Enterprise Risk Management (ERM) in the Banking Sector: Evidence from Bangladesh

The aim of this study is threefold. First, to investigate how Enterprise Risk Management (ERM) diffuses in the banking sector under a regulatory environment. Second, to explore how this regulatory diffusion triggers incremental change and how banks adapt to this incremental change. Finally, to investigate how this diffusion influences the “MCS (Management Control Systems) package”. This study, therefore, develops an integrated theoretical framework, drawing on Abrahamson’s (1991) diffusion typology, “neo-institutionalism” (Greenwood and Hinings, 1996) and “MCS package” (Malmi and Brown, 2008) to address the ERM phenomena. The data was collected using semi-structured interviews and triangulated through secondary materials. The evidence shows that ERM is diffused as a result of forced selection and efficient choice in the banking sector. The usefulness of ERM is meaningfully established in banks. Consequently, it is mandated internally at the organisational level as an efficient innovation. Thus, it may be argued that forced-selection and efficient-choice perspectives are useful in framing an account of primary stage diffusion of ERM in a regulatory environment, which helps address the apparent paradox between these two perspectives. Following the ERM diffusion, banks shift towards an institutionalised template of risk management that influences both the structure and operations of banks simultaneously. These changes occur within a quick pace of time soon after the regulation. ERM, therefore, is regarded as a driver of incremental change, particularly under a regulatory environment. A new departmental agent, the RMD (Risk Management Division), evolves within banks following the diffusion. The highest interest of RMDs and the reformative commitment of boards and CEOs towards the ERM act as precipitating factors within banks in adaption to incremental change. Likewise, the favourable power/resource to the RMDs and the growing implementation capacities act as enabling factors in this adaption process. Furthermore, the elements of the “MCS package” are reshaped following the diffusion of ERM based on the notion of “risk”, whereby the “MCS package” turns into a “risk-based MCS package”. Therefore, this study asserts that the regulation signifies ERM, and that has important implications for organisational change and the reinvention of MCS.