Impact of Corporate Governance on Deposit Money Banks’ Financial Performance in Nigeria
Chapter One
OBJECTIVE OF THE STUDY
The main objective of the study is to ascertain the impact of corporate governance on deposit money banks’ financial performance in Nigeria, but to aid the successful completion of the study, the researcher intends to achieve the following sub-objective;
- To ascertain the effect of board size on the Return on capital employed by the banks
- To examine the effect of the duality of the function of the chief executive officer on the ROCE of the banks
- To examine the impact of excessive remuneration of top executive officers on the ROCE of the banks
- To proffer suggested solutions to the identified problems
CHAPTER TWO
REVIEW OF RELATED LITERATURE
Introduction
It has become a worldwide dictum that the quality of corporate governance makes an important difference to the soundness and unsoundness of banks. Broadly speaking, corporate governance refers to the extent to which companies are run in an open and honest manner. Sanusi (2003). Thus, effective corporate governance practice incorporates transparency, openness, accurate reporting and compliance with statutory regulations among others. Historically, antecedents indicate that financial crisis is a direct consequence of lack of good corporate governance in banks; invariably one of the sources of instability in the banking sector is lack or inadequate practice of corporate governance. Wherever a power is exercised to direct, control and regulates activities that affect people, there is need for good exercise of such power. For corporate entities, particularly public liability companies, the exercise of power over the enterprise’s direction, the supervision and control of executive actions, concern for the effects of the enterprise on other parties and especially the environment, the acceptance of a fiduciary duty to be accountable, constitute the quintessential of corporate governance. The banking distress of the last decades has posed many challenges to corporate governance in banking industry. Bank distress can be associated to lack or avoidance of code of ethics and professionalism. Odozi (2007) expound this posting that, “Ethics, like, corporate governance, transparency and accountability, etc, is a cliché that has been abused and misused”. The failure of banks in Nigeria, as elsewhere, has been largely due, not merely to inadequate corporate governance or leadership, but to a failure of professional ethics as manifested in numerous instances of creative accounting practices, professionals insensitive internal control and risk management position being seriously compromised or even colluding with fraudster. Financial scandals around the world and the recent collapse of major corporate institution in the USA has brought to the fore, once again the need for the practice of good corporate governance, which is a system of managing the affairs of corporations with a view to increasing shareholders’ value and meeting the expectations of other stake – holders. For the financial institutions, the retention of public confidence through the enthronement of good corporate governance remains of almost importance given the role of the industry in the mobilization of fund, the allocation of credit to the deficit sectors of the economy, the payment and settlement system and the implementation of monetary policy. Universally, there is a grounds well of interest in corporate governance. Particularly, the need to implement good corporate governance in the banking sector becomes more apparent after the Asian financial crisis. This has been largely event- driven in the sense that it is in response to scandals and unexpected crisis, which in some cases abruptly terminated the existence of large corporate entities. The failure of Johnson Matheys Bank, Bank of Credit and Commerce International, Polly Peck, world com and Enron Incorporation are cases in point. The failure of these institutions has been traced to several lapses associated with poor corporate governance including conflicts of interest of corporate governors. Corporate governance has in recent time’s assumed heightened importance requiring that boards and management of companies’ exhibit greater transparency and accountability in their business conduct. The just concluded consolidation of the Nigeria banking industry makes the institution of corporate governance a sine qua non in the industry. With twenty- five, now twenty- four as at today banks that emerged from the ashes of the erstwhile eighty- nine banks being publicly quoted, corporate governance should in fact take the centre stage in the management of these banks. Hence, effective corporate governance requires a clear understanding of the respective role of the board and of senior management and their relationships with others in the corporate structure. The relationships of the board of management with stockholder should be characterized by candour; their relationships with employees should be characterized by fairness; their relationships with the communities in which they operate should be characterized by good citizenship, and their relationships with government should be characterized by commitment to compliance and good corporate citizenship. Anya (2003). On the other hand, bank like many other economic organizations are expected to generate profit through effective and efficient utilization of resources (inputs) to create sound asset portfolio (output) and ensure continuity. The position of bank therefore in the nation is seen as the oil of the engine of economic development through financial intermediation and advisory services. Bank makes profit from the spread between interest charged on deposit and loan interest rate. These differentials ought to compensate adequately for the investors contribution and the service provider as well, if corporate governance has to be used a yard stick in determining bank performance. Bank performance therefore, could be seen in term of how the management operates or the result of their actions. In view of the later, performance could be seen in terms of the absolute profits, rate of return, earnings per share, the quality of asset portfolio, level of liquidity and net contribution to the economic development of the nation. Performance however is not determined by inputs alone but is also dependent on the environment within which the bank operates. This environment is refers to as “PESTLM” comprising of Political, Economic, Social Cultural, Technology, Legal and Marketing. The level of bank’s performance is determined also on how the institution can positively influence these environmental factors and effective survive in a driven competitive environment. In the last two decades, developments in Nigeria financial sector have reinforced the need for greater concern for corporate governance in financial institutions in the country. The role of governance on banking performance relating to economic growth cannot be over-emphasized. Banks are the pivot of modern economy, the repository of people’s wealth, and supplier of credit which lubricates the engine of growth of the entries economy. Ebhodaghe (1997). The upsurge in the number of financial intermediaries following deregulation and the failure of a significant number of the institutions with attendant agony suffered by many Depositors/Customers and the systemic threat to the economy, all underscore the imperative for greater concern for corporate governance in financial intermediaries especially mainstream banks. For instance, between 1994 and 1995, five banks failed and had their licenses revoked by the Central Bank of Nigeria (CBN) due to distress. This was to be a tip of the iceberg as the distress situation worsened and later resulted in the closure of thirty other licensed banks between 1998 and 2002. With the catalogue of these failed banks even up to the period of consolidation in 2004 from the Nigeria banking landscape, the ‘multi- million naira’ question now being asked by financial expects is how many more banks would follow suit? It is against this back drop that this study attempts to examine corporate governance and bank performance in Nigeria most especially the post- consolidation era. What has been the impact of corporate governance to bank performance? Since the advent of newly adopted “code of corporate governance in Nigeria launched by the past President Obasanjo on November 4, 2003, as there being any change in corporate organization. Hence, the kernel of this study is to examine how corporate governance affects bank performance in Nigeria.
