Assessment Of Corporate Social Responsibility On Financial Productivity Of Microfinance Banks

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Assessment Of Corporate Social Responsibility On Financial Productivity Of Microfinance Banks

Abstract

This study investigated the impact of corporate social responsibility practices on financial productivity of micro finance bank in Nigeria. The study used generalized least square multiple regression to analyze the secondary data extracted from the annual reports and accounts of Seedvest Microfinance Bank, Ibadan. for the period of ten years from 2006 to 2016. The study found that environmental management, and customer services have a positive and significant impact on the financial productivity of micro finance banks. The study also found that corporate community development influences the financial productivity of the banks positively and insignificantly. In view of the findings, the study concluded that, though environmental management is having a negative effect, the bank’s engagement in environmental management could be of corporate strategic relevance as not all investment can yield financial returns. Also, the study recommended among others that the management of Seedvest Microfinance Bank, should patronize more of strategic CSR activities in order to be more credible which can improve their reputation since the application of CSR varies by industry.

Chapter One

Introduction

1.1. Background to the Study

People establish firms to allocate their resource for the purpose of common goal, to earn the profit. To achieve this goal, they also interact with society. On the basis of their motives, organization can be divided into Profit organization, Government organization and Non for Profit organization. Profit oriented organizations try to maximize owner’s wealth, Government organizations define the regulations and structure of society in which firm continue its operations and not for profit organizations perform the social deeds when society need. In society there are such types of organizations exist. No doubt they perform different task but they are interdependent in well-organized society. Business impact on society is growing with the passage of time and the number of Stakeholders also increased.

Though, at an earlier point in history, societal expectations from business organizations did not go beyond efficient resource allocation and its maximization. But today, it has changed and modern business must think beyond profit maximization toward being at least socially responsible to its society.

CSR, this phrase consists of three things, Corporate, Social and Responsibility. CSR check the relationship between firms and society in which they operate and interact, Corporate social responsibility (CSR) is a fast growing concept in banking industry with little attention paid to its linguistic. CSR is common in the literature but not in the practice. Despite the need for business to be morally conducted, one of the primary reasons in CSR is whether organisations pursue it for economic reasons or because of the advantages involve. Unfortunately, there has been few or no empirical test conducted in support of the advantages and disadvantages involve in CSR. This makes CSR practice sustainable to the popular accusation of being a profitable public relations and marketing strategies (Adegboyega and Taiwo, 2011).

In modern business world, corporate social responsibility has been emphasized by stakeholders as a driving tool for success to be accomplished. It has become an increasing evident and crucial component of overall performance of business organizations generally. Conscious of this concept, ordinary citizen, potential investors, pressure groups, politicians, insurance companies and a wide range of other stakeholders are increasingly demanding organizations to account for the social, natural environment and economic impacts that they have on every community in which they operate (Nwachukwu, 2006). CSR has today become imperative, due to the goodwill it generates and the belief that the overall health of both the corporate entities and the environment where they operate are mutually dependent.

Only if business and particularly Nigerian microfinance banks learn that to do well it has to do good, can we hope to tackle the major challenges facing developing societies today. The economic realities ahead are such that ‘social needs’ can be financed increasingly only if their solution generates commensurate earning which precisely is what business is known for. Most microfinance banks in every country is indispensable in the economic development of such country. This is probably the reason why the banking industry is the most regulated of all the industries in most countries.

Furthermore, the performance of business organizations is affected by their strategies and operations in market and nonmarket environments. Hence, there is a debate on the extent to which company directors and managers should consider social and environmental factors in making decisions. In essence, Corporate Social Responsibility (CSR) may be described as an approach to decision making which encompasses both social and environmental factors. It can therefore be inferred that CSR is a deliberate inclusion of public interest into corporate decision making, and the honoring of a triple bottom line which are People, Planet and Profit (Harpreet, 2009).

CSR has become a critical aspect in strategic decision making of microfinance banks primarily due to financial scandals and a drop in investors` confidence. CSR has stepped into the limelight in the 21st century to add to the financial performance of a firm and suggests that corporate decision makers must take care of a range of social and environmental affairs in other to maximize long-term financial returns. Every MFB differs in the way it implement CSR in strategic business practices, with its size, operating industry, stakeholder demands, historical CSR engagement, level of diversification, research and development and labour market conditions a few of the factors that determine this decision making.

1.2. Statement of Problem

In today’s global world, Microfinance banks have many challenges to operate and earn profits. People have more knowledge about the banks, their services and the way such MFB operate their businesses. People are more conscious about the their work for the prosperity of the society, the environment in which they operate and earn profits. In the countries many of this financial institutions are facing many problems with a new role, which is to fulfill the demands of the present generation in a socially responsible way. MFB must take responsibility for the ways they operate in the societies and natural environment because their operations impact societies and the natural environment.

