 23.05% to
14.71% for NIBL, from 33.58% to 18.66% for Standard Chartered Bank, from 24.13%
to 14.17% for Himalayan Bank, from 33.93% to 20.94% for Nabil Bank, from 28.96%
to 16.01% for Everest Bank, from 16.93% to 14.36% for Laxmi Bank and from 16.09%
to 9.88% for Kumari Bank. The variation in return on equity as indicated by SD is
lowest for Laxmi Bank followed by Siddhartha, SBI, Kumari, Himalayan, Nabil,
Everest, NIBL, Machhapuchhre and Standard Charterd, Bank.When the ROE is
compared over a period of time for individual banks, it is noticed that ROA has
decreased in majority of the selected commercial banks in recent years.
 42

Table 4. 3
Structure of age of firm
Mean S.D
Banks 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
n .
SBI 16 17 18 19 20 21 22 23 24 25 20.5 3
NIBL 23 24 25 26 27 28 29 30 31 32 27.5 3
SCB 22 23 24 25 26 27 28 29 30 31 26.5 3
Himalayan 16 17 18 19 20 21 22 23 24 25 20.5 3
Machhapuc
9 10 11 12 13 14 15 16 17 18 13.5 3
hhre
Nabil 25 26 27 28 29 30 31 32 33 34 29.5 3
Everest 15 16 17 18 19 20 21 22 23 24 19.5 3
Siddhartha 7 8 9 10 11 12 13 14 15 16 11.5 3
Kumari 9 10 11 12 13 14 15 16 17 18 13.5 3
Laxmi 7 8 9 10 11 12 13 14 15 16 11.5 3
Mean 14.9 15.9 16.9 17.9 18.9 19.9 20.9 21.9 22.9 23.9
6.7 6.7 6.7 6.7 6.7 6.7 6.7 6.7
S.D. 6.78 6.78
8 8 8 8 8 8 8 8
Source: Calculation using Excel

Table 4.3 shows that Nabil bank has highest average age of 29.5 years followed by
Nepal Investment Bank (27.5 years), Standard Chartered Bank (26.5 years), SBI Bank
& Himalayan Bank (20.5 years), Everest Bank (19.5 years), Machhapuchhre Bank &
Kumari Bank (13.5 years) and Siddhartha Bank & Laxmi Bank (11.5 years). The
sample banks have average age in the year 2022 is 23.9 years whereas average age of
sample banks in the year 2013 is 14.9 years. According to the table, age varies within
the individual banks according to their date of establishment. In 2013, age of SBI bank
is 16 years and it has reached to 25 years in 2022. Similarly, laxmi bank age is 7 years
in 2013 and reached to 16 years in 2022.
 43

Table 4. 4
Structure of audit committee
Banks 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Mean S.D.
SBI 4 4 4 4 4 4 3 3 3 3 3.6 0.51
NIBL 4 4 4 4 4 4 4 3 3 3 3.7 0.48
SCB 5 5 5 4 4 4 5 3 4 3 4.2 0.78
Himalayan 4 4 4 4 4 3 3 3 3 3 3.5 0.52
Machhapuchhre 2 3 4 4 3 4 3 3 3 3 3.2 0.63
Nabil 4 3 3 3 3 3 4 4 3 3 3.3 0.48
Everest 3 3 3 3 3 3 3 3 3 3 3 0
Siddhartha 3 3 4 4 4 4 4 4 3 5 3.8 0.63
Kumari 3 3 3 2 2 2 2 2 2 2 2.3 0.48
Laxmi 3 3 3 3 3 3 3 3 2 2 2.8 0.42
Mean (overall) 3.5 3.5 3.7 3.5 3.4 3.4 3.4 3.1 2.9 3
S.D. 0.84 0.7 0.67 0.7 0.69 0.69 0.84 0.56 0.56 0.81

Source: Calculation using Excel

Table 4.4 shows that standard chartered bank has highest average number of audit
committee (4.2) followed by Siddhartha Bank (3.8), Nepal investment Bank (3.7), SBI
Bank (3.6), Himalayan Bank (3.5), Nabil Bank (3.3), Machhapuchhre Bank (3.2),
Everest Bank (3), Laxmi Bank (2.8) and Kumari Bank (2.3). The sample banks have
more audit committee in the year 2015 with the mean of 3.7 members and least audit
committee in the year 2021 with the mean of 2.9 members. According to the table, audit
committee varies within the individual banks also. The variation in audit committee as
indicated by SD is lowest for everest bank (i.e zero) due to no variation. It is followed
by Laxmi (0.42), NIBL, Nabil & Kumari (0.48), SBI (0.51), Himalayan (0.52),
Siddhartha & Machhapuchhre (0.63) and Standard Chartered Bank (0.78).
 44

Table 4. 5
Structure of board size
Banks 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Mean S.D.
SBI 6 8 8 8 8 7 8 8 5 6 7.2 1.1
NIBL 7 8 7 7 8 7 6 7 8 7 7.2 0.6
SCB 6 5 6 6 6 7 6 8 7 8 6.5 1

Himalayan 9 9 9 9 9 8 8 8 8 8 8.5 0.5

Machhapuchh
7 8 11 11 11 8 7 9 6 6 8.4 2
re
Nabil 7 8 8 6 7 8 7 6 7 7 7.1 0.7
Everest 9 9 8 8 8 8 8 8 6 7 7.9 0.9

Siddhartha 8 9 10 9 9 9 9 8 5 5 8.1 1.7

Kumari 7 8 8 8 8 8 7 6 6 6 7.2 0.9

Laxmi 5 10 10 10 8 8 7 5 5 5 7.3 2.2

Mean 7.1 8.2 8.5 8.2 8.2 7.8 7.3 7.3 6.3 6.5

S.D. 1.28 1.31 1.5 1.61 1.31 0.63 0.94 1.25 1.15 1.08
Source: Calculation using Excel

Table 4.5 shows that Himalayan Bank has highest number of average board size (8.5)
followed by Machhapuchhre Bank (8.4), Siddhartha Bank (8.1), Everest Bank (7.9),
Laxmi Bank (7.3), SBI, NIBL and Kumari Bank (7.2), Nabil Bank (7.1) and Standard
Chartered Bank (6.5). The average number of board of directors across the year is
fluctuated over a period of time. The sample banks have more board of directors in the
year 2015 with the mean of 8.5 persons and least board of directors in the year 2021
with the mean of 6.3 persons. According to the table, member of board of directors
varies within the individual banks also. In some years it has increased and in some years
it has decreased. The variation in board size as indicated by SD is lowest for Himalayan
Bank followed by Nepal Investment Bank, Nabil Bank, Everest Bank, Kumari Bank,
Standard Chartered Bank, SBI Bank, Siddhartha Bank, Machhapuchhre Bank and
Laxmi Bank.
 45

Table 4. 6
Structure of firm size

Banks 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Mean S.D.

