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Managerial Auditing Journal

The impact of control quality on the non-performing loans of Tunisian listed banks
Moufida Ben Saada,
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Tunisian listed
The impact of control quality on banks
the non-performing loans of
Tunisian listed banks
Moufida Ben Saada
University of Kairouan, Kairouan, Tunisia

Purpose – This paper aims to explore the extent to which the control quality impacts non performing loans
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(NPLs) of Tunisian listed banks by integrating the guidelines of Circular No. 2011-06 issued on 20 May 2011
by Tunisian Central Bank.
Design/methodology/approach – Regressions using panel data are applied on a sample of 11 listed
banks during the period from 2010 to 2015.
Findings – The results show that the presence of foreign directors on the Tunisian bank board affects credit
risk. These administrators, with knowledge, independence and technology transfer, exercise more control
than institutional administrators or state representatives. The risk committee is more effective than the other
committees (audit committee and credit committee) in reducing non-performing loans. The role played by this
body is the most important.
Practical implications – Testing empirically the impact of control quality on NPL by integrating the
guidelines of the Central Bank leads to a better evaluation of reforms’ application and effective measures to
strengthen the banking governance practices.
Originality value – By exploring the application of the Central Bank’s guidelines for strengthening post-
revolutionary banking governance practices, it becomes easy to assess the extent of the Circular No. 2011-06
by accounting practitioners, auditors and authority bodies to give the necessary recommendations for further
Keywords Board composition, Credit risk, Non-performant loans
Paper type Research paper

1. Introduction
The Tunisian revolution, which occured in 2011, had significant effects on the economy.
There is an exponential inflation that has deteriorated purchasing power, an acceleration of
the debt ratio and a loss of the stock index by more than 15 per cent (Kalfaoui and Ben
Saaâda, 2015).
The banking sector has been affected deeply in terms of reduced liquidity and increased
risk[1]. Tunisian banks, concerned about their profitability, increased their interest margins.
As a result, borrowers were unable to repay the service of their debts. This has led to an
accumulation of non performing loans (NPLs)[2].
The weight of the NPL is heavy on the Tunisian banks. These loans were initially 21
per cent over the 2002-2006 period. Then, thanks to the reforms of the Central Bank, these
loans[3] had reached 13.5 per cent of total credit in 2012. They correspond to $10bn in 2013
(Abid et al., 2015). However, they continue to plumb the banking sector with a rate of 16
per cent, the highest rate in the southern and eastern Mediterranean countries in 2015
Managerial Auditing Journal
© Emerald Publishing Limited
JEL classification – G21, G23, G24, G29, C23 DOI 10.1108/MAJ-01-2017-1506
MAJ (African Manager, 2016). They represent 17.8 per cent for state banks and 10.6 per cent for
private banks (Kalfaoui and Ben Saaâda, 2015). These loans have increased both the volume
of doubtful loans and the risk of insolvency.
Faced to this alarming situation, the State has embarked on reforms to restructure and
modernize the banking sector. The Central Bank[4], the sole body responsible for the
issuance of currency and control of banks, has established rules of good governance. These
rules concern the composition of the board of directors by proposing the inclusion of three
committees: a credit committee responsible for supervising the financing activity, a risk
committee responsible for risk assessment and an audit committee giving its opinion on the
financial statements and alerting the external auditor of any inappropriate investment.
The preoccupying state of the NPL, its implications and the new governance rules issued
by the Central Bank are the main motivating factors of this study. In accordance with these
rules, the objective of this paper is to evaluate the effect of control quality on non-performing
loans of banks after the Tunisian revolution. More specifically, we study the effect of the
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composition of the board of directors as well as that of the three committees on non-
performing loans. The study of this objective is interesting, as very little research tested the
effect of control on non-performing loans of banks after the Tunisian revolution by
integrating the guidelines of Circular No. 2011-06 issued the 20 May 2011 by the Central
To reach this objective, the study is carried out on a sample of 11 banks listed on the
Tunisian Stock Exchange (TSE) during the period from 2010 to 2015. There are 66
observations. The results show that the presence of foreign directors on the Tunisian Bank
Board affects credit risk. These administrators, with knowledge, independence and
technology transfer, exercise more control than institutional administrators or state
representatives. The risk committee is more effective than the other committees (audit
committee and credit committee) in reducing non-performing loans. The role played by this
body is the most important. External audit, banking performance, bank size, growth,
inflation and credit information impact non-performing loans in turn.
The paper is organized as follows: we expose the literature review in the first section to
present the hypotheses, we devote the second section to the presentation of the methodology,
we expose the results in the third section and in the last section, we conclude.