Secondly, Corporate social responsibility commends the attention of executives everywhere, if their public statements are to be believed and especially that of the managers of microfinance banks. We can actually say MFB involved in Corporate Social Responsibility are actually not regretting because of the increase it has made on their sales leading to profit and how they have impacted the environment. Unfortunately, this is not the case. In some banks, more money is spent on advertising their CSR projects. There is therefore the question of finding out the extent to which corporate social responsibility affect deposit money banks in Nigeria.

Banking sector occupies important key position in the economy of a nation. In Nigeria virtually all the banks reports their expenses on social responsibility towards sustainable development in their annual reports. Most of them strive to meet the demand of charitable organizations, government agencies, religious organizations and tertiary institutions.

Microfinance banks efforts on social responsibility have produced multiplier effects on the sustainable development, these social responsibilities costs them some expenses which have effects on their financial performance.

1.3. Objectives of the Study

Many empirical studies have been carried out in order to assess the effect of corporate social responsibility on financial productivity of Microfinance banks, especially in developed countries. Why little studies were carried out in developing countries, Nigeria inclusive. It is against this background that this research paper tries to examine corporate social responsibility in Nigerian microfinance banks.

Other specific objectives include:

  1. Identify the impact of disclosure of CSR on firm’s Profit Margin.
  2. Determine the effect of corporate social responsibility on the financial performance of microfinance banks.
  3. Determine the relationship between Corporate Social Responsibility and Microfinance Banks profitability.
  4. Establish the meaning and practice of corporate social responsibility in relation to its impact on financial productivity
  5. Verify the relationship between EPS, ROA, ROE, Net Profit and CSR of Microfinance Bank
  6. Assess the effect of supporting education on the profitability of Microfinance Banks in Nigeria
  7. Ascertain the effect of financial literacy programs for clients on the profitability of Microfinance Banks in Nigeria

1.4. Research Question

In the light of the above problems faced by most microfinance banks, there is the need to evaluate the effect of CSR on the financial productivity of microfinance bank in Nigeria. The following questions were designed to guide the study:

  1. Impact of disclosure of CSR on firm’s Profit Margin?
  2. What are the effects of corporate social responsibility on the financial performance of microfinance banks?
  3. Are there any relationship between Corporate Social Responsibility and Microfinance Banks profitability?
  4. Explain the meaning and practice of corporate social responsibility in relation to its impact on financial productivity?
  5. Verify the relationship between EPS, ROA, ROE, Net Profit and CSR of Microfinance Bank?
  6. What are the effects of supporting education on the profitability of Microfinance Banks in Nigeria?
  7. What are the effects of financial literacy programs for clients on the profitability of Microfinance Banks in Nigeria?

1.5. Statement of Hypothesis

Hypothesis one

H0: there is no significant relationship between corporate social responsibility Microfinance Bank profitability

Hypothesis two

H0: relationship between EPS, ROA, ROE, Net Profit and CSR of Microfinance Bank

1.6. Significance of the Study

This research enhances the understanding of the relationship between corporate social responsibility and the financial productivity of banks. The results should be of interest to managers who contemplate engaging in CSR activities, investors and financial analysts who assess firm performance, and policy makers who design and implement guidelines on CSR.

The findings of this project will be used to improve information available to relevant actors regarding the current situation concerning corporate social responsibility in the banking industry and how this is related to the sectors profitability.

This project also sought to produce recommendations for other firms willing to incorporate corporate social responsibility practices in their various business operations.

The finding of the study will be of great importance to policy maker in the banking industry as they will be enlightened on the effect of corporate social responsibility on the financial profitability of Microfinance banks in Nigeria.

Lastly, the study will also be of great importance to future scholars and academicians as it will provide literature for future research as well as provide basis for future research.

1.7. Scope of the Study

The performance of business organizations is affected by their strategies and operations in market and non-market environments. Hence, there is a debate on the extent to which company directors and managers should consider social and environmental factors in making decisions.

It is therefore against the foregoing that this study examined corporate social responsibility on financial productivity of microfinance bank, using Seedvest Microfinance Bank, Ibadan as case study.

Although, there are many microfinance institutions in Nigeria, the scope of this research is however limited to microfinance banks with a special focus on a case study which Seedvest Microfinance Bank Limited.

The research study shall focus on the review and meaning of CSR, MFB and other challenges facing Microfinance banks when implementing social responsibility.

1.8. Limitation of the Study

The greatest challenge was the secrecy surrounding allocation of resources to various activities within the bank which led to the withholding of pertinent information from the researchers.

Environmental factor:

This is another limitation envisaged in the research study because of the business environment in which the selected case study was situated and being that most microfinance bank has little capital earnings unlike other commercial banks.

Distribution and retrieval of questionnaires from respondents (banks official and the clients) also constitute limitation as we were unable to retrieve all questionnaires distributed.

1.9. Definition of Terms

1. Volunteerism:

The policy or practice of offering one’s time or talents for charitable, educational, or other worthwhile activities, especially in one’s community (Tuffey, 2009).