NIBL 24.69 24.77 24.78 24.90 25.01 25.17 25.37 25.62 25.76 25.87 25.19 0.43

SCB 24.42 24.41 24.50 24.45 24.54 24.69 24.89 24.90 25.07 25.15 24.70 0.27

Himalayan 24.39 24.47 24.56 24.71 24.83 25.02 25.13 25.32 25.39 25.48 24.93 0.39

Machhapuchhre 23.58 23.75 23.91 23.69 24.13 24.43 24.61 24.80 24.95 25.16 24.30 0.56

Nabil 24.50 24.67 24.78 24.87 25.01 25.22 25.49 25.57 25.66 25.80 25.16 0.45

Everest 24.41 24.44 24.55 24.79 24.90 24.97 25.31 25.45 25.48 25.69 25.00 0.46

Siddhartha 23.60 23.85 23.91 24.11 24.24 24.42 24.64 25.03 25.22 25.50 24.45 0.63

Kumari 23.64 23.74 23.74 23.94 24.06 24.15 24.34 24.47 24.83 24.84 24.17 0.43

Laxmi 23.63 23.76 23.79 23.97 24.11 24.27 24.54 24.73 24.99 25.11 24.29 0.52

Source: Calculation using Excel

Table 4.6 shows that Nepal Investment Bank has highest average logarithmic firm size
value of 25.19 followed by Nabil Bank (25.16), Everest Bank (25.0), Himalayan Bank
(24.93), SBI Bank (24.81), Standard Chartered Bank (24.70), Siddhartha Bank (24.45),
Machhapuchhre Bank (24.30), Laxmi Bank (24.29) and Kumari Bank (24.17).

The average logarithmic firm size value computed across the year is fluctuated widely
over a period of time. The sample banks have more firm size in the year 2022 with the
mean of 25.39 and least ROA in the year 2013 with the mean of 24.1. According to the
table, firm size varies widely within the individual banks also. It increased from 24.15
to 25.35 for SBI, from 24.69 to 25.87 for Nepal Investment Bank, from 24.42 to 25.15
for Standard Chartered Bank, from 24.39 to 25.48 for Himalayan Bank, form 23.58 to
25.16 for Machhapuchhre Bank, from 24.50 to 25.80 for Nabil Bank, from 24.41 to
25.69 for Everest Bank, from 23.60 to 25.50 for Siddhartha Bank, from 23.64 to 24.84
for Kumari Bank and from 23.63 to 25.11 for Laxmi Bank. The variation in logarithmic
firm size value as indicated by SD is lowest for Standard Charterd followed by SBI,
Himalayan, NIBL & Kumari, Nabil, Everest, Laxmi, Machhapuchhre and Siddhartha
 46

Bank. When the logarithmic firm size value is compared over a period of time for
individual banks, it is noticed that firm size has increased in majority of the selected
commercial banks in most of the years.

Table 4. 7
Structure of leverage

Banks 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Mean S.D.

SBI 94.46 93.55 93.75 94.49 94.13 92.57 90.47 91.18 89.58 87.47 92.16 2.39

NIBL 92.62 91.99 91.15 90.79 90.4 90.8 90.6 87.44 87.59 85.53 89.89 2.26

SCB 92.47 91.62 91.6 90.1 89.88 90.45 90.83 88.45 84.67 83.42 89.34 3.01

Himalayan 92.06 91.94 91.45 91.47 91.33 91.73 91.59 91.16 89.08 87.85 90.96 1.37

Machhapuchhre 90.27 91.42 89.12 90.9 90.76 92.05 91.81 91.01 87.43 87.78 90.25 1.62

Nabil 92.86 92.63 92.13 91.36 90.85 91.5 91.87 90.88 89.92 87.21 91.12 1.63

Everest 94.03 93.33 93.26 92.51 92.65 92.25 93.05 92.52 90.09 88.85 92.25 1.58

Siddhartha 92.84 92.96 91.85 92.63 94.61 92.55 92 91.63 88.87 88.56 91.85 1.84

Kumari 91.23 91.29 89.19 90.54 90.58 90.43 91.04 90.49 86.75 86.54 89.8 1.76

Laxmi 92.69 90.87 90.19 91.1 90.84 90.88 90.84 89.62 86.37 86.21 89.96 2.08

Source: Calculation using Excel

Table 4.7 shows that Everest bank has highest average leverage of 92.25% followed by
SBI Bank (92.16 percent), Siddhartha Bank (91.85 percent), Nabil Bank (91.12
percent), Himalayan Bank (90.96 percent), Machhapuchhre Bank (90.25 percent),
Laxmi Bank (89.96 percent), NIBL Bank (89.92 percent), Kumari Bank (89.80 percent)
and Standard Chartered Bank (89.34 percent). The average leverage computed across
the year is fluctuated widely over a period of time. The sample banks have more
leverage in the year 2013 with the mean of 92.55% and least leverage in the year 2022
with the mean of 86.94%. According to the table, leverage varies widely within the
individual banks also. In some years it has increased and in some years it has decreased.
It decreased from 94.46% to 87.47% for SBI, from 92.62% to 85.53% for Nepal
Investment Bank, from 92.47% to83.42% for Standard Chartered Bank, from 92.06 to
 47

87.85% for Himalayan Bank, from90.27 to 87.78 for Machhapuchhre Bank, from
92.86% to 87.21% for Nabil Bank, from 94.03% to 88.85% for Everest Bank, from
92.84% to 88.56%or Siddhartha Bank, from91.23% to 86.54% for Kumari Bank, from
92.69% to 86.21% for Laxmi BankThe variation in leverage as indicated by SD is
lowest for Himalayan Bank followed by Everest, Machhapuchhre, Nabil, Kumari,
Siddhartha, Laxmi, NIBL, SBI and SCB.When the leverage is compared over a period
of time for individual banks, it is noticed that leverage has decreased in majority of the
selected commercial banks in recent years

4.1.2 Trend Analysis

35

30

25

20

15

10

Figure 4. 1 Trend of return on assets and return on equity

Figure 4.1 shows the trend of return on assets and return on equity of selected Nepalese
commercial banks from year 2013 to 2022. The X-axis represents the year and banks
name whereas Y-axis represents ROA. The figure indicates various fluctuations over
the study period. There is no fixed trend in ROA and ROE. In figure, it is seen that the
lowest return on assets is 0.05 of Machhapuchhre bank in 2015 and highest return on
assets is 3.25% of Nabil bank in 2017. Similarly, the lowest return on equity is 0.5% of
Machhapuchhre bank in 2015 and highest return on equity is 33.93 of Nabil banks in
2013.
 48

The return on assets is highest for SBI in 2022 (1.97%), for NIBL in 2017 (2.6%), for
SCB in 2016 (2.8%), for Himalayan in 2021 (2.19%), for Machhapuchhre in
2021(1.89%), for Nabil in 2017 (3.25%), for Everest in 2017 (2.39%), for Siddhartha
in 2018 (1.74%) for Kumari in 2020 (1.69%) and for Laxmi in 2015 (1.76%). Similarly,
the return on assets is lowest for SBI in 2016 (0.83%), for NIBL in 2016 (1.6%), for
SCB in 2021 (1.84%), for Himalayan in 2014 (1.19%), for Machhapuchhre in 2015
(0.05%), for Nabil in 2019 (2.06%), for Everest in 2020 (1.61%), for Siddhartha in 2014
(1.06%) for Kumari in 2017 (1.03%) and for Laxmi in 2019 (1.04%).

