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This study investigated “The role of corporate governance on the performance of banks in Nigeria”. Data for the study were sourced through questionnaires shared to various departments in both first bank of Nigeria and UBA Owerri, Imo state. The data collected were analyzed using percentage tables. Hypotheses were tested with the aid of analysis of variance (ANOVA) statistical technique. Both null hypotheses was rejected due to the F value calculated exceeded the F value tabulated consecutively, that is 8.6>3.49 and 12.11>3.49. The findings revealed that there are challenges faced when implementing corporate governance code in the banking sector and also the extent at which noncompliance of corporate governance code in performance of banks is low. Based on the findings, recommendations were made; Regulatory authorities like corporate affairs commission(CAC), Central bank of Nigeria(CBN), security and exchange commission(SEC), national insurance commission(NAICOM), Nigeria deposit insurance commission etc. should a consolidated approach towards the supervision of listed banks since corporate governance boost investors’ confidence. Banks should instill due process of transparency, integrity and disclosure of its core concept in order to ensure shareholders’ confidence. Banks should also ensure that the issue of fraud and insider abuse should be minimized.
Title page i
Table of content vii
CHAPTER ONE: INTRODUCTON
1.0 Background of the study 1
1.1 Statement of the problem 6
1.2 Objective of the study 10
1.3 Research questions 10
1.4 Research hypotheses 11
1.5 Significance of the study 12
1.6 Scope of the study 13
1.7Definition of terms 13
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Conceptual Review 17
2.2 Theoretical Review 18
2.3 Empirical Review 20
2.4 Research Gap 25
2.5 corporate Governance and Nigerian Banks 25
2.6 pillars of corporate Governance 40
2.7 Challenges / Weakness of Corporate Governance 41
2.8 Corporate Governance and Banking regulation 44
2.9 Bank Compliance with Regulations 48
CHAPTER THREE: RESEARCH METHODS
3.1 Research Design 53
3.2 Method of Data Collection 53
3.3 Population of the Study 53
3.3.1 Sample Size Determination 54
3.4 Sampling Procedure 55
3.5 Design and Administration of Questionnaire 55
3.6 Validity of Instrument 56
3.7 Reliability of Instrument 56
3.8 Methods of Data Analysis 57
3.9 Limitation of the Study 59
CHAPTER FOUR: PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA
4.1 Presentation of Data 62
4.2 Analysis of Questionnaire 63
4.3 Test of Hypotheses 73
CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1 Summary of Findings 84
5.2 Conclusion 85
5.3 Recommendations 85
1.0 BACKGROUND OF THE STUDY
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, professional’s 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 asine qua nonin 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 candor; 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.
1.1 STATEMENT OF THE PROBLEM
Adedipe (2013),there is no gainsaying that the present economy deserves a sound, stable and better banking performance following the causative factors, such as unethical and unprofessional practices, poor management quality among others which contributed to low level of bank performance and sometimes lead to failure of bank.
The bitter experiences of Asian financial crisis of the 1990s underscore the importance of effective corporate governance procedures to the survival of the macro economy. This crisis demonstrated in no unmistakable terms that “even strong economies, lacking transparent control, responsible corporate boards and shareholder right can collapse quite quickly as investor’s confidence collapse”.
In Nigeria, before the consolidation exercise, the banking industry had about 89 active players whose overall performance led to sagging of customers‟ confidence. There was lingering distress in the industry, the supervisory structures were inadequate and there were cases of official recklessness amongst the managers and directors, while the industry was notorious for ethical abuses (Akpan, 2007). Poor corporate governance was identified as one of the major factors in virtually all known instances of bank distress in the country. Weak corporate governance was seen manifesting in form of weak internal control systems, excessive risk taking, override of internal control measures, absence of or non-adherence to limits of authority, disregard for cannons of prudent lending, absence of risk management processes, insider abuses and fraudulent practices remain a worrisome feature of the banking system (Soludo, 2004). This view is supported by the Nigeria Security and Exchange Commission (SEC) survey in April 2004, which shows that corporate governance was at a rudimentary stage, as only about 40% of quoted companies including banks had recognized codes of corporate governance in place. This, as suggested by the study may hinder the public trust particularly in the Nigerian banks if proper measures are not put in place by regulatory bodies.
The Central Bank of Nigeria (CBN) in July 2004 unveiled new banking guidelines designed to consolidate and restructure the industry through mergers and acquisition. This was to make Nigerian banks more competitive and be able to play in the global market. However, the successful operation in the global market requires accountability, transparency and respect for the rule of law. In section one of the Code of Corporate Governance for banks in Nigerian post consolidation (2006), it was stated that the industry consolidation poses additional corporate governance challenges arising from integration processes, Information Technology and culture. The code further indicate that two-thirds of mergers world-wide failed due to inability to integrate personnel and systems and also as a result of the irreconcilable differences in corporate culture and management, resulting in Board of Management squabbles.
