The influence of Corporate Governance on Credit Rating in Pakistan
Keywords:Corporate Governance, Credit rating, Islamic Corporate Governance, Ordered Logistic Regression, Islamic Banks
Credit rating agencies have great significance in the growth of the financial industry by giving confidence to borrowers and lenders through expressing their opinion on the ability of the institution to meet its financial obligation through credit ratings. Therefore, if the governance structure is weak, credit rating agencies are likely to expect poor financial position and vulnerability of the stakeholders' interests. The purpose of this study is to determine whether the corporate governance characteristics of Islamic banks influence Islamic banks' credit ratings. Data is calculated from the annual reports of 22 banks in Pakistan for 14 years from 2007 to 2014. The results show that the board size, board members' independence, CEO tenure, blockholders, foreign investors, Shariah board size, education levels of Shariah supervisors, and Shariah board expertise negatively affect credit rating when bank-specific financial variables are used as the control variables. On the other hand, credit rating is positively correlated with board independence, foreign directors, women directors, board meetings, listing shares, size of audit committee members, audit committee meetings, changes in the structure of the shariah supervisory board, and foreign shariah experts. As a result, Islamic banks in Pakistan show strong corporate governance, leading to better credit ratings.