Analysis And Hypotheses Testing

Published Date: 02 Nov 2017

Chapter 3

Scanning data was obtained from bank officer responses to 23 questions in the questionnaire "The role of audit in sustaining the implementation of corporate governance in the Lebanese banking sector".

The data is segmented into two parts. First part were analyzed in terms of frequency of response and gathered in excel. The second part considers the answers that were collected in excel and analyzed in terms of level of agreement or disagreement.

B. Sample Profile

The first section of the questionnaire, Sample Description, contains eight questions allowing the classification of respondents according to:

• Age

• Marital Status

• Number of Children < 18 years

• Education

• Certificates

• Tenure at the Organization

• Level of Management

• Total Years of Work Experience

The results are shown in Table 1.

43.90%, nearly half of the respondents, lie in the 30-39 age category while

17.07% are below the age of 30 years and 39.02% lie in the 40-49 age category. 17% of respondents are in Top level management, 44% of respondents are in middle management while the remaining 39% are not in management. 29.27% of them are not married, 63.41% are married and 7.32% are divorced. 21.21% of all respondents and 63.64% of married and divorced respondents have children under the age of 18 years while the rest are either not married or do not have children yet.

All respondents have finished the tertiary level of education and only 15 of them, 37%, stopped at that level. 61% of the respondents have reached a masters degree and one respondent has PhD and thirteen years of experience. 22% of those, 9 respondents, have other certificates: three have CFAs, two have CIAs and four have CPA certificates. Finally, Most of the respondents, 81%, have been working for 10 years or less in the same organization. The remaining 20% of respondents have been working in the same organization for 11-15 years. The total years of experience of the respondents were divided: 27% have 1-5 years of experience, 37% have 6-10 years of experience, 32% have 11-15 years of experience and only two of respondents have more than 15 years of experience. Note that the results are obtained from respondents that work into five banks in Lebanon: Banque du Liban et D’Outre Mers(BLOM)- 22% and Bank Audi S.A.L. 22%. 12% of respondents work at Credit Bank S.A.L., nine works at BankMed S.A.L. and nine works at Société Générale des Banques au Liban (SGBL).

Table 1. Sample Description

1. Sample Description

Variable

Frequency

N= 41

Percentage

(%)

Age

20-29

30-39

40-49

50+

7

18

16

0

17.07

43.90

39.02

0.00

Marital Status

Single

Married

Divorced

12

26

3

29.27

63.41

7.32

Number of Children < 18

0

1

2

6

18

17

15

44

41

Educational Level

Bachelor

Masters

PhD

15

25

1

37

61

2

Certificates

Yes

No

9

32

22

78

Level of Management Top Management

Middle Level

Not in Management

7

18

16

17

44

39

Tenure at the Organization

1-5 years

6-10 years

11-15 years

15

18

8

37

44

20

Total Years of Work Experience

1-5 years

6-10 years

11-15 years

> 15 years

11

15

13

2

27

37

32

5

Name of the Organization

Banque du Liban et d'Outre Mers (BLOM)

Bank Audi s.a.l-Audi Saradar Group

Bank Med s.a.l.

Credit Bank s.a.l.

Société Générale des Banques au Liban (SGBL)

9

9

9

5

9

22

22

22

12

22

Table 2 shows the job titles of the respondents classified by organization name. Some of these job titles have the same job description and only the title differs from organization to organization which explain why there are so many job titles under the domain of commercial credit banking. But, it is important to record that as Table 2 shows, some of the respondents work in the credit risk field which is a complementary field to credit and which is a division that should increase bank credit monitoring.

