Purpose. This study aims to explore the role of corporate governance (CG) in the financial soundness of banks in Pakistan.
Design/methodology/approach. We analyzed the panel data of 21 commercial banks in Pakistan from 2006 to 2017. The CG score was measured in a composite manner based on: the audit committee, board size and independence, CEO duality, and managerial ownership. Financial soundness was measured using Z-scores based on the ROE & ROA of banks.
Findings. The results show a positive role of CG in the financial soundness of banks in Pakistan. Further findings show that an increase in credit risk plays a negative role in banks’ financial soundness. Moreover, the interaction of CG and credit risk positively impact banks’ financial soundness. Specifically, the risk management side of CG ensures the banks’ financial soundness in Pakistan.
Originality. The findings provide important policy implications for the policymakers of Pakistan who are responsible for financial soundness in the country, suggesting that the focus on risk-taking channels be maintained.