Board Diversity, Governance Quality and Financial Sustainability of Nepalese Commercial Banks

Abstract

Background: Board diversity and governance quality has become important in the case of Nepalese commercial banks where good governance practices and long-term financial sustainability have become a necessity in the increasingly competitive and regulated financial environment. Therefore, this study examines the effect of board diversity on financial sustainability of Nepalese commercial banks with governance quality as a mediating variable.

Methods: This study employed a quantitative research approach with a structured questionnaire using a five-point Likert scale. Data were collected from 290 respondents comprising board members, senior executives and governance professionals working in Nepalese commercial banks. Data were analyzed by Structural Equation Modeling (SEM) using SmartPLS 4.0. For the measurement model, Cronbach’s alpha, composite reliability, convergent validity, and discriminant validity were evaluated.

Results: The findings reveal that the effects of board diversity and governance quality on financial sustainability are significant and positive. Moreover, governance quality significantly mediates the board diversity and financial sustainability nexus implying that diverse boards improve financial sustainability through better governance practices including transparency, accountability, effective oversight and strategic decision-making.

Conclusion: The study shows that board diversity and governance quality are important factors in ensuring the financial sustainability of Nepalese commercial banks. Good governance and diversity of the board increase the resilience of organizations and help ensure financial sustainability. This implies that the bank management, board of directors, and regulatory agencies should work towards having a diverse board and good governance.

Novelty: This research serves as an important contribution to the existing literature considering the combined impact of board diversity and governance quality on financial sustainability in Nepalese commercial banks.