Ownership in Financial Sector: Analytical Essay

Backbone of the country’s economy is the financial sector. It plays the part of facilitator to attain constant and continues development of economy through providing actual monetary intermediation. A robust economic system through a competitive atmosphere encourages investment via financing productive business opportunities, mobilizing economies, efficiently distributing resources, and enabling trade in goods and services. Banking system is the chief component of financial system, playing a very noteworthy role in the countries’ economies. The wellbeing of the economy is meticulously related to the soundness of its banking system, which is the outcome of efficiently managing of government and tax management principles.

In both developed or developing economies, the banking system has a dynamic part in the advancement of development of economy. It is the heart of economic structure. It provides the capital for industry, agriculture, and other activities and it is like the blood in it. Contemporary trade and commerce would be nearly dreadful if short of the availability of satisfactory competitive banking facilities. This is for the reason as they encourage the saving, endorses investment in country, agricultural trade; permits foreign trade in the form of exports and imports, which is very imperative in the existing situation.

According to Kim et al., 2012, functions of banks are entirely changed from commercial banks 'retail banking functions, though in Malaysia there are State-owned banks as financial organizations. Consequently, there is only two types of Bank ownership with in the Malaysia, which are private banks and foreign-owned banks. The ownership structure is the comparative amount of possession prerogatives apprehended by outsiders (stockholders lacking direct role in the running the company) and management (insiders). The majority ownership specifies the advanced authority of owners in controlling the bank. In short, there have been numerous bank terminations and a considerable refurbishment of banking guidelines in Malaysian banks. Experimental investigations show that administrators should be worried regarding ownership and that the effects of good governance on good banking performance and profitability. These discoveries approve that foreign-owned banks execute upright corporate governance and thus having an amplified gain in growing performance, and same with the private banks owned by the country. Thus, having healthier performance than foreign-owned banks. Good corporate governance performance in commercial banks will be constructive for banks to continue the level of risk they can be able to accomplish and providing investors an adequately innocuous level of their investments. Consequently, domestic and private banks maintained by Malaysia have a decent performance owing to the execution of higher corporate power.

In Pakistan, it is proposed that all substitutions of the ownership structure i.e. management ownership, institutional ownership, foreign ownership, and block holders have a weighty effect on risk-taking behavior. Managerial property has a noteworthy positive impact on risk-taking behavior while institutional ownership has a significant negative impact on the risk-taking conduct of banks in Pakistan. Alternatively, foreign property and block holders have a negligible impact on risk-taking behavior. The result of Bank identification is also substantial showing that the ownership structure has a noteworthy impact on bank risk-taking in conventional banks while in the ownership structure of Islamic banks does not have an impact on the risk Bank. (Arif et al., 2018)

According to oryzalin et al, 2015 who conducted research on Russian banks on post crises period of 2010-2012, demonstrated that foreign ownership is fairly and meaningfully interrelated to operating performance, backing up the assessment that foreign investors are authorizing the finest corporate governance practices. The outcomes illustrate that banks apprehended by foreign investors have advanced operational performance in a post-crisis period in the context of Russia, supporting the results of Hasan and Marton (2003), Kasman and Yildirim (2006), Bayyurt (2013), who stated that Bank results and foreign ownership are positively linked with each other. In terms of management ownership, the fallouts specify that there is no relationship between management ownership and performance of banks. Opposing to prospects, these discoveries do not back the declaration of the Agency's theory, that managerial ownership enhances the performance of banks. These results are constant with the empirical data provided by Demsetz and Lehn (1985), Vefeas and THEODOROU (1998), and El Mehdi (2007) who determined that the managerial property has no influence on the bank performance. The outcomes for Government ownership show that the authority and impact of the State have no impression on the performance of the banks. Nevertheless, the Government ownership is positive and significant statistically impacting ratio ready/deposits meaning that the capital is injected by governments into industries facing hardships in a post-crisis period via State banks for macroeconomic equilibrium.

