Corporate governance and the external monitoring of banks in Lebanon

Abstract

Purpose Prior research suggests that corporations in countries with a weak and illiquid stock market rely either on internal resources or on loans from the banking system, while family businesses, in their desire to maintain control, prefer debt to equity. Owing to the weak external monitoring role played by the financial markets in Lebanon, this paper aims to goes beyond the financial role played by Lebanese banks by investigating their role in monitoring corporate clients. Design/methodology/approach A survey was conducted which included 12 questions and focused on the role of banks in Lebanon in fostering proper practices of governance amongst their corporate clients. The completed surveys represent 24 banks, with more than 85 percent of the total deposits, 89 percent of the total loan portfolio, and spanning all bank groupings. Findings The paper finds that, in addition to their financing role, Lebanese banks are both active monitors of and resource providers to their corporate clients, which is consistent with Hillman and Dalziel. Originality/value The paper contributes to prior research on the role played by the banking system in supporting economic growth in developing countries, as well as the large number of reports and recommendations on corporate governance in the MENA region. The empirical findings indicate that developing‐country banks have a substitution role that allows them to act as channels for implementing good corporate governance practices. Specifically, the greater involvement of banks with their larger corporate clients may ensure better oversight of the risks encountered by banks in their clients' operating activities.

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