Relationship between board characteristics and non-performing loan: A comparative study of Islamic bank and Conventional bank

Abstract

The research aims to analyze Islamic and conventional banks in Bangladesh by taking the relationship between board characteristics and non-performing loans (NPLs) in the banking sector as the main issue. How board structure, independence, diversity, and competence affect credit risk management is very important to know, because non-performing loans (NPLs) are a major risk factor in the banking sector and they greatly affect the stability of the financial system. The research will assess the possible impacts of certain board characteristics (size, independence, and the presence of politically connected members) on non-performing loans (NPLs) in Bangladesh's two banking types. The analysis reveals that the governance of the board is very successful in letting the NPLs down. The independent board and the financial expert are shown as having a positive impact by better oversight and, thus, strengthening the practices of monitoring the lending. In Islamic banks, Shariah knowledge and the governance in place also indicate a significant impact on the quality of loans. On the other hand, the larger boards and political connections are seen to have mixed effects on the NPLs, which differ between Islamic and conventional banks because of the different operational frameworks and regulatory requirements. The study, therefore, suggests that the banks in Bangladesh, both Islamic and conventional, can improve their financial and risk management practices by having strong board structures that are able to produce good quality assets and are thus sustainable.