The return on equity is highest for SBI in 2018 (22.85%), for NIBL in 2014 (28%), for
SCB in 2013 (33.58%), for Himalayan in 2013 (24.13%), for Machhapuchhre in 2020
(18.12%), for Nabil in 2013 (33.93%), for Everest in 2017 (32.52%), for Siddhartha in
2018 (23.41%) for Kumari in 2020 (18.11%) and for Laxmi in 2014 (20.35%).
Similarly, the return on equity is lowest for SBI in 2016 (15.02%), for NIBL in 2022
(14.71%), for SCB in 2021 (11.98%), for Himalayan in 2014 (14.02%), for
Machhapuchhre in 2015 (0.5%), for Nabil in 2022 (20.94%), for Everest in 2022
(16.011%), for Siddhartha in 2014 (15.06%) for Kumari in 2021 (9.6%) and for Laxmi
in 2019 (10.95%).Overall, the trend line shows that ROA and ROE cannot be predicted
as it is highly fluctuating.

35

30

25

20

15

10

5
La

an

15
mi

k-
B
x

Figure 4. 2 Trend of age

 49

Figure 4.2 shows the trend of age of selected Nepalese commercial banks from year
2013 to 2022. According to the figure X-axis represent year and bank name, Y-axis
represent number of years. The figure indicates various ages over the study period. In
figure, it is seen that the lowest age is 7 years of Siddhartha and Laxmi bank in 2013
whereas highest age is 25 years of Nabil bank in 2013. This means that Nabil bank is
the oldest and Siddhartha and Laxmi are youngest banks of selected commercial banks.
In 2022, figure shows the age of SBI bank is 25 years, age of Nepal investment Bank
is 32 years, age of standard chartered bank is 31 years, age of himalayan bank is 25
years, age of machhapuchhre bank is 18 years, age of nabil bank is 34 years, age of
everest bank is 24 years, age of Siddhartha bank is 16 years, age of kumara bank is 18
years and age of laxmi bank is 16 years. Overall, the trend line shows that age of the
selected commercial banks in different years.

Figure 4. 3 Trend of audit committee

Figure 4.3 shows the trend of audit committee of selected Nepalese commercial banks
from year 2013 to 2022. The X-axis represents the year and banks name whereas Y-
axis represents ROA. The figure indicates various fluctuations over the study period.
There is no fixed trend in the audit committee. In figure, it is seen that the minimum
number of audit committee is 2 members of Machhapuchhre bank in 2013, Kumari
bank in year 2017-2022 and Laxmi bank in 2021 & 2022. Similarly, maximum number
 50

of audit committee members is 5 of Standard chartered bank in year 2013, 2014, 2015
& 2019 and Siddhartha bank in 2022. This trend line also shows that members of audit
committee of Everest bank is same throughout the study period i.e. 3 members.

12

11

10

Figure 4. 4 Trend of board size

Si Si K K K La La

a a B B B an an

an an k- k- k- 11 15
ha ha m m m mi mi

B B an an an k- k-
rth rth ari ari ari B B
dd dd u u u x x

k- k- 09 13 17
11 15
Figure 4.4 shows the trend of board size of selected Nepalese commercial banks from
year 2013 to 2022. The X-axis represents the year and banks name whereas Y-axis
represents members of board of director. The figure indicates various fluctuations over
the study period. There is no fixed trend in the board size. In figure, it is seen that the
minimum number of board of directors is 5 members of SBI bank in 2021, Standard
Chartered bank in year 2014, Siddhartha Bank in 2021 & 2022 and Laxmi bank in 2013,
& 2020-2022. Similarly, maximum number of board of directors is 11 of
Machhapuchhre bank in year 20011, 2016 and 2017.
 51

26.0

25.5

25.0

24.5

24.0

23.5

EvEvEvSi Si K K K La La

an an an a a B B B an an

- - - an an k- k- k- 11 15
es es es ha ha m m m mi mi

ks ks ks B B an an an k- k-
tB tB tB rth rth ari ari ari B B
er er er dd dd u u u x x

09 13 17 k- k- 09 13 17
11 15
Figure 4. 5 Trend of firm size

Figure 4.5 shows the trend of logarithmic value of firm size of selected Nepalese
commercial banks from year 2013 to 2022. The X-axis represents the year and banks
name whereas Y-axis represents ROA. The figure indicates various fluctuations over
the study period. There is no fixed trend in firm size. In figure, it is seen that the lowest
logarithmic value of firm size is 23.58 of Machhapuchhre bank in 2013 and highest
logarithmic value of firm size is 25.87 of Nepal Investment Bank in 2017. The firm size
is highest for all the selected commercial banks in 2022. The logarithmic value of firm
size of every bank moved upwards continuously in most of the years. The increment in
bank size gain advantage of economies of scale.
 52

96

94

92

90

88

86

84

82

Figure 4. 6 Trend of leverage

Figure 4.6 shows the trend leverage of selected Nepalese commercial banks from year
2013 to 2022. The X-axis represents the year and banks name whereas Y-axis represents
ROA. The figure indicates various fluctuations over the study period. There is no fixed
trend in leverage. In figure, it is seen that the lowest leverage is 83.42% of Standard
Chartered bank in 2022 and highest leverage is 94.61% of Siddhartha bank in 2017.
Overall, the trend line shows that leverage ratio cannot be predicted as it is highly
fluctuating. This figure shows that leverage has decreased over the period.

4.2 Descriptive Analysis

This section deals with the descriptive analysis of the collected data of banks.
Descriptive analysis quantitatively describes the features of the data. Table 4.1
summarizes the descriptive statistics of dependent and independent variables used in
the study for the period of 2012/13 to 2021/22 associated with 10 sample commercial
banks in Nepal.
 53

Table 4. 8
Summary of descriptive analysis

Board

Measures ROA ROE Age AC Size Lnsize Leverage

Mean 1.71 19.63 19.4 3.34 7.54 24.71 90.76

Median 1.67 19.17 18.5 3 8 24.78 91.07

Maximum 3.25 33.93 34 5 11 25.87 94.61

Minimum 0.05 0.5 7 2 5 23.58 83.42

Std. Dev. 0.61 7.19 7.90 0.73 1.39 0.57 2.17

Skewness -0.06 -0.10 0.15 0.17 0.13 -0.11 -0.93

Jarque-Bera 0.09 0.41 4.63 0.65 0.32 2.12 18.20

Probability 0.96 0.81 0.10 0.72 0.85 0.35 0.00011

Observations 100 100 100 100 100 100 100

Source: Calculation using SPSS

Table 4.8 shows mean, median, maximum value, minimum value, standard deviation,
skewness, Jarque-Bera, Probability and observations. The number of observations is
100 with the sample size of 10 commercial banks. The ROA ranges from 0.05% to
3.25% leading to mean of 1.7117% and median of 1.665% with standard deviation of
.608595%. The ROA is negatively skewed and value of Jarque-Bera is 0.088271 having
probability of 0.956824. Since, probability of Jarque-Bera value is greater than 0.05 so
the data of ROA is normally distributed. It can be concluded that ROA of sample banks
represents the ROA of population. Similarly, ROE ranges from 0.5% to 33.93% leading
to mean of 19.632% and median of 19.175% with standard deviation of 7.189921%.
The ROA is negatively skewed and value of Jarque-Bera is 0.412486 having probability
of 0.813635. Since, probability is greater than 0.05 so the data of ROE is normally
distributed. It can be concluded that ROE of sample banks represents the ROE of
population.
 54

Moreover, the age ranges from 7 to 34 years leading to mean of 19.4 and median of
18.5 with standard deviation of 7.088189. The age is positively skewed and value of
Jarque-Bera is 4.63102 having probability of 0.098716 i.e. data of age is normally
distributed. Furthermore, audit committee ranges from 2 to 5 members leading to mean
of 3.34 and median of 3 with standard deviation of 0.727803. The audit committee is
positively skewed and value of Jarque-Bera is 0.64706 having probability of 0.72359
i.e. data of audit committee is normally distributed. Similarly, the minimum board
member is 5 and the maximum board member is 11 having mean value of 7.54 and
median value 8. The standard deviation of board size is 1.388408 with positively
skewed data and the value of Jarque- Bera is 0.325098 having probability of 0.849975
i.e. data of audit committee is normally distributed.

