THE EFFECTIVENESS OF CORPORATE GOVERNANCE ON BANK PERFORMANCE IN NIGERIA.

ABSTRACT

This study seeks to examine the impact of corporate governance on bank performance in Nigeria from the period of 2009 – 2014. Corporate governance mechanism was proxied by board size, board composition, audit committee members and bank performance by return on asset. Data were collected from the bank annual financial report from the study period and were analyzed using the ordinary least square multiple regression and descriptive statistics. The findings indicate that corporate governance significantly impact on financial performance in Nigerian banks. The study recommends that stringent requirement should be put in place by regulators of financial institution to curtail sharp practices by directors and reduce the incidence of insider trading done by directors in the banking industry.

TABLE OF CONTENTS

Title page

Declaration

Dedication

Certification

Acknowledgement

Table of contents

List of tables

Abstract

CHAPTER ONE: INTRODUCTION

1.1  Background to the study

1.2  Statement of study

1.3  Objective of the study

1.4  Research question

1.5  Research hypothesis

1.6  Significance of study

1.7  Scope of the study

1.8  Structure of the Study

1.9  Definition of Terms

CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.1 Introduction

2.2  Historical Overview of Corporate Governance

2.3  The Concept and Practice of Corporate Governance

2.4  Theoretical Framework of Corporate Governance

2.5  Principles of Corporate Governance in Nigeria

2.6  Regulatory Framework for Corporate and Governance

2.6.1 Enforcement and Compliance

2.6.2 Threats to Effective Governance

2.7  Nigerian Banking Industry

2.8  Corporate Governance and the Nigerian banking system

2.9  Corporate Governance and Financial Performance

2.10 The Challenges of Corporate Governance in Nigeria

2.11 Empirical Reviews of Related Literature

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Introductions

3.2 Research Design

3.3 Population of the Study

3.4 Sample Size

3.5 Sources of Data

3.6 Definition of Variation

3.7 Model Specification

3.8 Techniques of Data Analysis

3.9 Limitation of the Methodology

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND INTERPRETATION

4.1  Introductions

4.2  Data Validity Test

4.3  Data Presentation and Analysis

4.4  Test of Research Hypothesis

4.5 Discussion and Interpretation of Result

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summaries of Findings

5.2 Conclusions

5.3 Recommendations

5.4 Limitation of the Research Work

5.5 Suggestions for Future Research

Appendix

Reference

CHAPTER ONE

INTRODUCTION

• BACKGROUND OF THE STUDY

Since the 1990s, corporate governance has become a frontier issue across the world. Following the UK 1992 Cadbury report, corporate governance has been identified as a complex and multifaceted subject. Corporate governance is a multidisciplinary concept which draws from the fields of economics, accountancy, finance, among others (Cadbury, 2002).

Corporate governance is a principal determinant of the health of any organization and its ability to survive contemporary competitive global economy. That a firm is healthy is predicated on its financial performance. Corporate health, facilitated by good and effective corporate governance practices, is essential both for the growth of an economic entity and of the economy. Corporate governance refers broadly to the systems or structures (internal and external) – processes, rules, regulations and control mechanisms – that govern the conduct of an organization for the benefit of all stakeholders (Tsegba and Herbert, 2013). The need to implement good corporate governance in the banking sector is real because of the vitality of the banking industry to both national and regional growth of nation states. 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 2005 banking consolidation exercise in the Nigeria banking sector made the institution of corporate governance a sine qua non in the industry. With 24 banks that survived the banking consolidation exercise of 89 banks, corporate governance has, in fact taken,  a centre stage in the management of these banks. Effective corporate governance requires a clear understanding of the respective roles of the boards and senior management and their relationships with others in the corporate structure. The relationships of the board of directors  with shareholders 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).