2. Literature review and hypothesis development

The process of banking governance is complex. The governance framework includes the
shareholders of the bank, its officers, employees and board of directors. This process should
reduce agency conflicts stemming from the separation between ownership and
management: shareholders seek to maximize the value of the company while the manager
wants to increase his own utility. These agency conflicts arise from agency costs (Berle and
Means, 1932; Jensen and Meckling, 1976). Governance, through its control over the manager,
is a solution that reduces these agency costs.

2.1 Bank specific factors

2.1.1 Composition of the board and non-performing loans. Banking governance is
characterized by opacity, supervision and regulation (Adams and Mehran, 2003). The
opacity derives from the information asymmetry between shareholders and manager. It
may extend between the latter and creditors, depositors and regulators. The reduction of
this opacity includes obligations to raise equity, reserves, increased disclosure and control of
adequate credit policies.
The effectiveness of any board of directors, particularly that of banks, depends on its Tunisian listed
characteristics. These include the dual positions of president of Board and chief executive banks
officer (CEO), independent external directors, institutional directors and foreign directors. In
Tunisia, banks[5] are characterized gererally by combining the functions of the manager. He
is at the same time chairman of the board and CEO (Law 2000-93 of 3 November 2000). The
board contains a modest proportion of independent directors. It is populated by different
types of administrators (institutional, foreign, state representatives).
2.1.2 Institutional directors. The presence of financial or other institutional directors
affects any decision that comes from the board. These directors, thanks to their large
financial resources, can control the actions of the manager and improve the performance of
banks (La Porta et al., 2000). They can access to private information from the bank, thus
having a better knowledge of the banking sector.
Empirically, the control exercised by institutional investors on the board is merely
studied. This control is weak because of banking regulations, which is a substitute for
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control (Elyasiani and Jia, 2008). The studies of Deng and Jia (2008) and Barry et al. (2011)
conducted in the US and European context, respectively, find mixed results: a positive
relationship between institutional investor participation and credit risk is explained by their
passivity in the control of the manager. On the contrary, a negative relationship between the
participation of institutional investors and non-performing loans is because of their activism
and their influences in the control of the manager (Boudriga et al., 2011). It is therefore
relevant to examine the relationship between institutional investors and credit risk.

H1. The presence of institutional investors on board is related to non-perfoming

loans. Foreign directors. The presence of foreign directors improves banking governance.
Banks with strong foreign ownership benefit from economies of scale and serve as a broad
customer base by opening subsidiaries to their customers. These banks easily access to the
capital markets and diversify the risks of their activities. In developing countries, such as
the case of Tunisia, banks with significant foreign ownership benefit from technology
transfer and good governance practices.
Empirically, Barth et al. (2002), Micco et al. (2007) and Lensink and Hermes (2004) found
that the presence of foreign directors improved banking performance. Boudriga et al. (2011)
showed that in a sample of 46 banks belonging to 12 countries studied during the period
from 2002 to 2006, the participation of foreign directors reduced non-performing loans.

H2. Foreign directors’ participation on the board affects negatively non-performing

loans. Representatives of the state and public institutions. According to the agency theory,
the participation of the state in the bank’s board reduces the disciplinary effect of the
financial market. Indeed, in such firms, the managers, appointed by the public institution,
privileges its own interest to the detriment of that of the bank. La Porta et al. (2002) shows
that government participation in banks of developing countries accentuates its
mismanagement. These banks suffer from high unproductive credit rates (Louzis et al.,
2011). In fact, the state has different goals that distance it from maximizing the value of the
bank. Instead, it undertakes to finance specific sectors, to grant direct export credits and to
collaborate with other State institutions. As a result, its control over banks is reduced. The
opportunist behavior of the manager gets worse and drives them to give risky credits.
MAJ Ahmad et al. (2016) showed that independent directors impact negatively on non-
performing loans of the Pakistani state-owned banks. They argued that managers try to
perform well in reducing non-performing loans to remain the firm’s chief. They confirmed
that managers are depending on the voting power of the shareholders that pushes them to
achieve the desired income.