The minimum value of lnsize is 23.58494 and the maximum value of lnsize is 25.87014
having mean value of 24.70636 and median value 24.7782. The standard deviation of
lnsize is 0.572656 with negatively skewed data and the value of Jarque- Bera is 2.12255
having probability of 0.34601 i.e. data of lnsize is normally distributed. Since,
probability is greater than 0.05 so the data of firm size is normally distributed. It can be
concluded that firm size of sample banks represents the firm size of population. Finally,
the minimum value of leverage is 83.42% and the maximum value of leverage is
94.61% having mean value of 90.762% and median value 91.07%. The standard
deviation of leverage is 2.16988% with negatively skewed data and the value of Jarque-
Bera is 18.20262 having probability of 0.000112 i.e. data of leverage is not normally
distributed.

4.2 Panel Unit Root Test Results

Tests for stationary were conducted by the using the Levin, Lin & Chu t* in eviews
software.

Table 4. 9
Panel root test of ROA
Cross-
Method Statistic Prob.** sections Obs
Null: Unit root (assumes common unit root process)
Levin, Lin & Chu t* -4.24342 0.0000 10 80
Sources: Eviews
 55

From Table 4.9 the Levin, Lin & Chu t* of -4.24342 has a p-value of 0. This means that
this Levin, Lin & Chu t* value is significantly less than zero (p<0.05) and therefore I
reject the null hypothesis of a unit root in ROA panel in favor of the alternative that the
panel is stationary at level.

Table 4. 10
Panel root test of return on equity
Cross-
Method Statistic Prob.** sections Obs
Null: Unit root (assumes common unit root process)
Levin, Lin & Chu t* -3.35879 0.0004 10 80
Sources: Eviews
Table 4.10 shows a Levin, Lin & Chu t* value of -3.35879 has a p-value of 0.0004.This
means that the Levin, Lin & Chu t* value is significantly less than zero (p<0.05) and
therefore I reject the null hypothesis of a unit root in ROE panel in favor of the
alternative that the panel is stationary at level.

Table 4. 11
Unit root test of age

Cross-
Method Statistic Prob.** sections Obs
Null: Unit root (assumes common unit root process)
Levin, Lin & Chu t* -18.3872 0.0000 10 80
Sources: Eviews
Table 4.11 shows a Levin, Lin & Chu t* value of -18.3872 has a p-value of 0.0000.This
means that the Levin, Lin & Chu t* value is significantly less than zero (p<0.05) and
therefore I reject the null hypothesis of a unit root in age panel in favor of the alternative
that the panel is stationary at level.
 56

Table 4. 12
Unit root test of audit committee
Cross-
Method Statistic Prob.** sections Obs
Null: Unit root (assumes common unit root process)
Levin, Lin & Chu t* -2.91879 0.0018 9 72
Sources: Eviews
Table 4.12 shows a Levin, Lin & Chu t* value of -2.91879 has a p-value of 0.0018.
This means that the Levin, Lin & Chu t* value is significantly less than zero (p<0.05)
and therefore I reject the null hypothesis of a unit root in audit committee panel in favor
of the alternative that the panel is stationary at level.

Table 4. 13
Unit root test of board size
Cross-
Method Statistic Prob.** sections Obs
Null: Unit root (assumes common unit root process)
Levin, Lin & Chu t* -5.52052 0.0000 10 80
Sources: Eviews
Table 4.13 shows a Levin, Lin & Chu t* value of -5.52052 has a p-value of 0.0000.
This means that the Levin, Lin & Chu t* value is significantly less than zero (p<0.05)
and therefore I reject the null hypothesis of a unit root in board size panel in favor of
the alternative that the panel is stationary at level.

Table 4. 14
Unit root test of firm Size
Cross-
Method Statistic Prob.** sections Obs
Null: Unit root (assumes common unit root process)
Levin, Lin & Chu t* -5.31854 0.0000 10 80
Sources: Eviews
Table 4.14 shows a Levin, Lin & Chu t* value of -5.31854 has a p-value of 0.0000.
This means that the Levin, Lin & Chu t* value is significantly less than zero (p<0.05)
 57

and therefore I reject the null hypothesis of a unit root in lnsize panel in favor of the
alternative that the panel is stationary at level.

Table 4. 15
Unit root test if leverage
Cross-
Method Statistic Prob.** sections Obs
Null: Unit root (assumes common unit root process)
Levin, Lin & Chu t* -2.87374 0.0020 10 70
Sources: Eviews
Table 4.15 shows a Levin, Lin & Chu t* value of -2.87374 has a p-value of 0.0020.
This means that the Levin, Lin & Chu t* value is significantly less than zero (p<0.05)
and therefore I reject the null hypothesis of a unit root in D (leverage) panel in favor of
the alternative that the panel is stationary at level. From the unit root tests (Table 4.9 to
Table 4.15) all the panels were found to be stationary at level. This means that in
specifying the model, no adjustments due to non-stationarity problems would be made
to the model.

4.3 Regression Analysis

To choose fixed or random effect model a formal test so called Hausman test is used. It
is based on the null hypothesis in favor of random effect model estimator. If p value is
greater than 0.05 (i.e. it is insignificant) random effects is preferable whereas if p value
is less than 0.05(i.e. it is significant) fixed effect is preferable. Wikipedia defines that
the Durbin-Wu-Hausman test (also called Hausman specification test) is a statistical
hypothesis test in econometrics named after James Durbin, De-Min Wu, and Jerry A.
Hausman. The test evaluates the consistency of an estimator when compared to an
alternative, less efficient estimator which is already known to be consistent. It helps one
evaluate if a statistical model corresponds to the data. The Hausman test can be also
used to differentiate between fixed effect model and random effect model in panel data.
The hypotheses for Hausman test are:

H0: Random model is better than fixed model.

H1: Fixed model is better than random model.
Correlated Random Effects - Hausman Test
Equation: Untitled
 58

Test cross-section random effects

Table 4. 16
Hausman test of ROA
Test Summary Chi-Sq. Statistic Chi-Sq. d.f. Prob.

