Board Financial Literacy And Corporate Profitability In Nigeria Banking Sector
The study was carried out to examine the aspect of the present day board financial literacy of Banking Institutions in Abia State on profitability. More specifically, the study addressed the effect of financial literacy on profitability of Banking Institutions in Abia State. The researcher used a descriptive research design. A sample of 85 Banking staff was selected using stratified random sampling technique. The study employed questionnaires to collect data from the field. Data was typeset using a computer to ease preparation of the report. Data was then tabulated and presented using descriptive statistics. The results of the research indicate that more performing Banking Institutions employs more than three permanent employees, have been in business for more than five years, has an annual revenue growth of more than 10% and are basically financial literate. Secondly the researcher establishes that there is a positive strong effect of financial literacy on Banking Institutions profitability exists. Finally, the researcher report urges the providers of various financial literacy programs to consider implementing a program which fits the culture and traditions of the context targeted.
Table of Content
- 1.1 Background of the Study
- 1.2 Research Problem
- 1.3 Purpose of the Study
- 1.4 Objectives of the Study
- 1.5 Research Questions
- 1.6 Significance of the Study
- 1.7 Scope of the Study
- 1.8 Limitations of the Study
- 1.9 Definition of Terms
- 1.10 Organization of the Study
Review of Related Literature
- 2.1 Conceptual Review
- 2.2 Theoretical Review
- 2.3 Empirical Review
- 2.4 Summary of Literature Reviewed
- 3.1 Introduction
- 3.2 Research Design
- 3.3 Target Population
- 3.4 Sampling
- 3.5 Data Collection
- 3.6 Sources of Data
- 3.5 Data Processing, Presentation and Analysis
- 3.7 Instrumentation
- 3.8 Reliability of the Study
- 3.9 Validity of the Study
- 3.10 Ethical Consideration
Data Analysis and Result Presentation
- 4.1 Data Presentation
- 4.6 Interpretations of the Findings
Summary, Conclusion and Recommendation
- 5.1 Introduction
- 5.2 Summary of Findings and Interpretations
- 5.3 Conclusion
- 5.4 Policy Recommendations
1.1 Background of the Study
Banking Institutions are the main driving forces of economic growth & job creation that have a special importance, not only in developed countries but also in developing and emerging economies (Lockea,2012). Banking Institutions in most countries have barriers to access to finance, difficulties in exploiting the technology, insufficient managerial capabilities, low productivity and regulatory burdens in their business environment.
According to Capital Market Authority (2010) Banking Institutions play an important role in the Nigerian Economy such as creating jobs, but face serious challenges such as finance setbacks, problems associated with government regulation, tax and low cash flow among others. The economic pillar of vision 2030 initiative aims to improve the prosperity of all Nigerians through an economic development program, covering all the regions of Nigeria, and aiming to achieve an average Gross Domestic Product (GDP) growth rate of 10% per annum beginning in 2010. It focuses on moving the economy up the value chain, addresses tourism, Agriculture, wholesale and retail trade, manufacturing, business process outsourcing (BPO), and financial services. Banking Institutions in Nigeria face challenges that hinder them from attaining economies of scale. Financial literacy therefore is regarded as one of the strategies used by board to provide knowledge and skills needed to change operations and attract more potential users of banking.
Despite all these challenges Banking Institutions have ability to fuel economic growth because they create new jobs, expands the tax base, and is drivers of innovation. According to Wanjohi (2011) Banking Institutions enhance competition and entrepreneurship hence has external benefits on economy wide efficiency, innovation and aggregate productivity. They are the primary vehicles by which entrepreneurs ride on is continuous supply of ideas, finance, and innovations from banks. According to Normah (2007) the concentration of Banking Institutions has a close relationship with the dominant economic activities. Banking Institutions dominate the world economies in terms of fuelling companies through credit, yet their full potential remains shkend with an non standard board (Atsede et al, 2008).