Table 2. Job Title by Organization

Name of the Bank

Job Title

Bank BLOM Bank Credit SGBL Audi Med Bank

Total

(%)

Credit Officer

Credit Analyst

Senior Credit Officer Corporate Officer Corporate Credit Analyst Senior Supervisor Relationship Manager

Senior Relationship Manager Head of Unit-Corporate Division Manager

Recovery Officer

Risk Analyst

Credit Risk Officer

1 3 4

2

1 2

1 1

1 2

1 2

2 1

2 2 2

1 1

3

2

1 1

1 1

8

2

3

2

3

3

3

6

2

3

2

2

2

19.51

4.88

7.31

4.88

7.31

7.31

7.31

14.66

4.88

7.31

4.88

4.88

4.88

Total

9 9 9 5 9

41

100

(%)

21.95 21.95 21.95 12.20 21.95

100

C. Analysis and Hypotheses Testing

1. In the Bank’s opinion: How Important is Corporate Governance in Lebanon?

First, in general the study intends to identify the level of respondents’ knowledge about "corporate governance", and the degree of significance to their organization that the audit involves good corporate governance. This part is important for results assessment because it will display the quality and level of knowledge of the respondents thus the value of the study itself.

The majority of respondents respond that they have some knowledge of corporate governance; 68% answered that they are somewhat informed while 20% answered that they are very well-informed. Likewise, more than 90% of respondents believe that it is important that the audit committee control the principles to reach good corporate governance: 29% of correspondents believe that it is very important while 66% believe that it is somewhat important. What is surprising is that even though the plurality of respondents believe in the importance of corporate governance, approximately 12% of respondents are either not at all informed about the corporate governance policies of the bank or are not sure whether they are informed or not.

83% of respondents believe that board members have the legal responsibility to protect and serve all the firm’s stakeholders. This is an important figure considering Lebanese culture, where people generally believe that management and Boards of Directors are one entity. These results propose that there is an understanding of corporate governance policies. Approximately the same percentage of respondents believes that board’s decision-making processes are either completely or rubber-stamped to management views. In this case, this is actually contrary to corporate governance policy. However this opacity may be expected from people living in a market such as the Lebanese market which is mainly composed of family-owned businesses.

Around 85% of respondents believe that the Board of Directors should have consultants as members’ independent and well-experienced. Only 2% believe that the Board of Directors should include lawyers and 12% believe that it should have bankers as members. What is important to note is that nobody of these respondents believe that the board should include politicians as members.

In this section, the majority of respondents’ answers are going to determine the results of this thesis, have some knowledge of corporate governance policies even though some of them do not identify them as "corporate governance" per se. What I would like to point out is that little people refused to fill in the questionnaire because they believe that the whole subject related to the study will hardly be applicable in Lebanon.

2. Intensity of Bank Monitoring

This study identified the importance of each bank monitoring the "corporate governance" policies to avoid financial distress. This section aims at identifying the level of auditing that Lebanese banks are conducting.

First step: in this section (of the questionnaire), the respondents were asked about some principles of corporate governance, and the importance of auditing.

Table 3 Summarizes the results. The respondents believe that it is important for their corporate clients to apply good corporate governance principles, specifically to have an effective and independent BOD (Board of Directors), an Internal Audit function, transparent disclosure, communications to stakeholders, an internal framework and reporting procedure and risk management policies and procedures.

On the other hand, the majority of respondents were neutral about whether their corporate clients should have an official Code of Conduct or not. This is perhaps understandable in Lebanon where, unlike more developed countries, most people are not acquainted to the idea of having an official Code of Conduct.

Moreover, all bank officers ask for information about their corporate clients from different sources, first the bank’s information division, the annual reports and other documents provided by the clients, plus market research, the internet and official reports provided by the Lebanese Central Bank, newspapers, trade publications. It is important to note that all respondents demand yearly audited financial statements from their corporate clients but most of them do not enforce a specific type of auditor. For example, the auditor could be an international auditor or a local auditor, an individual auditor or a local-international associate auditor. Actually, the Central Bank of Lebanon does not require that it has a specific type of auditor, no matter how big the corporation and its activities are. This may cause problems as it increases the possibility that large firms may use inexperienced and unknown auditors that may present an unclear or even misleading view of the corporation which may be damaging to the lending bank.