Cross-section random 3.10161 5 0.6843

Sources: Eviews
Since the p value is greater than 5 percent and insignificant the null hypothesis is
accepted and alternative hypothesis is rejected for all the dependent variables. Hence in
this study random effect model is most appropriate model for hypothesis testing

4.3.1 Random Model of ROA

Regression analysis is the statistical tool applied for the investigation of the relationship
between variables. The regression of the financial performance of commercial banks
has been analyzed by defining the bank performance in terms of ROA and ROE. Least
square method has been used for regression analysis. Regression model for period
random effect for ROA helps to determine the effect of independent variables on ROA
on the basis of cross-section i.e. sample banks.

Table 4. 17
Cross section random effects foe ROA
Variable Coefficient Std. Error t-Statistic Prob.
C 4.97584 5.64055 0.88216 0.3799
AGE 0.06009 0.02361 2.54563 0.0125
AUDIT_COMMITTEE -0.0058 0.07332 -0.0796 0.9367
BOARD_SIZE -0.0595 0.03149 -1.8889 0.062
LNSIZE -0.2077 0.19202 -1.0816 0.2822
LEVERAGE____ 0.01288 0.02659 0.48461 0.6291
R-squared 0.16947 Mean dependent var 0.45404
Adjusted R-squared 0.12529 S.D. dependent var 0.35323
S.E. of regression 0.33036 Sum squared resid 10.2592
F-statistic 3.83614 Durbin-Watson stat 1.11502
Prob(F-statistic) 0.00331
Sources: Eviews
 59

On the basis of Table 4.17 the probability of age is lower than 0.05 so, age is negatively
significant to ROA according to cross section random effect. According to cross section
random effect, the value of R square is 16% i.e. 16% variation in the return on assets of
commercial banks is explained by the independent variables included in the model. And
the value of adjusted R square 12% i.e. 12% variation in the return on assets is explained
by the independent variables after adjusting the degree of freedom. However the
remaining 88% changes in the return on assets are caused by other factors. Similarly on
the above table f statistics shows the model is right because model is significant at 5
percent. The result shows that there is no effect of audit committee, board size, firm
size and leverage on firm performance because the probability is higher than 5 percent.
The regression coefficient 0.06 indicates that 1 percent increase in age will lead to 0.06
percent decrease in return on assets.

Furthermore, the table also indicates that the overall model is significant at 5% level of
significance. The Durbin Watson stat is 1.115024 i.e. there is positive autocorrelation
in the time series data at 5% level of significance. This table shows the regression
coefficient of return on assets. According to the equation of this study, the independent
variable age and leverage has the positive relationship with ROA and audit committee,
board size and firm size has negative relationship with ROA.

Table 4. 18
Hausman test of ROE
Test Summary Chi-Sq. Statistic Chi-Sq. d.f. Prob.
Cross-section random 9.429467 5 0.0931
Sources: Eviews
Since the p value is greater than 5 percent and insignificant the null hypothesis is
accepted and alternative hypothesis is rejected for all the dependent variables. Hence in
this study random effect model is most appropriate model for hypothesis testing.
 60

Table 4. 19
Cross section random effect for ROE

Variable Coefficient Std. Error t-Statistic Prob.

C -78.833 63.3011 -1.2454 0.2161

AGE 0.51195 0.23611 2.16829 0.0327
AUDIT_COMMITTEE 0.65206 0.85619 0.76158 0.4482
BOARD_SIZE -0.9755 0.37036 -2.6339 0.0099
LNSIZE -1.4299 2.07634 -0.6887 0.4927
LEVERAGE____ 1.42171 0.30861 4.60684 0
R-squared 0.29411 Mean dependent var 6.54378
Adjusted R-squared 0.2565 S.D. dependent var 4.73919
S.E. of regression 4.08626 Sum squared resid 1569.57
F-statistic 7.83308 Durbin-Watson stat 1.23256
Prob(F-statistic) 0.000
Sources: Eviews
On the basis of Table 4.19 the probability of age, board size and leverage are lower than
0.05 so, age, board size and leverage are negatively significant to ROE according to
cross section random effect. According to cross section random effect, the value of R
square is 29% i.e. 29% variation in the return on assets of commercial banks is
explained by the independent variables included in the model. And the value of adjusted
R square 25% i.e. 25% variation in the return on assets is explained by the independent
variables after adjusting the degree of freedom. However, the remaining 75% changes
in the return on assets are caused by other factors. The result shows that there is no
effect of audit committee and firm size on firm performance because the probability is
higher than 5 percent. The regression coefficient 0.51 indicates that 1 percent increase
in age will lead to 0.51 percent decrease in return on assets. Furthermore, the table also
indicates that the overall model is significant at 5% level of significance. The Durbin
Watson stat is 1.232560 i.e. there is positive autocorrelation in the time series data at
5% level of significance. According to the equation of this study, the independent
variable age, audit committee and leverage has the positive relationship with ROE and
board size and firm size has negative relationship with ROE.
 61

4.4 Discussion

This study has mainly focused on the impact of corporate governance on the financial
performance of Nepalese commercial banks. This study used corporate governance
variables: age, audit committee, board size, firm size and leverage ratio. The dependent
variables of performances are return on assets and return on equity. The result
acknowledged in this study is based on the selected 10 commercial banks over the
period of 2013 to 2022. Trend analysis, descriptive statistics and regression analysis are
used in order to study the impact of corporate governance on the financial performance
of commercial banks in Nepal. Trend analysis shows the patterns of the different
variables from FY 2012/13 to FY 2021/18. Two categories of commercial bank i.e.
joint venture banks and domestic banks has been selected and analyzed their patterns
through trend analysis. Nabil bank has highest average return on assets of 2.59%
followed by Standard Chartered Bank (2.42 percent), Nepal Investment Bank (2.04
percent), Everest Bank (1.99 percent), Himalayan Bank (1.67 percent), Laxmi Bank
(1.45 percent), Siddhartha Bank (1.41 percent), SBI Bank (1.33 percent), Kumari Bank
(1.27 percent) and Machhapuchhre Bank (0.9 percent). Similarly, structure and patterns
of ROE shows that Nabil bank has highest average return on equity of 27.9% followed
by Everest Bank (25.92 percent), Standard Chartered Bank (24.67 percent), Nepal
Investment Bank (24.07 percent), Siddhartha Bank (18.97 percent), Himalayan Bank
(18.84 percent), SBI Bank (18.33 percent), Laxmi

Bank (15.36 percent), Kumari Bank (12.86 percent) and Machhapuchhre Bank (9.35
percent).Nabil bank has highest average age of 29.5 years followed by Nepal
Investment Bank (27.5 years), Standard Chartered Bank (26.5 years), SBI Bank &
Himalayan Bank (20.5years), Everest Bank (19.5 years), Machhapuchhre Bank &
Kumari Bank (13.5 years) and Siddhartha Bank & Laxmi Bank (11.5 years).Similarly,
Standard chartered bank has highest average number of audit committee (4.2) followed
by Siddhartha Bank (3.8),Nepal investment Bank (3.7), SBI Bank (3.6), Himalayan
Bank (3.5), Nabil Bank (3.3),Machhapuchhre Bank (3.2), Everest Bank (3), Laxmi
Bank (2.8) and Kumari Bank (2.3).Moreover, Himalayan Bank has highest number of
average board size (8.5) followed byMachhapuchhre Bank (8.4), Siddhartha Bank (8.1),
Everest Bank (7.9), Laxmi Bank(7.3), SBI, NIBL and Kumari Bank (7.2), Nabil Bank
(7.1) and Standard Chartered Bank(6.5).
 62