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought to evaluate the impact of corporate governance on deposit money banks financial performance in Nigeria.
Sources of data collection
Data were collected from two main sources namely:
(i)Primary source and
(ii)Secondary source
Primary source:
These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.
Secondary source:
These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.
Population of the study
Population of a study is a group of persons or aggregate items, things the researcher is interested in getting information on the study the impact of corporate governance on deposit money banks financial performance in Nigeria. 200 staff of selected commercial banks in the state was selected randomly by the researcher as the population of the study.
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain the impact of corporate governance on deposit money banks financial performance in Nigeria.
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the impact of corporate governance on deposit money banks.
Summary
This study focused on finding out the triggers of performance of the banking sector of which Corporate Governance proved to be an important issue for many commercial banks. It has been established in selected literatures that corporate governance affects stakeholders and the banks as a whole, corporate governance affects the potential or ability of a bank to reach its market share both domestically and globally, corporate governance also determines the banks’ ability to fulfill its social objectives with its clientele and society at large. This study has also established that that corporate governance practices have measurable effects on banks operational performances. The study therefore concludes that weak corporate governance structure in Nigeria contributed immensely to the recent crisis experienced in Nigerian banking sector.
Conclusion
The relationship between corporate governance and the financial performance of listed deposit money banks in Nigeria has been explored using data collected from the questionnaire and it was discovered that bigger board size contributes more to performance than smaller board size. Also, when a board size is large, it will be difficult for a person (may be CEO) to dominate the board and decisions reached by the board are seen to have emanated from sound and constructive arguments. The result of the summary statistics revealed that the proportion of nonexecutive director serving in the boards of banks are high and this is in compliance with the specification of corporate governance code which specifies that the number of non-executive directors should be higher than the executive directors. Of to continue to enjoy the advantage of larger board size, efforts should be directed at bringing on board those with relevant credentials, competence and wide range of experience.
Recommendations
Based on the discussion and conclusion above, the researchers recommend the following: Banks should engage in the development and implementation of strategic training for board members and senior bank managers. This should be carried out with special emphasis on corporate governance, corporate governance disclosure and banking ethics. They should regulate the size of the board which should not be too large and must consist of highly skilled and competent professional who are conversant with oversight function. There should also be in existence, a proper internal control structure and self-government regulation so as to detect early rule violations and also monitor systemic problems for early remediation and solutions. An effective legal framework should be developed by the legislature to regulate and specify the rights and obligations of a bank, its directors, and shareholders. Also such laws and regulations should specify disclosure requirements and enhance transparency and accountability. Also, Extra care and precautions.
Reference
- Abu-Tapanjeh. M. A. (2008):“Corporate Governance from Islamic Perspective: A Comparative Analysis with OECD Principles”. Elsevier Ltd
- Adeusi S, Akeke N, Aribaba F, and Adebisi O. (2013): Corporate Governance And Firm Financial Performance: Do Ownership And Board Size Matter. Academic Journal of Interdisciplinary Studies 2: 251-258.
- Ajala, O. A. And Amuda, T. And Arulogun, L. (2012): Evaluating the Effects of Corporate Governance on the Performance of Nigerian Banking Sector. Review of Contemporary Business Research, Vol. 1, No. 1, PP 32-42.
- Akingunola R.O, Adekunle O.A, and Adedipe O.A. (2015): Corporate Governance And Bank’s Performance in Nigeria. European Journal of Business and Social Sciences, Vol. 2, No.8, Pp 89-111.
- Bebeji A, Mohammed A, and Tanko M. (2015): The Effect of Board Size and Composition on the Financial Performance of Banks in Nigeria. African Journal of Business Management, Vol. 9(16), pp. 590-598.