Despite all these measures, the problem of corporate governance still remains un-resolved among consolidated Nigerian banks, thereby increasing the level of fraud (Akpan, 2007). The causes of the recent global financial crises have been traced to global imbalances in trade and financial sector as well as wealth and income inequalities (Goddard, 2008). More importantly, Caprio, Laeven& Levine (2008) opined that there should be a revision of bank supervision and corporate governance reforms to ensure that deliberate transparency reductions and risk mispricing are acted upon.
The series of widely publicized cases of accounting improprieties recorded in the Nigerian banking industry in 2009 (for example, Oceanic Bank, Intercontinental Bank, Union Bank, Afri Bank, Fin Bank and Spring Bank) were related to the lack of vigilant oversight functions by the boards 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). Inan (2009) also confirmed that in some cases, these bank directors‟ equity ownership is low in other to avoid signing blank share transfer forms to transfer share ownership to the bank for debts owed banks. He further opined that the relevance of non- executive directors may be watered down if they are bought over, since, in any case, they are been paid by the banks they are expected to oversee.
As a result, various corporate governance reforms have been specifically emphasized on appropriate changes to be made to the board of directors in terms of its composition, size and structure (Abidin, Kamal and Jusoff, 2009).
It is in the light of the above problems, that this research work studied the ROLES OF CORPORATE GOVERNANCE ON THE PERFORMANCE OF BANKS in Nigeria.
1.2 OBJECTIVE OF THE STUDY
This study seeks to achieve the following objectives:
This research work will be guided by the following research questions:
The following hypotheses form the basis for carrying out this study.
H0: There are no challenges faced when implementing corporate governance code in the banking sector.
H1: There are challenges faced when implementing corporate governance code in the banking sector.
H0: The extent at which noncompliance of corporate governance code in performance of banks is not low.
H1: The extent at which noncompliance of corporate governance code in performance of banks is low.
The significance of the study is drawn from two stand points: Academic and practical view.
In the academic arena, this study will prove to be significant in the following ways;
Practically, the study will result in broadening understanding of the following;
The study covers the roles of corporate governance on performance of banks in Nigeria, a study of listed banks in Nigeria (first bank of Nigeria and UBA) both in Owerri.
It examines the noncompliance, contribution and implementation of corporate governance code. It also seeks to investigate the challenges facing the implementation of corporate governance code to the performance of Nigeria banking sector.
1.7 OPERATIONAL DEFINITION OF TERMS
Financial crisis: A financial crisis is a situation in which the value of financial institution or asset drops rapidly.
INSTABILITY: Is the quality of not being stable balance or predictable or unusually or unnaturally.
FIDUCIARY: If any person or institution that has the power to act on behalf of another in situation requires great trust honesty and loyalty.
TRANSPARENCY AND ACCONTABILITY: In corporate and governmental transparency and accountability are vital to a functioning democracy, especially in case where so much money is being traded for political influence.
ETHIC: Is a system of moral principle it affect how people make decision and lead their live it about what is good for individual.
INTERNAL CONTROL: This is defined in accounting as a process for assuring achievement of an organization objective in operational effectiveness and efficiency reliable to financial reporting and compliance with law, regulations and policies. It also involves the control risk of risk within the organization.
RISK MANAGEMENT: Is the process of identifying and controlling threat to a company’s assets.
FINANACIAL INSTITUTION: a financial institution is an institution that provides financial services for its clients or members. One of the most important financial services provided by a financial institution is acting as a financial intermediary. Most financial institutions are regulated by the government.
CREDIT: is the trust which allows one party to provide money or resources to another party where that second party does not reimburse the first party immediately (thereby generating a debt), but instead promises either to repay or return those resources (or other materials of equal value) at a later date.
INCORPORATION: Incorporation is the formation of a new corporation (a corporation being a legal entity that is effectively recognized as a person under the law). The corporation may be a business, a non-profit organization, sports club, or a government of a new city or town.
CONSOLIDATION: the action or process of combining a number of things into a single more effective or coherent whole.
CORPORATION STRUCTURE: Corporations can have many structures, but the most typical corporation organizational structure consists of the (1) board of directors, (2) officers, (3) employees, and (4) shareholders or owners. There is no limit — your corporation can have as many as are desirable or expedient to do business. On the other end of the spectrum, an individual can simultaneously be the sole shareholder, the director, the officer, and the employee.
INTEREST RATE: Interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets
FINANCIAL INTERMEDIARIES: A financial intermediary is an entity that acts as the middleman between two parties in a financial transaction, such as a commercial bank, investment banks, mutual funds and pension funds.
MACRO ECONOMY: Macro–economic involves the application of concepts, models, and theories, in order to understand and analyze problems and also evaluate policies.
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