CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE OF THE NIGERIAN BANKS

CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE OF THE NIGERIAN 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 become a serious issue around the world. Several unpleasant events have made corporate governance a very important issue in both developed and developing countries (such as Nigeria).

Prior to the consolidation, there were approximately 89 commercial banks in Nigeria, but the activities of these banks have eroded customer confidence in the Nigerian banking system. Some of them are: Oceanic Bank, Intercontinental Bank, Union Bank, AfriBank, Fin Bank, Spring Bank. These banks are associated with a lack of careful oversight by their boards. Boards relinquish control to business leaders pursuing their own interests and neglect accountability to stakeholders (Uadiale, 2010). Corporate governance in the banking sector requires wise and prudent management of resources and protection of company resources (assets). Ensuring ethical and professional standards and pursuing corporate goals are aimed at enhancing customer satisfaction, employee morale and maintaining market discipline.

1.2 Problem Description

In fact, corporate governance failures in banks are a major factor in financial crises. As banks grew in size and complexity, bank directors often fell short and were euphoric by the apparent year-over-year growth.

1.3 Purpose of the survey

The overall objective of this study is to examine the impact of Corporate He governance on the financial performance of Nigerian banks through a survey of his five deposit banks in Nigeria.

Specific goals are:

1. A study of the impact of board size on the financial performance of Nigerian depository banks.

2. A study of the impact of board composition on the financial performance of Nigerian depository banks. 3. A study of the impact of board committees on the financial performance of Nigerian depository banks.

4. A study of the impact of shareholder numbers on the financial performance of custodians in Nigeria.

1.4 Importance of research

This study is relevant to Nigerian banks in all aspects of corporate governance. They complement existing knowledge on this topic and serve as reference data for future research. It also allows banks to know their stance on corporate governance issues. The Board believes this information will be useful in benchmarking bank performance.

1.5 Research question

The following are specific research questions.

1. How does the size of the board of directors affect the financial performance of a Nigerian custodian bank? 2. How does the composition of the board of directors affect the financial performance of a Nigerian custodian bank?

3. What impact do board committees have on the financial performance of Nigerian depository banks?

Four. 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:
The composition of the board of directors has a significant impact on the financial performance of a Nigerian custodian.

Hypothesis 3

H0:
Board committees do not have significant influence over the financial performance of Nigerian custodians.

H1:
Board committees have a significant impact on the financial performance of Nigerian depository banks.

Hypothesis 4

H0:
The number of shareholders does not significantly affect the financial performance of a Nigerian depository bank.

H1:
The number of shareholders has a significant impact on the financial performance of a Nigerian custodian.

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)

From where:

ROA = Return on Assets (a proxy for financial performance)

CORGOV=Company management.

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

From where:

BS=board size

BC= Board composition

BCM = Board Committee

NS = number of shareholders

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

Converting this functional relationship to a regression model gives:

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

From where:

α0 = constant term of regression model

α1-4 = coefficients for parameter estimates of financial capacity.

µ= random variable.

1.9 Definition of terms

Corporate Governance; Corporate Governance is defined by the Business Dictionary as the framework of rules and practices by which the board of directors ensures accountability, fairness and transparency in its relationship with all its stakeholders . These stakeholders include financiers, customers, management, employees, governments and communities.

The term also refers to the mechanisms, relationships, and processes by which an enterprise is managed and directed. In other words, it balances the many interests of the company’s stakeholders.

Financial performance; Financial performance refers to the level of performance of a company over a period of time, expressed in total profit and loss for that period.

Bank; according to the Business Dictionary, this refers to an entity authorized by the government to take deposits, pay interest, cash checks, make loans, broker financial transactions, and provide other financial services to customers . Shareholder; a person who has an internal or external interest in an organization