Nepal Investment Bank has highest average logarithmic firm size value of 25.19
followed by Nabil Bank (25.16), Everest Bank (25.0), Himalayan Bank (24.93), SBI
Bank (24.81), Standard Chartered Bank (24.70), Siddhartha Bank (24.45),
Machhapuchhre Bank (24.30), Laxmi Bank (24.29) and Kumari Bank (24.17). The firm
size is highest for all the selected commercial banks in 2022. The logarithmic value of
firm size of every bank moved upwards continuously in most of the years. Finally,
Everest bank has highest average leverage of 92.25% followed by SBI Bank (92.16
percent), Siddhartha Bank (91.85 percent), Nabil Bank (91.12 percent), Himalayan
Bank (90.96 percent), Machhapuchhre Bank (90.25 percent), Laxmi Bank (89.96
percent), NIBL Bank (89.92 percent), Kumari Bank (89.80 percent) and Standard
Chartered Bank (89.34 percent). When the leverage is compared over a period of time
for individual banks, it is noticed that leverage has decreased in majority of the selected
commercial banks in recent year.

Descriptive study that is carried out for all the sample banks shows the minimum values
to the maximum values, mean, standard deviation, skewness and Jarque-Bera of age,
audit committee, board size, firm size and leverage ratio. According to descriptive
statistics of all the variables ROA has mean value of 1.7117% which indicates that the
sample banks on average earn 1.7117% of the total assets by managing the corporate
governance variables. Higher ROA shows that the bank is more efficient in using it
resources because it indicates the efficiency of the management of a company
generating return from all the resources of the institutions. ROA ranges from 0.05
percent to 3.25 percent of net income for a single rupee invested in the assets of firm
respectively. The ROA positively skewed and is normally distributed.

Similarly, according to descriptive statistics of all the variables ROE has a mean value
of 19.632% by managing the corporate governance variables for the shareholders. ROE
ranges 0.5 to 33.93 percent having standard deviation of 7.189921 percent. ROE is
negatively skewed and is normally distributed. Similarly, the age ranges from 7 to 34
years leading to mean of 19.4 and median of 18.5 with standard deviation of 7.088189.
The age is positively skewed and normally distributed. Furthermore, audit committee
ranges from 2 to 5 members leading to mean of 3.34 and median of 3 with standard
deviation of 0.727803. The audit committee is positively skewed normally distributed.
Similarly, the minimum board member is 5 and the maximum board member is 11
having mean value of 7.54 and median value 8. The standard deviation of board size is
 63

1.388408 with positively skewed data and normally distributed. The minimum value of
firm size is 23.58494 and the maximum value of firm size is 25.87014 having mean
value of 24.70636 and median value 24.7782. The standard deviation of firm size is
0.572656 with negatively skewed and normally distributed. It can be concluded that
firm size of sample banks represents the firm size of population.

Finally, the minimum value of leverage is 83.42% and the maximum value of leverage
is 94.61% having mean value of 90.762% and median value 91.07%. The standard
deviation of leverage is 2.16988% with negatively skewed data and the data of leverage
is not normally distributed. Similarly a formal test called Hausman test is performed to
choose between the fixed and random effect model. In the test it is found that p-value
is greater than 5 percent and insignificant, the null hypothesis is accepted and the
alternative hypothesis is rejected. Hence in this study random effect model is most
appropriate model for the hypothesis testing.

The regression model is then presented. According to cross section random effect, the
probability of age is lower than 0.05 so, age is negatively significant to ROA. The value
of R square is 16% i.e. 16% variation in the return on assets of commercial banks is
explained by the independent variables included in the model. And the value of adjusted
R square 12% i.e. 12% variation in the return on assets is explained by the independent
variables after adjusting the degree of freedom. Furthermore, the table also indicates
that the overall model is significant at 5% level of significance. The Durbin Watson stat
is 1.115024 i.e. there is positive autocorrelation in the time series data at 5% level of
significance.

According to cross section random effect, the probability of age, board size and
leverage are lower than 0.05 so, age, board size and leverage are negatively significant
to ROE The value of R square is 29% i.e. 29% variation in the return on assets of
commercial banks is explained by the independent variables included in the model. And
the value of adjusted R square 25% i.e. 25% variation in the return on assets is explained
by the independent variables after adjusting the degree of freedom. Furthermore, the
table also indicates that the overall model is significant at 5% level of significance. The
Durbin Watson stat is 1.232560 i.e. there is positive autocorrelation in the time series
data at 5% level of significance.
 64

CHAPTER V

SUMMARY AND CONCLUSION

This chapter provides a succinct summary of the study's findings and results. The data
analysis and prior hypothesis testing provide the foundation for the study's findings and
conclusion. This chapter's first portion summarizes the results, followed by the second
section's conclusion and the third section's recommendations.

5.1 Summary

A number of businesses in the USA and internationally have failed in recent years as a
result of poor corporate governance and unethical behavior. Nepal is not an exception
to the increased importance of corporate governance. Numerous businesses have failed
recently, including in the context of Nepal, which highlights the need of corporate
governance. Because the Nepalese banking sector is undergoing significant changes
and is becoming a significant economic sector, a study on corporate governance and
bank performance for Nepalese banks has been conducted. In Nepal's banking sector,
the study intends to investigate the relationship between corporate governance firm
performances. This study is based on secondary information about 10 Nepalese
commercial banks from 2013 to 2022 AD. The data were taken from these banks' annual
reports and various published articles. For trend analysis, descriptive statistics, and
regression analysis, the researcher used Eviews software.

The goal of the study is to determine the connection between corporate governance and
financial performance in Nepal's commercial banks. First, a review of the literature was
conducted, and then, based on that study, hypotheses were established to determine how
corporate governance affected the financial performance of commercial banks. Return
on assets (ROA) and return on equity (ROE) are the most important financial metrics
for evaluating performances. Age, the size of the board, the size of the firm, and the
leverage ratio are the independent factors of the study. The study used descriptive
statistics and regression analysis in analysis data accesses from the annual reports of
the 10 commercial banks for a period of 10 years (2013-2022). Among 10 commercial
banks 5 are domestic banks and 5 are joint venture banks.
 65

The major findings of the study are summarized as follows:

 The average return on asset is highest for Nabil Bank (2.59%) and lowest for
Machhapuchhre Bank (0.9 percent). It has been found that return on asset has
increased in the majority of the selected commercial banks during the study
period.

 Nabil bank has highest average return on equity of 27.9% and Machhapuchhre
Bank has the lowest (9.35 percent). It has been found that return on equity has
decreased in the majority of the selected commercial banks during the study
period.

 Nabil bank has highest average age of 29.5 years and Siddhartha Bank & Laxmi
Bank has lowest average age (11.5 years) which shows that Nabil bank is the
oldest and Siddhartha and Laxmi are youngest banks of selected commercial
banks.

