Reform, Financial Systems and Legal Frameworks
The CRC Series on Competition, Regulation and Development
Edited by Thankom Gopinath Arun and John Turner
Chapter 7: Corporate Governance of Banks in Developing Economies: Concepts and Issues
Thankom Gopinath Arun and John Turner INTRODUCTION Although the subject of corporate governance in developing economies has recently received a lot of attention in the literature (Goswami, 2001; Lin, 2001; Malherbe and Segal, 2001; Oman, 2001), the corporate governance of banks in developing economies has been almost ignored by researchers (Caprio and Levine, 2002). Even in developed economies, the corporate governance of banks has only recently been discussed in the literature (Macey and O’Hara, 2003). In order to address this deficiency, this chapter discusses some of the key concepts and issues for the corporate governance of banks in developing economies. The corporate governance of banks in developing economies is important for several reasons. First, banks have an overwhelmingly dominant position in developing-economy financial systems, and are extremely important engines of economic growth (King and Levine, 1993a, 1993b; Levine, 1997). Second, as financial markets are usually underdeveloped, banks in developing economies are typically the most important source of finance for the majority of firms. Third, as well as providing a generally accepted means of payment, banks in developing countries are usually the main depository for the economy’s savings. Fourth, many developing economies have recently liberalized their banking systems through privatization/disinvestments and reducing the role of economic regulation. Consequently, managers of banks in these economies have obtained greater freedom in how they run their banks. In the next section, we argue that the unique nature of the banking firm, whether in the developed or developing world, requires that a broad view of...
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