H3. The participation of representatives of the State impacts positively the non-
performing loans.
The board of directors can fully fulfill its supervisory role only if it is supported by other
supervisory mechanisms, namely, the audit committee, the credit committee and the risk
2.1.3 Control committees and non-performing loans. The opaque nature of banks,
particularly in the balance sheet, as well as the existence of certain regulations such as
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deposit insurance, hamper the shareholders to control the risky behavior of the manager.
The shareholders leave that task to the board of directors. The latter, because of his heavy
responsibilities, can reduce his control on manager.
In Tunisia, the banking regulations of 2011[6] aim to establish better control of banking
and risk undertaken by the manager. To this end, this regulation calls for the establishment
of an independent support and assistance structure through the creation of three
committees: an audit committee, a credit committee and a risk committee. The audit
committee[7] controls the operation of the bank’s internal control system and reviews the
financial statements before their transmission to the supervisory board and intervenes in the
appointment of the external auditor. The credit committee examines the financing activity of
the bank and formulates its opinion on the credit categories. The risk committee manages
and assesses the risks incurred by the banking activity.
Empirically[8], no studies have tested the effect of these three committees on non-
performing loans. We assume that the control exercised by the audit committee, the credit
committee and the risk committee reduces the manager’s discretion in granting loans. The
extent of this control would reduce in turn non-performing credits.
H4. Control committees have a negative impact on non-performing loans.
The composition of the board and the interaction between the various committees (audit,
credit and risk) reflect the extent, the quality of control and represent the idiosyncratic
factors of the bank that affect credit risk. Other controlling factors influence credit risk.
These include bank size, audit quality and banking performance.
Big banks are accommodated in the consolidation and in the financing of the economy.
Small and medium banks are more vulnerable to risk diversification than large banks. We
consider that the total assets, which consist largely of customer deposits, have a positive
effect on the margin of the banking interests, reducing thus the non-performing loans.
However, this effect can be reversed if the deposits are used for speculative purposes.
Consequently, external audit is a governance mechanism that impacts non-performing
loans. The auditor communicates to the supervisory bodies and regulators the real risk on
bank assets, as well as any other relevant information to the assessment of banking risks[9]
(Gonzalez, 2005). External audit is a mechanism that increases the control on the manager.
Banking performance in turn affects non-performing loans. Indeed, the study of Kalfaoui
and Ben Saaâda (2015) showed that the most profitable Tunisian banks have the lowest non-
performing credit rates. Indeed, the most profitable banks are endowed with significant
resources stemming from the interest on repayment of loans granted by banks.
In addition to bank-specific factors, there are other macroeconomic factors that influence Tunisian listed
non-performing loans. banks
2.2 Macroeconomic factors
The accumulation of non-performing loans do not depend only on bank-specific factors but
also on macroeconomic factors. In this regard, an abundant literature[10] showed that the
evolution of non-performing loans reveals a cyclical nature.
Morakinyo and Sibanda (2016) have explored the dynamic relationship of non-
performing loans and economic growth in Nigeria. They find a long-run relationship
between the level of non-performing loans and economic growth in Nigeria during a period
of 17-year quarterly data from 1998 to 2014.
Salas and Saurina (2002), Fofack (2005) and Jimenez and Saurina (2006) found that in the
growth phase, measured by the GDP growth rate, the volume of non-performing loans was
low. In this phase, consumers and non-financial institutions have enough income to pay off
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their debts. Banks continue to provide credit. Conversely, in a period of economic recession,
borrowers are unable to repay their debts. As a result, the volume of non-performing loans is
Inflation is another factor that significantly impacts non-performing loans (Nkusu, 2011;
Klein, 2013). In a context of low volatility inflation, nominal interest rates are low. Therefore,
economic agents are encouraged to deposit their money in the banks. On the other hand, in a
context of high inflation, real interest rates become negative. Thus, depositors save no
longer their money and borrowers are no longer able to repay their debts, especially when
the interest rate is variable. Abid et al. (2015) and Kalfaoui and Ben Saaâda (2015) showed
that the inflation rate acts negatively on the non-performing loans of the Tunisian banks
studied respectively during the first quarter of 2003 until the fourth quarter of 2012 and
during the period from 2000 to 2013.
Ikram et al. (2016) found that the interest rate and inflation impact positively on the non-
performing loans of Pakistan banks. The most significant macro-economic problem rated by
the bankers is the high interest rate with 28.6 per cent, followed by 16.7 for inflation.
The credit information index affects non-performing loans. Kalfaoui and Ben Saaâda
(2015) showed that this index acts negatively on non-performing loans. If this index is high,
this means that the banks have all the necessary information before the credit agreement. As
a result, the risk of non-payment of credits decreases.

