The Impact of Bank Corporate Governance on Non-Performing Loans: Evidence from Malaysian Commercial Bank

Abstract

This study examines the impact of corporate governance on non-performing loans (NPLs) in the commercial banks in Malaysia. The data used in this study are unbalanced panel data of 24 commercial banks regulated by Bank Negara Malaysia (BNM) between 2015 and 2024, which amounts to 215 bank-year observations. Least Squares Dummy Variable (LSDV) and Random Effects (RE) models are used to examine the influence of corporate governance, bank-specific and macroeconomic variables on the NPL of commercial banks. The empirical findings indicate that board size and board independence have a positive relationship with NPLs, while audit committee size negatively affects NPLs. However, there is no statistical relationship between board meetings, audit committee independence and audit committee meetings. From the empirical results, the study suggests that banks should control board size. Instead of increasing the number of directors, commercial banks should focus on getting the right directors, especially those with expertise in managing non-performing loans. Aside from that, when appointing independent directors and audit committee members, professional competence and industry experience should be the primary consideration, rather than merely meeting regulatory independence quotas. In addition, banks must transform their risk management model from a passive response to active prevention. Instead of holding more meetings after NPLs rise, the board and audit committee should regularly conduct pre-risk assessments for lending businesses, establish a fullcycle monitoring system for loans, and identify potential default risks at an early stage