Further to this point, 87.80% of respondents believe that Banks should have external auditors. Moreover around 12.20% believe that this issue is not important at all, even though the Lebanese banks themselves, have internal auditors, thus they know of the importance of such a function to their business. This point demonstrates that Lebanese banks are not yet overly involved in corporate governance policies and procedures. Commercial Banks have an international reputable auditor from the big four auditing firms in the world and/or a local audit firm, this will attempts to find a relationship between the combined expertise provided by the international and the local audit firm. The bank may employ both kind of audit firms, is to take advantage of the combined expertise and reputations of the auditors on the international and local level.

The importance of auditor reputation is explained by two things, the first one is that auditor reputation is taken and understood by shareholders to be a "substitute" for audit quality. The second one argues that auditors with a well-known reputation provide those who fund the firm with "extended collateral guarantees" in matters involving litigation. The first thing of auditor reputation being a substitute for audit quality is relevant in this present study as the better the quality of auditing statements is the higher their credibility. The reason more credible financial statements allow firms to find a lower cost of capital is because the increased credibility diminishes the information asymmetry between firms and shareholders. Moreover, auditor reputation is country specific (i.e. perceived auditor reputation is different for every country). Banks, having both an international and a local auditor provides for higher reputation standards and more credible financial statements.

Table 3. Intensity of Bank Monitoring-Part I

1. Rate the following principles of good corporate governance as they apply to the bank’s corporate clients? (1= Very Important and 4= Very Unimportant)

Average

Independent and effective board of directors 1.91

Internal control framework and reporting procedure 2.03

Risk management policies and procedures 2.09

Internal audit function 1.97

Formal code of conduct 2.48

Transparent disclosure and communications to stakeholders

2.00

2. What sources does the bank use to obtain information about its corporate clients? (Several entries possible)

Percentage

(%)

Frequency

N=41

Informal discussions 2% 1

Annual Reports 32% 13

Documentation provided by the client 29% 12

Information given by the bank’s information department 29% 12

Market investigation 5% 2

Internet 5% 1

Other BDL Reports, Official Newspapers, Suppliers, Economic Magazines

3. Does your bank require submitting audited financial statements yearly?

Yes 100.00% 41

No 0.00% 0

Yes

87.80%

36

No

12.20%

5

type of auditor required by the bank?

Local

17.07%

7

International

21.95%

9

Local-International associate

14.7%

6

Individual

0.00%

0

Any of the above

46.28%

19

to have internal auditors?

Yes

92.68%

38

No

7.32%

3

Not Important at all

0%

0

4. In your opinion does your bank require having external auditors?

5. If yes, is there any specific

6. In your opinion does your bank require

After having verified the importance of auditing, the second part of the analysis aims at evaluating the power of monitoring at this time taking place in Lebanon. From here onward, the respondents were asked to express the scope to which they agreed or disagreed with a given statement. They were asked to choose from four items to indicate their opinion: {4- Strongly agree, 3- Agree, 2- Disagree and 1- Strongly Disagree}. Table 4 summarizes the findings.

This table shows that bank officers are increasing their efforts in monitoring the companies by closer monitoring of borrowers after making loans in addition to more examination of loan applications. The main factors that motivate bankers to improve their monitoring efforts are the strengthened prudential regulations on Credit Risk management imposed by the Central Bank authority and better information from the clients which serves as a basis for constant monitoring.

Previously, the main constraints that banks used to face to conducting effective monitoring were a lack of transparency in the company’s financials, the weak bargaining power of banks vis-à-vis their clients, the poor system of managing client information, and weak incentives by bank officers to monitor well. This is complicated by the fact that banks were not penalized for neglecting monitoring, and loan decisions were often dictated by supervisors without much regard to screening. Furthermore some clients had been considered to be too-big-to-fail.

The bank officer responses in this section demonstrate an awareness of the importance of monitoring, in addition to an understanding of the compelling reasons to increase monitoring and root causes of prior neglect.