3. Data and methodology

3.1 Sample selection
The sample consists of all banks listed on the Tunisian Stock Exchange (TSE) during the
period from 2011 to 2015. The choice of the period is explained by the promulgation of the
circular of the Central Bank relating to good governance practices. The sample consists of 11
banks observed over five years. These banks are divided into three state banks (National
Agricultural Bank [BNA]; Housing Bank [BH]; Tunisian Society Banks [STB]), seven private
banks (Amen Bank [AB]; ArabTunisian Bank [ATB]; Attijari Bank; Arab International
Bank of Tunisia [BIAT]; Bank of Tunisia [BT]; Union Bank for Trade and Industry [UBCI];
International Union of Banks [UIB]) and a mixed bank (Tunisia and Emirates Bank [BTE]).
These banks represent more than 80 per cent of Tunisian banks and finance more than
three-fourth of the economy. We gather a total of 55 observations. The governance data as
well as the financial data were collected from the annual reports of each bank and the guides
of the TSE. Macroeconomic data were collected from database of World Development
Indicator (WDI).
MAJ 3.2 Definition and measurement of variables[11]
3.2.1 The endogenous variable non-performing loans labelled “credit risk”. Credit risk
represents the most alarming risk for the bank. It reflects the importance of bad debts.
Managing credit risk is important for the survival and the stability of banking institutions.
In assessing this risk, banks must distinguish their assets from the balance sheet and the
off-balance sheet by the following:
(1) Current assets, which represent a full recovery in time.
(2) Classified assets that correspond to the risk of loss and the probability of recovery.
They are classified in four classes:
 Class 1: assets requiring special monitoring;
 Class 2: uncertain assets;
 Class 3: acts of concern; and
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 Class 4: compromised or uncollectible assets.

3.2.2 The exogenous variables. We summerize the definition of exogenous variables, their
measurement and the expected signs in the following Table I.

Variables Measurements Expected signs

Explanatory variables
Institutional directors, denoted “Pr. Ins. Dir” Measured by the proportion of institutional –
directors in the board
Foreign directors, noted “Pr. For.Dir” Measured by the proportion of foreign –
directors in the board
Directors representing the state, noted “Pr. Measured by the proportion of the directors þ
State. Rep” that represent state or public institutions in
the board
Audit committee, rated “Nbr.Audit. Com” Measured by the number of annual –
meetings of the audit committee
Credit committee, noted “Nbr.Credit. Com” Measured by the number of annual –
meetings of the credit committee
Risk committee, noted “Nbr.Risk. Com” Measured by the number of annual –
meetings of the risk committee
Control variables
Nature of report, noted “” Measured by a binary variable which takes þ
the value 1 if the auditor’s report is
delivered with reserves and 0 otherwise
Size of the audit firm, rated “Big Four” Measured by a binary variable which takes þ
the value 1 if the audit firm is a Big Four
and 0 otherwise
Banking performance, rated “performance” Measured by the growth rate of net banking –
income (GRNBI)
Size of banks, denoted “size” Measured by the log of total assets of each þ
Economic growth, labeled “GDP” Measured by the annual growth rate of real –
The credit information index, referred to as The index varies from 0 to 8. The higher the –
“information” value, the more credit-related information is
Table I. available and reliable
Measures of expected Inflation, referred to as “inflation” Measured by the general consumer price þ
variables and signs index
3.2.3 Summary statistics. We present some characteristics of the sample. These Tunisian listed
characteristics are shown in the following Table II. banks
The results of Table II show that the credit risk incurred by all banks does not exceed an
average 2 per cent (assets requiring special monitoring). The minimum and maximum
values correspond, respectively, to 3.58 per cent for the STB in 2015 and to 7.2 per cent for
the same bank in 2011. We deduce that the full recovery of all assets on time is still possible.
The proportion of institutional and foreign directors in the board is more important than
that of directors representing the State. Similarly, the annual frequency of meetings of the
audit committee and the credit committee is two times greater than the risk committee.