2. Corporate Social Responsibility:

A management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. (Obrien, 2011).

3. Financial Literacy:

Is the ability to understand how money works in the world: how someone manages to earn or make it, how that person manages it, how he/she invests it (turn it into more) and how that person donates it to help others.

4. Profitability:

The state or condition of yielding financial profit or gain (Kweyun, 2009).

5. Donation:

Donation determinant shows the interest of financial institution to pay a specific amount of money to rehabilitate the society.

6. Financial Performance:

Financial Performance can be defined as it measures the financial position of a company over a specified time period to know how efficiently a company is using its resources to generate income.

7. Net profit:

Net profit means revenues minus all expenses. Net profit of the organization is shown after deducting the interest expenses and taxes on the profit.

8. Earning per Share:

Earnings per Share show the earning of banks that how much profit is earned during the period of one year on behalf of each outstanding share of common stock.

1.10. Background History of Case Study Seedvest Microfinance Bank Limited:

– SEEDVEST MICRO-FINANCE BANK LIMITED started in Lagos in the year 2006 A D. as a FINANCE HOUSE known as SEEDVEST LIMITED RC439825 it was a financial institution service provider with superior financial strength and had interest in MICRO-FIANACE and SMALL SCALE BUSINESS financing.

SEEDVEST MICRO-FINANCE BANK LIMITED was registered under the provision of banks and other financial institution Acts No 25 of 1999 as amended to carry on micro-finance business on the 25th of June, in the 2007 and was officially opened as a micro-finance bank on the 30th of July, in the 2007 by the then deputy governor of Central Bank of Nigeria finance sector surveillance Mr. Tunde Lemo, also in attendance were the promoters of seedvest limited ,and the then Managing Director(Mr. Bode Ajayi),trade unions, etc . The vision of the company is to be Nigerian leading finance organization by providing critical finance for underserved entrepreneur.
(Source: Olumide A.L; Industrial Training Report; 2013 unpublished)

Chapter Five

Summary, Conclusion and Recommendations

5.1 Summary

In this study, the emphasis was given to the assessment of the “impact of corporate social responsibility practices on the financial productivity of microfinance banks in Nigeria”, using environmental management, community development, and return on asset as proxies for CSR practices and financial productivity respectively. Seedvest Micro finance Bank, Ibadan was used as a case study. The data was analysed using descriptive statistics and inferential statistics, that is, panel regression technique. The test of the formulated hypotheses of this study and the analysis of the data, led to the following major findings:

There is a strong negative and significant relationship between environmental managementand financial productivity(return on asset) of microfinance banks in Nigeria. The relationship between community development and financial productivity (return on asset) of microfinance banks in Nigeria is also positive and significant.
The results also show that there is a negative and significant relationship between employee relations and the financial productivity (return on asset) of microfinance banks in Nigeria. The product quality and customer service a strong positive and significant relationship with the financial productivity (return on asset) of microfinance banks in Nigeria.

5.2 Conclusions

The following conclusions are drawn from the findings of the study:

The environmental management negatively and significantly influences the financial productivity (return on asset) of microfinance banks in Nigeria, the banks that engage in high environmental management are likely to have low financial productivity while those that engage in low environmental management are likely to have higher financial productivity.

Community development has positive relationship with return on asset but insignificantly affects the financial productivity of microfinance banks in Nigeria. Signifying that the return on assets of Seedvest Micro finance Bank is insignificantly affected by CSR practices directed at community development. CSR practices directed at communities in form of developmental projects have no ripple effect on the triple bottom line.

The financial productivity of the microfinance banks in Nigeria is negatively and significantly influenced by CSR activities to employee, implying that not all investment on employees yields better financial productivity.

5.3 Recommendations

In line with the conclusions of the study and for a continuous attainment of high financial productivity through CSR practices of microfinance banks in Nigeria, the following recommendations are proffered:

  1. The management of the companies should prudently explore the use of debt financing to be invested in viable projects that would boost the share value of the companies in the stock market. The result which indicates that the financial productivity of the microfinance banks is insignificantly affected by community development could be attributed to the inability of some of Seedvest Micro finance Bank to disclose more of its engagement to community regularly during the period under consideration. Therefore, management of the microfinance banks in Nigeria should ensure a regular disclosure of their activities directed at community development.
  2. The study reveals that employee relation does not have any effect on the financial productivity of the bank. We therefore, recommend that management of Seedvest Micro finance Bank should be concerned with the expectations of their employees, be socially responsible as well as engaging in more proactive employee relations through more training, better working conditions, motivational packages, better health and safety policies and compliance to ISO26000, which will bring about efficiency and effectiveness in achieving both their personal and corporate objective.
  3. The microfinance banks in Nigeria should improve on their product quality and customers service through providing qualitative and environmental friendly products, ensuring improve and organized customers‟ service which will build better and bigger brand names and improving their brand equity. Since product and customer CSR have a positive and significant effect on their financial productivity.

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