Banks as many profit – making organizations, are expected to generate profit through effective and efficient utilization of resources to create sound asset portfolio and ensure continuity. The position of banks therefore, in an economy can be likened to the oil in  the engine of economic development through financial intermediation and wealth-creating services.. Bank performance therefore, could be seen in terms of how management utilizes the resources put at its disposal by both the shareholders and depositors. Accordingly,bank profitability is a reflection of its performance and of its governance mode. Performance is not determined by inputs alone but is also a function of the environment which the bank operates. This environment  of any business is composed of the political, economic, social cultural, technology, legal and marketing (PESTLM). 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 corporate governance on bank performance is receiving increasing attention following the 2008 global financial meltdown.

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 institutions. For instance, between 1994 and 1995, five banks failed and had their licenses revoked by the Central Bank of Nigeria (CBN) due to distress. distress situation worsened over the years 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 2005 from the Nigeria banking landscape, the question now being asked by financial experts is how many more banks would follow suit? It is against this backdrop that this study attempts to examine the effectiveness of corporate governance on bank performance in Nigeria.

• STATEMENT OF THE PROBLEM

A 2003 survey, Securities and Exchange Commission (SEC) showed that corporate governance was at a rudimentary stage, as only about 40% of quoted companies, including banks, had established codes of corporate governance in their firms. Specifically for the financial sector, poor corporate governance was identified as one of the major factors in virtually all known instances of  financial distress in the country. (CBN 2006)

Since then is there any empirical evidence that the corporate governance situation in Nigeria’s financial sector has significantly improve? This study is an attempt to answer the question. Further the removal of the boards of eight Nigeria banks( Union Bank of Nigeria Plc, Afribank Nigeria Plc, Intercontinental Bank Plc, Wema Bank Plc, Oceanic Bank International Plc, Bank PHB Plc, Fin bank Plc, and Spring Bank Plc.) was allegedly predicated on corporate governance failure.

Specifically the problem of this study is to assess the relationship between corporate governance and performance of Nigeria banks. This assessment is pursued through the examination of the effectiveness of corporate governance on the performance of Nigerian bank

1.3.    OBJECTIVES OF THE STUDY

The general objective of this study is to examine the effectiveness of corporate governance on bank performance in Nigeria. Specifically, the study seeks to examine  the relationship between internal corporate governance structures and financial performance in the Nigerian banking industry . This is further explore through the following specific objectives:

1. To determine the impact of board size on the financial performance of commercial banks in Nigeria.
2. To determine the impact of board composition on the financial performance of commercial banks in Nigeria.
3. To determine the impact of audit committee on the financial performance of commercial banks in Nigeria.
   • RESEARCH QUESTIONS

The question put forward in this study intends to achieve the research objectives listed above. It is based on this background that this study is using the following constructed questions.

1. To what extent has board size impacted on the financial performance of commercial banks in Nigeria?
2. To what extent has board composition impacted on the financial performance of commercial banks in Nigeria?

• To what extent has audit committee impacted on the financial performance of commercial banks in Nigeria?

1.5     RESEARCH HYPOTHESIS

The following research hypotheses are formulated in the null form as a basis of realizing the objectives of the study.

H₀₁: There is no significant relationship between board size and the financial performance in Nigerian commercial banks.

H₀₂: There is no significant relationship between board composition and the financial performance in Nigerian commercial banks.

H₀₃: There is no significant relationship between audit committee and the financial performance in Nigerian commercial banks.

1.6     SIGNIFICANCE OF THE STUDY

This study is of immense value to bank regulators, investors, academics and other relevant stakeholders. Boards of directors will find the information of value in benchmarking the performance of their banks, against that of their peers. The result of this study will also serve as a data base for further researchers in this field of research.

1.7     SCOPE OF THE STUDY

This study investigates the relationship between corporate governance and financial performance of banks in Nigeria from the period of 2008 – 2012. The choice of this sector is based on the fact that the banking sector’s stability has a large positive externality and banks are the key institutions maintaining the payment system of an economy that is essential for the stability of the financial sector.

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