3.3 Model estimation

To test the effect of the composition of directors’ board and the frequency of meetings of the
three committees (risk committee, credit committee and audit committee) on credit risk, we
make two estimations: The first one takes into account only the effect of the composition of
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the board of directors. We obtain Model 1. While in the second estimation, we introduce in
Model 1 three committees as mentioned above, to test their impact on the credit risk. We
then obtain Model 2. We introduce the controlling variable in Model 1, as well as in Model 2.
Consideration of individual data leads us systematically to an estimation of panel data to
better understand the factors explaining the variability of credit risk. Our empirical analysis
was based on annual data for a sample of 11 banks listed on the TSE over the period (2010-
The general specification of the model takes the following form: yi;t ¼
ai þ b EVi;t þ d CVi;t þ « i;t 8 i 2 ½1; 11 ; 8 t 2 ½2010; 2015, where Yit: is the credit risk,
EV: explanatory variables (composition of the board of directors and frequency of meetings
of the risk, credit and audit committees); CV: control variables and « it: the error term with E
(« it) = 0 et E (« it2) = s 2«
3.3.1 Model specification test. First, we test the hypothesis of a common constant for all
banks ðH0 : ai ¼ a 8 i 2 ½1; 11 Þ. If this hypothesis is rejected, we obtain the following
model with individual effects:yi;t ¼ ai þ b EVi;t þ d CVi;t þ « i;t ; with: « i;t ¼ ui þ eit ;
eit ! iid.
The results of the specification test or the existence of individual effects for the first and
the second regression is summarized in Table III.

Variable Mean SD Minimum Maximum

Risk_Credit 0.0186 0.0165 0.00358 0.0720

Pr. Ins. Dir 0.230 0.136 0.0833 0.583
Pr. For.Dir 0.232 0.211 0 0.583
Pr. State. Rep 0.125 0.189 0 0.500
Nbr.Audit. Com 4.939 1.080 2 6
Nbr.Credit.Com 4.682 1,729 0 11
Nbr.Risk.Com 2.318 2.047 0 6
Big Four 0.727 0.449 0 1 0.379 0.489 0 1
Performance 0.207 0.138 0.402 0.479
Inflation 5.022 0.822 3.609 6.103
Size 6.724 0.167 6.342 7.022
Information 4.167 0.904 3 5 Table II.
GDP 1.704 2.077 2,384 3.700 Descriptive statistics
MAJ At a risk level of 5 per cent, we accept the null hypothesis of equality of constantsfor both
estimations (p-value > 5 per cent). It is therefore not necessary to introduce individual
effects. It is a totally homogeneous specification. In this case, the most appropriate estimator
is the generalized least squared (GLS) estimator. The final specification of the two models is
as follows:

yit1 ¼ a þ b CBDi;t þ d CVi;t þ « i;t ðmodel 1Þ

yit2 ¼ a þ b CBDi;t þ g NAMCi;t þ d CVi;t þ « i;t ðmodel 2Þ

8 i 2 ½1; 11 ; 8 t 2 ½2010; 2015

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Yit: credit risk, CBD: composition of the board of directors, NAMC: number of annual
meetings of three committees (risk committee, credit committee and audit committee), CV:
control variables.
3.3.2 Heterocidasticity
 and auto-correlation tests. For heteroskedasticity of residues
s 2i 6¼ s 2 , we used the modified Wald test. The statistic of this test follows a Chi2 law with
11 degrees of freedom. At a 5 per cent risk level, the null hypothesis of heteroskedasticity of
the residues is accepted for both models, and the p-value = 0.0000 is less than 5 per cent.