 The structure and pattern analysis shows that Standard Chartered Bank has
highest average number of audit committee (4.2) and and Kumari Bank (2.3).
The sample banks have more audit committee in the year 2015 with the mean
of 3.7 members and least audit committee in the year 2021 with the mean of 2.9
members.

 Himalayan Bank has highest number of average board size (8.5) and and
Standard Chartered Bank has lowest (6.5). It has been found that board of
director ranges from minimum 5 to maximum 11.

 Nepal Investment Bank has highest average logarithmic firm size value of 25.19
and Kumari Bank has lowest (24.17). It has been found that firm size is highest
for all the selected commercial banks in 2022. The logarithmic value of firm
size of every bank moved upwards continuously in most of the years.

 Everest bank has highest average leverage of 92.25% and Standard Chartered
Bank (89.34 percent) and it has been found that leverage has decreased in
majority of the selected commercial banks in recent year.
 66

 The descriptive analysis shows that mean of ROA and ROE of selected
commercial banks are 1.7117% and 19.632% respectively.

 The mean of age, audit committee, board size, firm size and audit committee
are 19.4, 3.34, 7.54, 24.70636 and 90.762% respectively.

 From the unit root tests, all the panels were found to be stationary at 5 percent
level.

 The result of Hausman test for both ROA and ROE showed that the random
model is better than fixed model.

 The regression study reveals that age is significant effect on the return on assets
of the banks however audit committee, board size, firm size and leverage have
insignificant effect.

 Age, board size and leverage have significant effect on the return on equity of
the banks however audit committee and firm size have insignificant effect as
per the regression.
The summary of the findings with respect to each dependent factor is summarized in
table below:

Table 5. 1
Finding of ROA and ROE
Independent Variables ROA Statistically significant test
Age Effect 5%
Audit Committee No effect Not Significant
Board Size No effect Not Significant
Firm Size No effect Not Significant
Leverage No effect Not Significant
Independent Variables ROE Statistical significant test
Age Effect 5%
Audit Committee No effect Not Significant
Board Size Effect 5%
Firm Size No effect Not Significant
Leverage Effect 5%
Sources: From calculation of regression
 67

5.2 Conclusion

The study's main goal was to determine how corporate governance affected the
financial performance of Nepal's commercial banks between FY 2012/13 to FY
2021/18. The study looked at the relationship between board size, debt, age, audit
committee, and firm size with regard to return on assets and return on equity.

The study's main goal was to determine how corporate governance affected the
financial performance of Nepal's commercial banks between FY 2012/13 to FY
2021/18. The study looked at the relationship between board size, debt, age, audit
committee, and firm size with regard to return on assets and return on equity.

Regarding the study's hypotheses, the first one (H1), which states that board size has a
considerable impact on financial performance, is accepted because it has an impact on
the ROE of the banks that were chosen. The second hypothesis (H2), which deals with
whether or not firm size has a major impact on financial performance, is disproved. The
third hypothesis (H3), which states that a firm's age has a major impact on its financial
performance, is accepted because it has an impact on the selected banks' ROA and ROE.
The selected banks' ROE indicates that the fourth hypothesis (H4), which deals with
the major influence of debt on financial performance, is accepted. The fifth hypothesis
(H5) that deals with there is significant impact of audit committee on financial
performance is rejected.

The outcome shows that age has a considerable impact on banks' return on assets,
whereas audit committee size, board size, company size, and leverage have little impact.
Similar to this, the analysis shows that age, board size, and leverage have large effects
on banks' return on equity, whereas audit committee and firm size have negligible
effects.

5.3 Implications

For both practitioners and policymakers in Nepal's banking sector, the study report
"Corporate Governance and Firm Profitability: Evidence from Nepalese Commercial
Banks" has significant significance. The study's conclusions highlight the critical role
that efficient corporate governance procedures play in boosting business profitability.
This information should spur a thorough review of corporate governance practices
among Nepalese commercial banks, ushering in a period of more accountability,
 68

transparency, and sensible risk management. Stakeholders now have strong

justifications for prioritizing the appointment of qualified and independent board
members, fostering an environment conducive to strategic decision-making that is in
line with goals for sustainable growth. Empirical evidence shows a positive correlation
between sound governance structures and financial success. The report's findings also
have a significant impact on capital inflows and investor confidence. As the connection
between sound corporate governance and profitability becomes undeniably clear,
domestic and foreign investors are likely to favor well-governed banks, providing the
industry with much-needed cash. This influx of capital not only improves the
functioning of individual banks but also aids in the stability and expansion of Nepal's
banking sector as a whole.

The report also emphasizes the crucial role that risk management plays in attaining
long-term sustainability. Effective corporate governance systems protect against
economic and financial turbulence and allow banks to proactively detect, evaluate, and
reduce risks. Banks may improve their risk management tactics by adopting these
discoveries, reducing their exposure to risk, and strengthening their positions in a
constantly shifting financial environment. This study's ramifications go beyond the
banking sector. The report's conclusions urge the launch of educational initiatives and
programs to raise public understanding of the importance of corporate governance. The
research lays the path for a more educated and involved stakeholder community, which
in turn supports a healthier and more accountable company environment, by
encouraging a culture of good governance through seminars, workshops, and training
activities.

From a regulatory standpoint, the paper offers legislators a useful roadmap for creating
focused policies that raise corporate governance standards. The study's reliance on data
provides verifiable justification for incorporating strict governance criteria into
legislative and regulatory systems. This strategy puts Nepal's banking industry as a
model for good corporate governance implementation in the larger South Asian area,
and it is also consistent with international best practices. The research study on
corporate governance and business profitability in Nepalese Commercial Banks, in
conclusion, goes beyond its particular environment to provide a roadmap for radical
reform. The implications of this study spread throughout Nepal's banking sector,
influencing it toward greater profitability, sustainability, and global competitiveness.
 69

These implications include advocating for improved governance practices, fostering

investor confidence, improving risk management strategies, promoting education and
awareness, and informing regulatory decisions.
 70

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Appendix I

Year Bank Name ROA ROE Leverage BS Age AC Lnsize

2013 Nepal SBI Bank 1.05 18.58 94.46 6 16 4 24.15456
2014 Nepal SBI Bank 1.03 16.05 93.55 8 17 4 24.36211
2015 Nepal SBI Bank 1.01 16.19 93.75 8 18 4 24.55382
2016 Nepal SBI Bank 0.83 15.02 94.49 8 19 4 24.78474
2017 Nepal SBI Bank 1.19 20.31 94.13 8 20 4 24.89451
2018 Nepal SBI Bank 1.51 22.85 92.57 7 21 4 24.8355
2019 Nepal SBI Bank 1.64 21.51 90.47 8 22 3 24.80549
2020 Nepal SBI Bank 1.59 22.16 91.18 8 23 3 25.08656
2021 Nepal SBI Bank 1.57 14.87 89.58 5 24 3 25.32672
2022 Nepal SBI Bank 1.97 15.81 87.47 6 25 3 25.35351
2013 NIBL 1.7 23.05 92.62 7 23 4 24.69376
2014 NIBL 2.2 28 91.99 8 24 4 24.77166
2015 NIBL 2 25.7 91.15 7 25 4 24.78984
2016 NIBL 1.6 20.1 90.79 7 26 4 24.90922
2017 NIBL 2.6 31.7 90.4 8 27 4 25.01581
2018 NIBL 2.3 27.6 90.8 7 28 4 25.17963
2019 NIBL 1.9 24.8 90.6 6 29 4 25.37097
2020 NIBL 2 26 87.44 7 30 3 25.62496
2021 NIBL 2.1 19.12 87.59 8 31 3 25.76902
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2022 NIBL 2 14.71 85.53 7 32 3 25.87014

