CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE OF THE NIGERIAN BANKS (A STUDY OF FIVE NIGERIA DEPOSIT BANKS)

ABSTRACT

The study examined the impact of corporate governance on the financial performance of selected deposit money banks in Nigeria between 2011 and 2017.

Data on the variables of interest were sourced from the annual financial statements of the sampled banks. The data were analyzed using the descriptive statistics, correlation analysis and the regression analysis.

The results revealed that; Board size has positive and insignificant effect on the financial performance of selected deposit money banks in Nigeria (β=1.56; p>0.05); Board composition has positive and insignificant effect on the financial performance of selected deposit money banks in Nigeria (β=1.42; p>0.05); Board committee has positive and insignificant effect on the financial performance of selected deposit money banks in Nigeria (β=0.03; p>0.05); BNumber of shareholders has positive and insignificant effect on the financial performance of selected deposit money banks in Nigeria (β=0.54; p>0.05).

The study concludes that although corporate governance positively drive financial performance of selected banks, its influence is statistically insignificant within the periods investigated.

Based on the findings and conclusion, the study hereby recommended that; The board should be mixed of executive and non-executive directors whom should be independent directors; The international codes of corporate governance should be properly designed to meet the needs of governance in the Nigerian banking sector; Shareholders of banks operating in Nigeria should ensure that their board of directors comply with the board of directors comply with the provisions of the CBN codes of corporate governance as well as other statues; Strategic training programmes for board members and senior bank managers should be organized or improved upon, especially on courses that promote corporate governance and banking ethics.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF STUDY

Corporate governance in number of ways has influenced the way an organization will be controlled. An important theme of corporate governance is the nature and extent of accountability of people in the business, and mechanisms that try to decrease the principal agent problem (Wikipedia 2011). Banks are the backbones of any economy therefore it is of immense importance for economies to possess a healthy and buoyant banking system with effective corporate governance practices. In Nigeria, the Central Bank replaced the past governance codes with the CBN code (2012).Therefore this study examines corporate governance and financial performance in Nigerian banks, using this new code.

Corporate governance has been an issue of serious concern around the world. Several unpleasant happenings made corporate governance a very important topic in both developed and developing countries (such as Nigeria).

There were about 89 commercial banks in Nigeria before the consolidation exercise but the activities of these banks caused customers to lose confidence in the Nigerian banking system. Some of them include; Oceanic Bank, Intercontinental Bank, Union Bank, AfriBank, Fin Bank and Spring Bank . These banks were related to the lack of vigilant oversight functions by their board of directors. The board relinquishing control to corporate managers who pursue their own self-interests and the board being remiss in its accountability to stakeholders (Uadiale, 2010). Corporate governance in the banking sector requires judicious and prudent management of resources and the preservation of resources (assets) of corporate firm; ensuring ethical and professional standards and the pursuits of corporate objectives, it seeks to ensure customers’ satisfaction, high employee morale and the maintenance of market discipline, which strengthens and stabilizes the bank (Okoi, Stephen and Sani, 2014 as cited in Afolabi, 2015).

1.2   STATEMENT OF THE PROBLEM

Failure in corporate governance at banks is indeed a principal factor contributing to the financial crisis. As banks grew in size and complexity, bank boards often did not fulfill their function and were lulled into a sense of well-being by the apparent year-over-year growth in assets and profits. In hindsight, boards and executive management in some major banks were not equipped to run their institutions. The bank chairman/CEO often had an overbearing influence on the board, and some boards lacked independence; directors often failed to make meaningful contributions to safeguard the growth and development of the bank and had weak ethical standards; the board committees were also often ineffective or dormant.

Details of the extent of insider abuse in several of the banks include; CEOs set up Special Purpose Vehicles to lend money to themselves for stock price manipulation or the purchase of estates all over the world. One bank borrowed money and purchased private jets which was later discovered were registered in the name of the CEO’s son. In another bank the management set up 100 fake companies for the purpose of perpetrating fraud. A lot of the capital supposedly raised by these so called “mega banks” was fake capital financed from depositors’ funds. 30% of the share capital of Intercontinental bank was purchased with customer deposits. Afribank used depositors’ funds to purchase 80% of its IPO. It paid N25 per share when the shares were trading at N11 on the NSE and these shares later collapsed to under N3. The CEO of Oceanic bank controlled over 35% of the bank through SPVs borrowing customer deposits. The collapse of the capital market wiped out these customer deposits amounting to hundreds of billions of naira.