3.4 Estimation results

The estimation results[12] of Models 1 and 2 are summarized in Table IV.
The proportion of institutional investors is negative but not significant. This result
confirms the thesis of the passivity of institutional investors in the control of the manager.
By joining the results of Elyasiani and Jia (2008), we conclude that the role played by these
investors remains limited. In Tunisia, the Central Bank intervenes heavily and influences
the credit policy of banks to guarantee the interests of some influential parts even after the
revolution (Boussada, 2012). The granting of credit depends on relational knowledge, family
membership or political affiliation.
In Model 1, the presence of foreign director is negative and significant at 5 per cent. The
presence of foreign director on the Tunisian Board of Banks is an indicator of good
governance. This director exercises his supervisory role better than a local director. He has
more expertise (Choi and Hasan, 2005) and independence (Gulamhussen and Guerreiro, 2009)
than a local director. He transfers technological advances. All these qualities enable the
foreign director to improve the independence of the board, to control further the credit policy
and to reduce the granting of non-performing loans (Choi et al., 2007; Barth et al., 2002).
According to Model 1, the presence of state representatives is positive but not significant.
Credit risk is not linked to the participation of represented government on the board. This
result can be explained by the privatization efforts launched since 2002. Indeed, faced with
the financial difficulties encountered by state banks, the Central Bank has advocated
privatization, restructuring and reform of the directors’ board.

Table III.
Regression n° F Test that all u_i = 0
Test of specification
or test of existence of 1 F (10, 46) = 1.89 Prob > F = 0.0713
individual effects 2 F (10, 43) = 2.18 Prob > F = 0.0584
Model 1 Model 2
Tunisian listed
Variables GLS GLS banks
Pr. Ins. Dir 0.00947 (0.00598) 0.00290 (0.00891)
Pr. For. Dir 0.0233*** (0.00846) 0.0218** (0.00890)
Pr. State. Rep 0.00647 (0.0314) 0.0205 (0.0322)
Nbr.Audit.Com 0.00152 (0.00106)
Nbr.Credit.Com 0.000205 (0.000714)
Nbr.Risk. Com 0.00154** (0.000769) 0.0226*** (0.00697) 0.0252*** (0.00564)
Big Four 0.0293** (0.0129) 0.0379*** (0.0138)
Performance 0.0419*** (0.00478) 0.0438*** (0.00480)
Size 0.0135** (0.00603) 0.00258 (0.00795)
Inflation 0.00222** (0.000960) 0.00245** (0.00112)
Information 0.00250** (0.00118) 0.000883 (0.00186)
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GDP 0.00139*** (0.000506) 0.00101* (0.000553)

Constant 0.0853** (0.0394) 0.0351 (0.0503)
Observations 66 66
Number of Id 11 11
Table IV.
Notes: Standard errors in parentheses; ***p < 0.01, **p < 0.05, *p < 0.1 Estimation results