2013 SCBL 2.56 33.58 92.47 6 22 5 24.42673
2014 SCBL 2.7 32.22 91.62 5 23 5 24.41746
2015 SCBL 2.55 30.43 91.6 6 24 5 24.50314
2016 SCBL 2.8 28.36 90.1 6 25 4 24.45322
2017 SCBL 2.67 26.38 89.88 6 26 4 24.54386
2018 SCBL 2.51 26.27 90.45 7 27 4 24.69965
2019 SCBL 1.99 21.69 90.83 6 28 5 24.89653
2020 SCBL 1.98 17.18 88.45 8 29 3 24.90051
2021 SCBL 1.84 11.98 84.67 7 30 4 25.07236
2022 SCBL 2.61 18.66 83.42 8 31 3 25.15446
Himalayan
2013 1.91 24.13 92.06 9 16 4 24.39501
Banks
Himalayan
2014 1.19 14.02 91.94 9 17 4 24.47787
Banks
Himalayan
2015 1.91 22.36 91.45 9 18 4 24.56778
Banks
Himalayan
2016 1.76 20.69 91.47 9 19 4 24.71898
Banks
Himalayan
2017 1.54 17.81 91.33 9 20 4 24.83664
Banks
Himalayan
2018 1.3 15.77 91.73 8 21 3 25.02177
Banks
Himalayan
2019 1.34 15.98 91.59 8 22 3 25.13971
Banks
Himalayan
2020 1.94 21.94 91.16 8 23 3 25.32707
Banks
Himalayan
2021 2.19 21.58 89.08 8 24 3 25.39848
Banks
Himalayan
2022 1.67 14.17 87.85 8 25 3 25.48083
Banks
2013 MBL 0.7 7.25 90.27 7 9 2 23.58494
2014 MBL 0.35 4.55 91.42 8 10 3 23.75237
2015 MBL 0.05 0.5 89.12 11 11 4 23.9161
2016 MBL 0.16 1.44 90.9 11 12 4 23.6991
2017 MBL 0.49 5.3 90.76 11 13 3 24.13429
2018 MBL 1.12 14.05 92.05 8 14 4 24.43008
2019 MBL 1.26 16.15 91.81 7 15 3 24.61004
2020 MBL 1.51 18.12 91.01 9 16 3 24.80849
2021 MBL 1.89 14.14 87.43 6 17 3 24.9563
2022 MBL 1.47 12.06 87.78 6 18 3 25.16342
2013 Nabil Banks 2.55 33.93 92.86 7 25 4 24.50444
2014 Nabil Banks 2.37 30.27 92.63 8 26 3 24.67604
2015 Nabil Banks 2.43 29.02 92.13 8 27 3 24.78542
2016 Nabil Banks 2.8 30.25 91.36 6 28 3 24.87048
2017 Nabil Banks 3.25 32.78 90.85 7 29 3 25.01842
2018 Nabil Banks 2.89 27.91 91.5 8 30 3 25.22633
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2019 Nabil Banks 2.06 22.73 91.87 7 31 4 25.49983

2020 Nabil Banks 2.32 25.61 90.88 6 32 4 25.57232
2021 Nabil Banks 2.7 25.61 89.92 7 33 3 25.66988
2022 Nabil Banks 2.61 20.94 87.21 7 34 3 25.80453
2013 Everest Banks 1.73 28.96 94.03 9 15 3 24.41006
2014 Everest Banks 2.09 30.17 93.33 9 16 3 24.44613
2015 Everest Banks 2.1 25.58 93.26 8 17 3 24.55703
2016 Everest Banks 2.11 27.15 92.51 8 18 3 24.79763
2017 Everest Banks 2.39 32.52 92.65 8 19 3 24.90899
2018 Everest Banks 2.25 29.04 92.25 8 20 3 24.9781
2019 Everest Banks 1.85 23.25 93.05 8 21 3 25.31993
2020 Everest Banks 1.61 20.61 92.52 8 22 3 25.45846
2021 Everest Banks 1.83 25.95 90.09 6 23 3 25.48125
2022 Everest Banks 1.97 16.01 88.85 7 24 3 25.6987
2013 Siddhartha Bank 1.22 17.08 92.84 8 7 3 23.60705
2014 Siddhartha Bank 1.06 15.06 92.96 9 8 3 23.85013
2015 Siddhartha Bank 1.28 15.61 91.85 10 9 4 23.91809
2016 Siddhartha Bank 1.12 15.12 92.63 9 10 4 24.11201
2017 Siddhartha Bank 1.43 19.23 94.61 9 11 4 24.2405
2018 Siddhartha Bank 1.74 23.41 92.55 9 12 4 24.42033
2018 Siddhartha Bank 1.74 23.41 92.55 9 12 4 24.42033
2019 Siddhartha Bank 1.51 20.48 92 9 13 4 24.64958
2020 Siddhartha Bank 1.69 20.11 91.63 8 14 4 25.03844
2021 Siddhartha Bank 1.54 21.15 88.87 5 15 3 25.22173
2022 Siddhartha Bank 1.59 22.49 88.56 5 16 5 25.50967
2013 Kumari Bank 1.41 16.09 91.23 7 9 3 23.64312
2014 Kumari Bank 1.59 17.69 91.29 8 10 3 23.74479
2015 Kumari Bank 1.23 11.36 89.19 8 11 3 23.74329
2016 Kumari Bank 1.1 11.61 90.54 8 12 2 23.94738
2017 Kumari Bank 1.03 10.95 90.58 8 13 2 24.06339
2018 Kumari Bank 1.1 11.54 90.43 8 14 2 24.15792
2019 Kumari Bank 1.06 11.77 91.04 7 15 2 24.34425
2020 Kumari Bank 1.69 18.11 90.49 6 16 2 24.4708
2021 Kumari Bank 1.29 9.6 86.75 6 17 2 24.83403
2022 Kumari Bank 1.26 9.88 86.54 6 18 2 24.84094
2013 Laxmi Bank 1.22 16.93 92.69 5 7 3 23.63488
2014 Laxmi Bank 1.66 20.35 90.87 10 8 3 23.76551
2015 Laxmi Bank 1.76 17.75 90.19 10 9 3 23.7941
2016 Laxmi Bank 1.5 15.87 91.1 10 10 3 23.97816
2017 Laxmi Bank 1.5 15.43 90.84 8 11 3 24.11803
2018 Laxmi Bank 1.47 16 90.88 8 12 3 24.27814
2019 Laxmi Bank 1.04 10.95 90.84 7 13 3 24.54274
2020 Laxmi Bank 1.35 12.89 89.62 5 14 3 24.73413
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2021 Laxmi Bank 1.52 13.15 86.37 5 15 2 24.99165

2022 Laxmi Bank 1.55 14.36 86.21 5 16 2 25.11722