This study was carried out on the impact of corporate social responsibility on financial performance of the banking institution. Although an enormous body of literature has emerged concerning the nexus between corporate social responsibility and profitability, actual empirical research designed to test the multitude of definitions, propositions, concepts and theories that have been advanced has produced mix results. In addition, much of the research done in the area has been incomplete and simplistic in methodology and epistemology. Many of the methodological quagmires in studying the nexus between corporate social responsibility and profitability stem from the fluid nature of the subject. With the increased concentration on the corporate social responsibility, firms are not only required to focus narrowly on generating profit returns for shareholders, but also asked to take responsibility for firms‘ other stakeholders. Hence, both having a decent social responsibility performance and adding profitability is significant for companies to achieve sustainable success in the long-term. This study therefore examines the effect of corporate social responsibility on the profitability of financial institutions in Nigeria. It uses panel data from 14 financial institutions over a period of 10 years (2006-2015) and tests for statistical significance using analysis of variance and multiple regression analysis. The results show that corporate social responsibility has significant and positive effect on net profit margin, return on total assets and return on equity, which were used to proxy for profitability. The study concludes that corporate social responsibility has positive and significant influence on profitability. The study recommends that banks should continue to invest in corporate social activities as much as practicable because they result into long run increase in profitability. Also, bank managers should leverage on social responsibility expenditures by ensuring that they are linked to profitable operations.
1.1 Background to the Study
Corporate social responsibility has become a common practice among most financial institutions in Nigeria. It is one of the newest management strategies where companies try to create a positive impact on society while doing business. Holme and Watts (2000) defined CSR as the continuous commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as the local community and society at large. Businesses can use ethical decision making to secure their businesses by making decisions that allow for government agencies to minimize their involvement in the corporation. Several reasons have been advanced to explain why commercial institutions voluntarily engage in social activities. Most companies practice social activities to satisfy their primary needs of presenting themselves as legitimate members of society (Bowen, 1953). This legitimacy has led companies to pursue their primary purpose of seeking sustainable profitability.
Leaving aside the fact that the corporate sector provides significant economic benefits to society, there are growing concerns that larger society provides great opportunities for companies to use public resources to operate their businesses (Carroll, 1979). Some experts are of the idea that most rules and regulations are formed due to public outcry, which threatens profit maximization and therefore the well-being of the shareholder and that if there were no outcry, there would be little regulation (Carroll, 1999). A firm is not socially responsible if it merely complies with the minimum required of the law, because this is what a good citizen would do.
It’s now recognized that sustainable development and reduction of poverty are the key issues that need to be addressed by the governments, mostly in the developing world. However, the government cannot meet this alone without the help of the private sector. Policy makers are paying much attention to the potential contribution of the private sector to such policy objectives. As the issue of sustainable development becomes more important, CSR becomes an element that addresses these issues and therefore it becomes more vital in the daily operations of financial institution in the banking industry. According to Pranjali (2011)The World Business Council for Sustainable Development (WBCSD) describes CSR as a contribution to sustainable economic development ;It is said that there is no way to avoid paying serious attention to corporate social responsibility: the costs of failing are simply too high. There are countless win opportunities waiting to be discovered: every activity in a firm’s value chain overlaps in some way with social factors, everything from how you buy or procure to how you do your research, yet very few companies have thought about this. The goal is to leverage your company’s unique capabilities in supporting social causes, and improve your competitive context at the same time. The job of today’s leaders is to stop being defensive and start thinking systematically about corporate responsibility according to Michael Porter (2005) who says successful executive or leaders know that CSR is inevitable and their long term success is based on continued good relationship with the society.
Corporate social responsibility is applicable to almost all organization but the banks are keener to these programmers as they have to do extra in order to satisfy their multiplicity of stakeholders. According to Nwankwo (1991) he points the advantages of CSR as, maximizing profit to shareholders who are the real owners of the business, maintaining optimal liquidity for depositors, Complying with regulators demand, Satisfying the deficit sector demand for credits, contributing to the development of the economy and Satisfying the needs of the immediate community in which they operate. CSR is being used today to establish good rapport with the public according to Nolan, Norton and Co (2009). It is also used as pre-emption strategy by the corporations to save their skin from unforeseen risks and corporate scandals, possible environmental accidents, governmental rules and regulations, protect eye-catching profits, brand differentiation, and better relationship with employees based on volunteerism terms. Corporations today are much conscious to publish their CSR activities on their websites, sustainability reports and their advertising campaigns in order to get the sympathy of the customer. CSR is also practiced because customers as well as governments today are demanding more ethical behaviors from organizations. In response, corporations are volunteering themselves to incorporate CSR as part of their business strategies, mission statement and values in multiple domains, respecting labor and environmental laws, while taking care of the contradictory interest of various stake holders according to Kashyap et al., (2006).