On the managerial level, the directors’ board have to collect vital information during the loan
application process to minimize the risk of non-repayment. They must diversify the
granting of credits to several customers with real guarantees and not be limited to a few
ones as was the case of the public banks, specifically the STB and the BNA. The directors’
board with the credit and the risk committes should implement an aggressive credit
collection policy. They can set up a sharing of information among banks about borrowers
and the use of specific limits and ratios based on cash flows in the evaluation process.
To identify the effect of audit, credit and risk committees on non-performing loans, we
introduced them into Model 1. We got a Model 2. The results of this model show neither the
presence of audit committee nor that of credit that affects non-performing loans. This result
can be explained by the variation in the composition of these committees from one bank to
another. Marrakchi and Ben Hassine (2006) showed that the independence of the audit
committee is not always verified, although it is stipulated by Article 32[13]. In the first group
of Tunisian banks, the audit committee is made up of internal directors. In the second group,
there is a CEO in the committee. In the latter group, there are only independent directors in
the committee. Consequently, the creation and functioning of the audit committee do not
improve the control exercised over the preparation of the financial statements, the
supervision of the work of the internal audit and the external audit. The credit committee
does not affect the credit risk. This result is also explained by the problem of independence.
In fact, it is the financial directors, general and rarely external and independent directors
who make up this committee. The dependence of committee members hampers the
effectiveness of their oversight role, facilitates corruption and increases the relational
impact. All these circumstances reduce control over the granting of credit and increase the
likelihood of risky credit.
On the contrary, the risk committee appears to be negative and significant at 5 per cent.
The risk committee assists the board in the design and in updating of a management
strategy for all risks. This committee is responsible for monitoring customer credit and
approving risk measurement. Besides these heavy responsibilities, we find that the majority
MAJ of the members of this committee are independent, as it is noted at the end of Article 28 of
this circular[14]. Thus, the combination of independence with the responsibilities of the
committee strengthens control over the granting of credits and reduces the likelihood of
risky credits.
On the tactical level, the three committees with the collaboration of directors’ board seek
an increased credit information during loan application and a rescheduling of loans. They
need to study in depth the oldest and most risky non-performing loans, as was the case of
BNA. They have to evaluate credit worthiness of borrowers. They may also recommend the
waiver of interest.
For the control variables, we find that the size of the bank is positive and significant in
Model 1. This result means that big banks are accommodated in the consolidation, financing
of the economy and risk diversification (Kalfaoui and Ben Saaâda, 2015).
We note from the results of Models 1 and 2 that the size of the audit firm and the nature
of the report are positive and very significant at the 1 per cent threshold for Model 2. This
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result shows that the control exercised by the external auditors affect the credit risk[15].
More specifically, the auditor’s belonging to a renowned firm, like the big four, increases its
supervisory role. In the event of a high credit risk, the auditor proposes to restrict the
granting of credit or to increase the provision. He may even carry reserves to alert the bank
to the state of its risky credits. In Model 2, we note that the addition of audit committees
improves the control environment. It strengthens the auditor’s control, reduces audit risks
and helps the auditor to implement recommendations (Marrakchi and Ben Hassine, 2006).
The performance, in turn, is negative and very significant in both Models 1 and 2.When
the value of non-performing loans exceeds a certain level, the bank’s profitability is affected,
as it will have less revenue from the interest of its loans. In this situation, banks will be
forced to set up a safety net in the form of provisions. Because of lower revenues and
provisions built up under the worst-case scenario, the bank will have limited resources to
provide new loans that reduce its profits and hence its performance.
For macroeconomic variables, we found that inflation is positive and significant. This
result supports the work of Nkusu (2011), Klein (2013), Abid et al. (2015) and Kalfaoui and
Ben Saaâda (2015). GDP growth is a macroeconomic variable that negatively and
significantly affects non-performing loans in Model 1 and in Model 2. When households
repay their debts, banks are performing well; they can provide new credits that create
wealth and increase the economy’s GDP (Abid et al., 2015). The credit information is
negative and significant in Model 1, as shown in the study of Kalfaoui and Ben Saaâda
By combining microeconomic factors and macroeconomic factors, we deduce that
governance practices affect credit risk and bank stability as well. These practices, as
foreseen in the Central Bank circular, reinforce the control exercised over the banks,
establish sound and careful management, which guarantees their financial soundness while
preserving the interests of shareholders, creditors, depositors and staff.