However, even though bank officers believe that they are improving their monitoring processes, this does not mean that the reasons for the earlier neglect have disappeared. The idea that some companies are too-big-to-fail still exists but not as widely as it used to. Furthermore, banks are not penalizing officers that do not monitor, and banks in Lebanon are still facing a high turnover of officers which is not helpful in the monitoring process. To attempt to improve this situation, the Central Bank is increasing rules and regulations that force banks to monitor their clients. Furthermore, it insists that banks keep a "watch list" of clients, and encourages banks to put conditions on none-performing loans and bad debts. All of these costs bank a lot of money, reinforcing the need for additional monitoring to reduce, as much as possible, non- performing debts.

The responses of bank officers to the last question of this section show that in times of financial distress corporate managers of all types most fear the creditor banks, followed by their fear of controlling owners, while in normal times they fear controlling owners first then creditor banks. This is an important reason why banks should monitor their corporate clients to avoid financial distress and to secure their debts.

Table 4. Intensity of Bank Monitoring-Part II

1. Are Banks making increased efforts to monitor companies?

Average

More serious screening of loan applications 2.55

Closer monitoring of the borrowers after making loans 2.24

More active role in corporate restructuring in the event of financial distress in borrowing firms

1.18

2. [If you answered yes on any of the items above] What is the most important factor that has motivated these enhanced efforts of monitoring by banks?

Higher risk of corporate default (including no more "too-big-to-fail"

Perception toward the chaebols Increased concern about the survival or growth of banks; lower chance of government bailouts of troubled banks

Strengthened prudential regulations on credit risk management imposed either internally or by the financial supervisory authorities

1.81

0.94

2.15

Debt-equity swap (as the result of workouts) that has made banks not only creditors but also shareholders in borrowing firms

0.73

4. What have been the most important factors constraining closer monitoring of borrowing corporations?

Weak incentives for bank officers to monitor closely 1.24

Difficulty in monitoring on the basis of corporate financial statements due to a lack of transparency

Difficulty in monitoring due to banks’ still weak bargaining power vis-à- vis borrowing firms (making information acquisition difficult)

Poor system of managing client information due to the high turnover of loan officers, shortage of manpower, etc.

Weak incentives for top bank managers: bank performance may not be the determining factor in the CEO’s objective functions

2.09

1.25

1.24

0.48

Inadequate expertise of bank officers in charge of monitoring 1.06

"Table 4-Continued"

5. How important is the role of banks in overseeing corporate management in comparison to that of other stakeholders? In other words, who do corporate managers fear the most (among controlling shareholders, outside shareholders, employees, and banks)?

Large Corporations

Small to Medium

Enterprises

Normal

Times

Times of Financial Distress

Normal

Times

Times of Financial Distress

Controlling Owners

1.23

1.43

1.17

1.53

Other Shareholders

2.40

2.63

2.63

2.87

Creditor Banks

2.37

1.40

2.23

1.27

Workers

3.27

3.33

3.50

3.30

4. Opinions on Bank Governance

This section’s main objective is to show the ideal bank ownership structure in terms of efficiency as well as avoidance of serious conflicts of interest between banks’ controlling shareholders and other stakeholders.

The most important factors behind the weak discipline in bank management, according to survey responses, are government ownership of banks, political and bureaucratic interference in banking operation, and duties neglected by other bank monitors such as the financial supervisory authorities or bank creditors. These answers are expected from bankers in Lebanon where most banks are owned by several large Chaebols or are family-owned businesses. With the exception of the Central Bank of Lebanon, no Lebanese banks are owned by the government.

Bank officers prefer, if they have the choice, not to allow large Chaebols to own and control major commercial banks, or to allow this only with strengthened prudential regulations. The main reasons for this are that, by doing so, Chaebols may abuse their market power to promote their own business and participating banks might discriminate against the Chaebol competitors in the provision of bank services and information, leaving much space for conflicts of interest. Moreover it might lead to favoring Chaebols since the entry into and competition in the banking sector would be restricted, contributing to further concentration of economic power and increasing ability for these conglomerates to distort government policies. Finally, this may lead to the bank being less stable than if it is a stand-alone bank due to its association with a Chaebol.