All these fraudulent activities shows the need to study corporate Governance and the financial management of Nigerian Banks.

1.3 OBJECTIVE OF THE STUDY

The broad objective of the study is to examine the impact of corporate governance on financial performance in Nigeria Banks using a study of 5 Nigeria Deposit banks.

The specific objectives are;

1. To examine the impact of board size on financial performance of Nigeria deposit banks.

2. To examine the impact of board composition on financial performance of Nigeria deposit banks.

3. To examine the impact of board committee on financial performance of Nigeria deposit banks.

4. To examine the impact of number of shareholders on financial performance of Nigeria deposit banks.

1.4 SIGNIFICANCE OF THE STUDY

The study would be significant to the Nigeria Banks in all aspects relating to Corporate Governance. It would add to the existing knowledge on the subject matter and serve as reference data for future research. It would also enable the banks to know their stance in relation to corporate governance issues. The board of directors will find this information useful in benchmarking the performance of their banks.

1.5   RESEARCH QUESTIONS

The following are specific research questions;

1. What is the impact of board size on financial performance of Nigeria deposit banks?

2. What is the impact of board composition on financial performance of Nigeria deposit banks?

3. What is the impact of board committee on financial performance of Nigeria deposit banks?

4.  Does the number of shareholders have effect on financial performance of Nigeria deposit banks?

1.6. RESEARCH HYPOTHESES

Four hypotheses were developed base on the objectives and the research question to guide the study. They include:

Hypothesis one

H₀: Board size has no significant impact on financial performance of Nigeria deposit banks.

H₁: Board size has significant impact on financial performance of Nigeria deposit banks.

Hypothesis two

H₀: Board composition has no significant impact on financial performance of Nigeria deposit banks.

H₁: Board composition has significant impact on financial performance of Nigeria deposit banks.

Hypothesis three

H₀: Board committee has no significant impact on financial performance of Nigeria deposit banks.

H₁: Board committee has significant impact on financial performance of Nigeria deposit banks.

Hypothesis four

H₀: Number of shareholders has no significant impact on financial performance of Nigeria deposit banks.

H₁: Number of shareholders has significant impact on financial performance of Nigeria deposit banks.

1.7      SCOPE OF STUDY

The study covers the examination of the impact of corporate governance on the financial performance of Banks in Nigeria, using five Nigeria deposit banks as a case study which are “(First bank Nigeria (FBN), Guarantee Trust Bank (GTB), United Bank of Africa (UBA), Zenith bank and Diamond bank)”. The study covers a time from 2011 till 2017.

1.8    Operationalization of Variables

The main objective is to examine the corporate governance and financial performance of the Nigerian banks. Corporate governance is the independent variables, which is proxy by board size, board composition, board committee and number of shareholders. Financial performance is the dependent variable which is measured by return on asset.

ROA= f (CORGOV)

Where:

ROA= Return on asset (proxy as financial performance)

CORGOV= Corporate governance.

But CORGOV= f (BS, BC, BCM, NS)

Where:

BS= Board size

BC= Board composition

BCM= Board committee

NS= Number of shareholders

ROA= f (BS, BC, BCM, NS)

Converting this functional relationship into a regression model, it becomes:

ROA= α₀ + α₁BS + α₂BC + α₃BCM + α₄NS + µ

Where:

α₀= Constant term of the regression model

α_1-4 = Coefficients of parameter estimates of financial performance.

µ= Stochastic variable.

1.9    DEFINITION OF TERMS

CORPORATE GOVERNANCE: Corporate Governance is defined according to the Business Dictionary, as the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company’s relationship with its all stakeholders. Such Stakeholders include, financiers, customers, management, employees, government, and the community.

The term also refers to the mechanisms, relations, and processes by which a corporation is controlled and is directed i.e. involves balancing the many interests of the stakeholders of a corporation.

FINANCIAL PERFORMANCE: Financial performance refers to the level of performance of a business over a specified period of time, expressed in terms of overall profits and losses during that time.

BANK: According to the Business Dictionary, It refers to an establishment authorized by a government to accept deposits, pay interest, clear checks, make loans, act as an intermediary in financial transactions, and provide other financial services to its customers.

SHAREHOLDER: A person who has an interest internally or externally in an organization.