4. Conclusion
The accumulation of non-performing loans is a crucial issue for the economy in general and
for the Tunisian economy in particular. In response to this issue, the Central Bank has
introduced several mechanisms, including the strengthening of good governance practices.
The objective of this article is to test the effect of the composition of the board on non-
performing loans on the one hand and to study the impact of the committees, as provided in
Circular No. 2011-06 of 20 May 2011, on non-performing loans on the other hand. The study
involved a sample of 11 Tunisian listed banks during the period from 2010 to 2015. The
estimation results using panel data show that the presence of foreign directors affects the Tunisian listed
credit risk. In fact, these directors enjoy a greater independence and are endowed with more banks
advanced technological knowledge than local administrators. They have more control and
can reduce the granting of risky loans.
It appears from this article that only the risk committee negatively impacts the credit risk.
This committee is responsible for assessing the various risks faced by banks. Its oversight
role appears more important than that of other committees, namely, the credit committee and
the audit committee. Concerning the specific control variables of the bank, the size of the
external audit firm, the nature of the report, the size of the bank and the performance affect
the credit risk for macroeconomic control variables, the results found show that inflation,
economic growth and credit information significantly influence the credit risk.
We conclude from this study that applying good governance practices, as required by the
Central Bank, is still limited. In this sense, we support the requirement of the independence of
all directors who make up the committees to ensure their oversight role. Similarly, we propose a
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detailed exposition of the roles played by each committee in a supplementary circular to make
convenient use of governance practices that would reduce non-performing loans.
Authority bodies, Central Bank, have to take account the results of this study to improve
the working of the committees together. Therefore Central Bank, with the association of
governmental bodies, need to take effective measures to strengthen the legal framewok and
the institutional environment. These measures guarantee a better control of credit risk and
ensure the stability of the financial system.
Finally, to better understand the interaction and the relationship between banks’ credit
risk and their governance mechanism, further investigations are needed to include internal
auditing, voluntary disclosure and culture factors.

1. The overthrow of the old regime, in early 2011, highlighted the failures of appliance of bank
governance in Tunisia. The banking sectors were most affected by corrupt practices (Kalfaoui
and Ben Saaâda, 2015).
2. A loan is considered “non-performing” after a 90-day delay in payment (European Central Bank,
3. The World Bank with the IMF has developed for the countries of the Middle East, which includes
Tunisia, a Financial Sector Assessment Program translated as Basel agreement. Tunisia has
applied Cook ratio in 1999. The minimum level of required capital was approximately 10 per cent
(Boudriga et al., 2011).
4. The Central Bank sets prudential regulations (Act No. 2001-65 of 10 July 2001). These rules
concern the management, administration and control of the banks.
5. The study of Boudriga et al. (2011) showed that only three Tunisian banks have a dual system of
ten. This domination of power in the hands of the manager is explained by the high
concentration of capital.
6. Circular No. 2011-06 of 20 May 2011 on the strengthening of the rules of good governance in
credit institutions.
7. The establishment of the audit committee in Tunisian banks exists since 1999 (Banking industry
standard No. 22). However, the banks have integrated the audit committee in their supervisory
boards after the promulgation of Law 2001-65 July 2001 on the banks (Article 34).
8. The only study of Marrakchi and Ben Hassine (2006) showed that the creation of an audit
committee does not significantly influence the functioning of the Board of Tunisian banks.
MAJ 9. Banks are exposed to a variety of risky classified into four categories: credit risk, market risk,
liquidity risk and operational risk (Greuning and Bratanovic, 2004).
10. Several studies have shown that the rate of unemployment, the legal environment, the corruption
are all factors that influence non-performing loans (Salas and Saurina, 2002; Boudriga et al., 2009;
Messai and Jouini, 2013; Abid et al., 2015).
11. All variables are from WDI, the Tunisian Central Bank (BCT), the Tunisian Professional Association
of Banks (TPAB) and annual reports of listed Tunisian banks during the period 2010-2015.
12. The results of Models 1 and 2 are from the STATA 2013.
13. Article 32: “The permanent internal audit committee should be chaired by an independent
member of the board within the meaning of Article 13 of this circular and enjoying a qualification
and expertise in finance and accounting”.
14. Article 28: “The risk committee must be chaired by an independent member of the board within
the meaning of Article 13 of this circular and enjoying a solid qualification and good expertise in
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management risk”.
15. According to banking regulations in 2008, Tunisian banks must be audited by two statutory

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Corresponding author
Moufida Ben Saada can be contacted at:

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