Governance and Insolvency Risk in Banking: A Systematic Literature Review

Abstract

Amidst the rapidly evolving banking sector and the consequential increase in insolvency risk, exploring extensive governance mechanisms to ensure financial stability is critical. This study conducts a systematic literature review to examine the role of Corporate Governance (CG), Shariah Governance (SG), and Institutional Governance (IG) in managing insolvency risk in banking. The review analyzed 55 relevant articles from Scopus and Web of Science (WoS) databases from 2012 to 2022 using the Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) framework. Thematic analysis produced three main themes: governance, bank-specific and macroeconomic factors, further divided into 12 subthemes. The weight analysis indicates that none of the governance mechanisms can be considered the best predictor. Well-utilized factors include board size, duality, independence, audit committee size, and public, government, foreign, and institutional ownership. Promising variables for effective risk management include CRO independence, risk and audit committee meetings, audit committee experience, Shariah Board size, and adherence to the rule of law. Moreover, the review sheds light on the areas that require further investigation and suggest recommendations for future studies. The findings revealed that governance has diverse dimensions and varying effects on risk management strategies, enriching the theoretical understanding of its role in banking. It highlights the critical need for a more integrated approach to governance in banking risk strategies, considering the unique demands of CG, SG, and IG to mitigate insolvency risk effectively. This study offers insights to banks and regulatory bodies on implementing effective governance structures for sound risk management practices towards strengthening the banking system's resilience.