A study reveals that the largest banks consistently have higher CSR strengths and CSR concerns during the sample period. Further, this group sees a steep increase in CSR strengths and a steep drop in CSR concerns after 2009, as the worst of the financial crisis passed. We also find that more profitable banks, banks with higher capital ratios, and banks that charge lower fees on deposits have significantly higher CSR strengths. Therefore, this study focuses on the assessment of the impact of corporate social responsibility on financial performance of the banking institution.
1.2 Statement of the problem
As for the banking industry, the relation between corporate social responsibility and financial performance has not been examined extensively, and the few existing studies offer conflicting evidence. In spite of the existing of some literature about the role of corporate social responsibility in the aspects of environment and society, there is a significance gap about how corporate social responsibility improves organization performance due to lack of documented evidence of the benefits hence the researchers focus was to find out the effect of CSR on organization performance based on selected commercial banks as we find out whether these institutions realize any benefits from the much they spend.
Financial institutions with good operating results and strategies can reduce screening and monitoring costs and diversify risk across different projects and overcome liquidity risks which ultimately provide savers with high return. Having long term financial success can attract investment in long-term projects while allowing investors access to their savings at short-term notice (Levine, 1991).
These institutions allow cross-sectional diversification across projects, allowing risky innovative activity while guaranteeing contracted interest rate to savers (King and Levine, 1993). Financial institutions can boost the rate of technological innovation by identifying the entrepreneurs with most promising technologies. Successful institutions can help reduce liquidity risk and enable long-term investment (Diamond and Dybvig, 1983). Banks with sound long term performance can offer job security to its employees, create new employment opportunities, assure government of continuous revenue apart from satisfying their shareholders’ expectations. These problems necessitates the need to carry out a study on the assessment of the impact of corporate social responsibility on financial performance of the banking institution.
1.3 Research Questions
In the light of the foregoing, the research questions of this study are articulated as follows:
(i) What effect does corporate social responsibility has on the net profit margin of financial institutions in Nigeria?
- How does corporate social responsibility affects the return on assets of financial institutions in Nigeria?
- Does corporate social responsibility affects the return on equity of financial institutions in Nigeria?
1.4 Objective of the Study
The general objective of this study is to carry out a study on the assessment of the impact of corporate social responsibility on financial performance of the banking institution. The specific objectives of the study are to:
- Examine the effect of corporate social responsibility on the net profit margin of financial institutions in Nigeria.
- Examine the effect of corporate social responsibility on the return on total assets of financial institutions in Nigeria.
- Assess the effect of corporate social responsibility on the return on equity of financial institutions in Nigeria.
1.5 Research Hypotheses
In order to achieve the specific objectives of this research, the following research hypotheses have been formulated to be tested in the study:
H1: Corporate social responsibility has no significant effect on the net profit margin of financial institutions in Nigeria.
H2: Corporate social responsibility has no significant effect on the return on total assets of financial institutions in Nigeria.
H3: Corporate social responsibility has no significant effect on the return on equity of financial institutions in Nigeria.
1.6 Scope of the Study
The study focuses on the nexus between corporate social responsibility and profitability of financial institutions in Nigeria. It covers a period of ten years (2006-2015) for the 15 financial institutions in Nigeria. The period of investigation is significant in many respects: first, the period witnesses the global financial crisis of 2007/2008 and therefore it will be interesting to investigate whether the crisis affected corporate social responsibility activities of financial institutions in Nigeria; second, since the 2015 financial data of the banks are published, 20062015 represent the most recent data in respect of the financial performance of financial institutions in Nigeria.
1.7 Significance of the Study
The study is expected to make contributions to knowledge in a number of ways. The outcome of this research will provide information about CSR in relation to corporate institutions especially the financial institutions in Nigeria. It is also expected that the results of this study would produce relevant material for scholarly discourse in management science relating to corporate social responsibility and profitability. Another benefit is that in a truly global economy, deposit money banks in Nigeria would be more responsible and become citizens. Banks would more easily and willingly respond to the social needs of the societies where they operate.
The findings generated in this study are useful in testing the existing theories under extreme conditions not present in developed economies where most of the prior studies were carried out. Current and potential investors are supplied with information to help them make good investment decisions. The findings and conclusion may enable the regulators to know the nature of demand placed on deposit money banks in Nigeria and ways banks have responded to them.
The work is important to the government, host communities and non-governmental organizations involved in development programmes. This study fills literature gap by investigating the effects of CSR on profitability of deposit money banks. The results provide useful evidence to other emerging sectors such as insurance, which is closely related to deposit money banking sector.
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