A study in China indicates that the Bank's type of ownership has a noteworthy impact on the bank's overall performance. The domestic banks and State owned, have a negative and significant relationship through the overall performance, signifying that these banks have a comparatively deprived performance relating to foreign banks. Foreign banks attain improved performance compared to national and public banks because foreign banks have depended on the human capital and skill of their parent banks, have up-to-date technology, providing improved competitive advantage and therefore healthier performance than national and public banks. Consequently, supporting Berger et al. (2009), who discovered that foreign banks are more competent as compared to private and domestic banks. In terms of profitability, outcomes propose that public and national banks seem like more lucrative related to foreign banks, contradicting a few studies in transitional economies Bonin et al. (2005a). Foreign banks may be deprived in terms of the cost of bringing the similar financial services relative to national banks owing to variances in language, ethnic, regulatory, and controlling models, constant with the conclusions drawn by Chari and Henry (2002), proposing that the entry of a foreign bank would help only if it has well known how of new market. Results propose that at the macroeconomic level, GDP growth and inflation appear to have an influence on the banks performance. The conclusion that the Bank size has a negligible and negative impression on performance is too in opposition with literature that huge firms have a tendency to decrease risks and fetch economies of scale hence, improved performance. Inflation is also positively associated to the performance measures, constant with the conclusion of Bourke (1989) and Boyd et al. (2001), specifying that low inflation is usually related with more profitability, as lower inflation decreases the operating costs of banks and expands performance. In terms of GDP growth rates, findings propose a negative but significant relationship between Bank performance and GDP, recommending that a GDP growth is related with an upsurge in prices and a rise in the provision for loan losses, resultant in a negative impact on the profitability of banks. (Boateng et al, 2015)

Banking in China has undertaken transformations in the previous 30 years. A study was conducted on commercial banks working in China for the period of 1995-2008. The yield of banks has enhanced considerably to 56 to 76 percent in the period of 1995-2008. Banks with widely held state ownership have truncated efficacy and are the most unprofitable. No noteworthy difference was found in bank's performance with or short of smaller ownership of foreign banks (Jiang et al, 2012).

If the risk preference of banks and ownership structure are concerned, all examinations have diverse outcomes. The studies suggest that there is a problem with agent of bank. There is a chief impact of managerial ownership on liking of taking risk. It is decided that in risk-taking behavior of bank, the main reason is ownership structure. According to Paligorova, shareholders with high equity lean towards more conventional strategy of investment thus stabilizing the value of their assets. Iannotta et al. investigates 181 European banks from the time of 1994 to 2004, showing that owners equity intensity does not meaningfully modify the banks ‘productivity. Some scholars be certain of that if concentration of ownership is high there will be high preference of risk. According to Anderson et al. stockholders can bear larger risk than managers.

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There is a positive relationship, in between risk-taking behavior of banks and ownership concentration according to Leaves study. when the ownership concentration is in low level, agency problem will come. Banks govern by bondholders have greater enthusiasm of taking risk than the banks administer through management. Minor and mid-sized stockholders will have an inferior drive for taking risk as compared to large shareholder, thus controlling shareholders have restricted strategy of investment. At that moment if there is increases in equity balance, management will control the bank, thus having lesser preference of risk as compared to stockholders. (Haoxuan Zhong,2017)

According to study conducted by Felício et al, 2013 though the maximum concentration of shareholders is observed in European banks, outcomes found do not back the reality of a linear relationship of performance and the concentration of the shareholders. So constant with the results that there is no meaningful relationship detected by SilvioSalsero et al. (2007); Kaymak and Bektas (2009). It was also observed that there is a negative effect of financial leverage on banks performance measured through operational performance like margin of profitability. It has been observed that the bigger banks having headquarters in the European country not in eurozone are expected to get a lower ROA. consequently, attain the lower profitability but if situated in the eurozone, margins progress. This is contrary to literature review that the size of the banks positively influences performance (Kiel & Nicholson, 2003). It was also observed that influence of block carriers’ participation does not affect on performance. It is also determined that the worth of banks in the stock market is hindered by the board size. Furthermore, the location of the headquarters and the size of the banks in the advanced economies influence negatively on the bank's profitability margins.

The economic crisis that instigated in 2007 bring about closures of many firms, plus banks around the world. The reason of the financial collapse may be because the boards of directors of the key organizations have unsuccessful to recognize and respond appropriately and instantly to evolving dangers (Lloyd, 2009). The steadiness and productivity of the banking sector initiated to tremble, intimidating the international economy. Hence, studies conducted from 2008 to 2009 on banks in Europe, Canada, Australia and Japan. The results indicate an insignificant association among corporate governance and bank's performance. It is also observed that developed continents like Australia and America display advanced levels of bank performance. As defined earlier that the current financial crisis has infected all monetary institutions, counting banks, directed to a deteriorating performance and therefore profits. It was also detected a positive bond between insider ownership or managerial ownership and performance, signifying that there would be better performance if more shares are held by insiders like large shareholders, administrators and executives. (PapanikolaoU Ermina, Patsi Maria, 2010)

