Corporate Governance and Banks’ Capital Adequacy in Gambia: The Moderating Impact of Politics

Abstract

Bank failures and banking crises create fears and anxieties in various stakeholders; and some of remote causes of bank failures across the globe are weak/poor corporate governance structures and practices, credit risk; government recapitalization regulation; corruption and embezzlement of banks’ assets; and weak legal/regulatory and political institutions. Undercapitalization is a symptom of banks’ capital inadequacy to withstand financial shock. Anchored on stakeholder-institutional theory; and secondary data, and general linear model, this study investigated the moderating impact of politics on the relationship between board effectiveness, management efficiency and capital adequacy of Gambia’s banking sector while controlling for financial leverage. The studied established that: the interaction of political stability and board effectiveness in risk management has significant negative effect on banks’ capital adequacy in Gambia; the interaction of political stability and management efficiency in profit maximization has significant positive effect on banks’ capital adequacy in Gambia; financial leverage has significant positive effect on banks’ capital adequacy in Gambia; board effectiveness in risk management has significant positive effect on banks’ capital adequacy in Gambia; and management efficiency in profit maximization has significant negative effect on banks’ capital adequacy in Gambia. The relevance of the joint stakeholder-institutional theory was established in this study. The work recommends that all political stakeholders in Gambia should strive to stabilize the country’s political system, and that the board of directors of banks in Gambia should ensure that their management teams apply prudent and best banking practices in declaring profit. This is because a positive profit should increase the capital adequacy of banks in a normal situation.