The first obstacle among stockholders and administrators that arises in the absenteeism of proper motivations or adequate supervision to bring into line the executive's concentration along with shareholder. The second agency hurdle exist among the stockholder and minority control. This causes commandeering of majority stockholders over minority bondholders. role corporate governance like ownership structure plays the role to lessen both costs (Sheiffer and Vishny, 1997). If there is low ownership concentration first agency problem is mainly destructive. In this condition, growth in ownership concentration decreases the free-riding in monitoring. As a result, first agency problem is lessened, thus performance will progress. This is applicable up to the point where the concentration of ownership is large so that stockholders have a substantial stake also known as block holders. These block holders have authority to follow the practices that solitary support block holders’ motives. In this situation, second agency problem is more significant than first agency problem as ownership concentration amplifies. The result in reduction in performance. When block holders have a sufficient stake, they assume a huge percentage of the commandeering costs. This drives to an enhancement in performance (Magalhaes et al, 2008)

Inessa Love and Andrei Rachinsky did a research on Ukraine and Russian banks in 2004 and 2003 and 2006 respectively. It was observed that corporate governance has a lesser impact on operational performance in the banks of Ukraine and Russian. It was too found that banks having larger concentrated ownership have lesser standings on corporate governance in both countries of Russia and Ukraine. corporate governance is possibly play a vital part in the problem of steadiness of banks and its capability to offer liquidity in tough market situations.

Ownership concentration owns significant and positive relation with Jordan bank performance signifying principal–principal conflict that can be acutely rooted in the banking sector of Jordan. In contrast, foreign and institutional ownership do not affect the performance of the banks. This outcome could be partly owing to the explicit features of the banks listed on Amman Stock Exchange (ASE) only. Regarding the corporate governance aspects, the resource dependence theory is reinforced, suggesting larger board size may drive to improved performance via ROA as of the diverse knowledge, skills, and expertise taken into meeting room conversation (Asma’a Al-Amarneh, 2014).

Given the swift evolution of Islamic banks round the globe a study was conducted on 105 Arab banks during the period of 2005 – 2009. It was found out that variations in shareholder structure are noteworthy in justifying the risk-taking behavior and performance of banks. Conventional banks along with concentrated ownership have inferior performance related to healthier performance in Islamic banks. Consequently, Islamic banks stick to the assumption of convergence of interests, where active checking of the concentrated ownership structures drives to an enhancement in the performance of banks. Conventional banks, alternatively, follow the assumption of entrenchment in which the widely held shareholders perform actions that commandeer minority shareholders, therefore generating differences of agencies resultant in deprived performance. So, the conflicts among principal agents are more intrinsic to conventional banks, considering effect on performance. It was also exposed that banks situated in countries with stouter shareholder rights are expected to accept lower risk-taking behavior, with no substantial variance among Conventional and Islamic banks. In countries wherever the fortification of shareholder rights is sturdy, can direct to more unrestricted influence on management and eventually less risk-taking. Incidentally, conflicts among principal agents are vital in Islamic and conventional banks since statistically weighty impact of shareholder rights on risk-taking behavior. It can be determined that the characteristics of governance are significant factors of the performance of Islamic banks. It can also be decided that governance machineries intended to protect shareholder benefits in conventional banks may not be sufficient in risk-taking behavior. (Mona Fayed, Asmaa Ezzat, 2017).

Riewsathirathorn et al, did research on banks of East Asia region in 2011 and brought to light that the more concentrated ownership is, the poorer, higher operating costs, bank performance, and less risk-taking will be. The inferior performance proposes that, as ownership turn out to be more concentrated, governing shareholders are more capable to manipulate minority shareholders, aggravating the agency conflict and subsequently in bank’s poorer performance. To the extent that risk-taking is concerned, the observed results that concentrated ownership enforces penetrating supervising on managers, roasting their encouragements to accept new risk. It was also proved that the route of causality goes from ownership to bank performance than other way round.

Study conducted on Kenyan banks by Rokwaro Massimiliano Kiruri in 2013 deduced that greater ownership concentration heads to commercial banks’ lesser profitability in Kenya. Thus, when the quantity of block holders escalates in a bank, the functioning of the bank descents whereas when the number sinks, performance upsurges. The research observed that foreign ownership is constructively linked with profitability of bank. it was also observed that domestic ownership is positively associated with banks’ profitability. There is a negative association of state ownership with banks proving that more the state ownership is, a reduced amount of profitability of banks.