1.2 Research Problem
While boards are the main tool of internal governance mechanism, their literacy may vary depending on their diversities. With the relationship between financial literacy in boardroom and firm performance, or lack thereof, firms will be encouraged to make appropriate choices about board appointments to create and improve firm value as constructing a quality boardroom is all about the caliber and perspective of individual directors chosen. For example, one major noteworthy aspect of Enron‟s board as pointed out by Masulis, Wang and Xie (2010) about foreign directors was that its audit committee included two foreign independent directors; the 5 Chairman of the Hang Lung Group in Hong Kong and a senior executive of Group Bozano in Brazil. This incidence, at a minimum, raises questions about the effectiveness of foreign directors’ financial literacy and financial reporting. In Nigeria, the poor performance of boards in 2009 which almost led to the near collapse of nine banks in the country has eroded investors‟ confidence in banks leading them into divesting their investments and has also painted a poor image on the financial sector. It is a matter of concern as there are very few empirical analyses on this aspect of board fianacial literacy in Nigeria (Ogbechie, 2012; Ogbechie & Koufopoulos, 2010). Ujunwa et.al (2012) and Omoye and Eriki (2013) that have both examined literacy of randomly selected, but there result remain inconclusive as some variables failed to test at any significant level. This study focus on the banking sector because of their complex agency conflicts when compared with other industries
1.3 Purpose of the Study
To examine the effect of financial literacy on profitability of Banking Sector
1.4 Objectives of the Study
The study seeks to assess the relationship between board financial literacy and profitability
1.5 Research Questions
What is the relationship between board financial literacy and profitability?
1.6 Significance of the study
The study will help training institutions in understanding the significance of financial literacy to profitability of Banking Institutions. It will also help academicians in establishing the relevance of curriculum taught in business schools to the actual business world.
Nevertheless, the research add to the existing literature and provide background information to research organizations and scholars who will need to carry out further study on Banking Institutions financial profitability as a key area of development. For instance, a research on SWOT analysis should be conducted on the Banking Institutions finance situation in the country, using lenders (financial institutions) and borrowers (Banking Institutions) to ascertain how financial literacy in the country is characterized by problems associated with risk, information, fund availability and government’s policies.
1.7 Scope of the Study
The study focused on board financial literacy and corporate profitability in Nigeria banking sector in Abia State. Microfinance banks were used to represent the banking sector.
1.8 Limitations of the Study
This study was limited by some respondents not willing to disclose their financial information in terms of revenue. Many firms especially those that have a no or decreasing revenue growth were unwilling to declare.
The response rate of the study was low due to reluctance of the targeted Banking Institutions to participate in the study. Further, some respondents were of the opinion that some of the information sought was confidential and hence they did not fill the questionnaire. Some Board were so busy serving clients hence delegating the marking of questionnaires to their employees.
The time period covered by the study and the resources available to the researcher were also limited. The resources available were not enough to cover the entire part of Abia State. Also, there are many challenges affecting the ability of Banking Institutions operating within Abia State in acquiring Board financial literacy training programs. A detailed review of all the issues is beyond the scope of this study. This was mainly due to the constraints of time.
Finally, the sample studied was restricted to the population of Banking Institutions alone. Perhaps a broader pool of Board financial literacy providers would have given more insights into the Board financial literacy programs they provide to Banking Institutions.
1.9 Definition of Terms
Is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing. Financial literacy is the foundation of your relationship with money, and it is a lifelong
Journey of Learning
Corporate Profitability an economic indicator that calculates net income using several different measures: Profits from current production: Net income with inventory replacement and differences in income tax and income statement depreciation taken into consideration.
1.10 Organization of the Study
This study is divided into five chapters.
- Chapter one is introduction which consists of the background to the study, statement of problem, research questions, research hypotheses, objectives of the study, the significance of the study, the scope and limitations of the study and finally the organization of the study.
- Chapter two deals with the literature review which consists of the conceptual literature, theoretical literature, empirical literature, theoretical framework.
- Chapter three gives the research methodology including research design, population of study, sample size, sampling technique, method of data collection, instrument of data analysis, method of data analysis, validity/reliability of instrument.
- Chapter four is presentation and analysis of data, discussion of findings.
- Chapter five gives the summary, conclusion and recommendations.
Summary, Conclusion and Recommendations
This chapter presents summary of data findings, conclusions based on the findings and recommendations there-to. The chapter also presents recommendations on further studies. The aim of the study was to examine the effect of Board Board financial literacy on profitability of Banking Institutions in Abia State.
5.2 Summary of Findings and Interpretations
The main objective of this study was to examine the effect of Board financial literacy on profitability of Banking Institutions in Abia State. From a sample size of 85 samples, 66 samples successfully provided data that is useful for this study. The main objective of this study was to examine the effect of Board financial literacy on profitability of Banking Institutions in Abia State. Data collected for Banking Institutions profitability included the market share, profitability, the numbers of years each banking institutions have been in business. Data collected for Board financial literacy included answers to simple Board financial literacy questions that covered debt management, record keeping and budgeting skills.
The minimum score for Board financial literacy is 32% with a maximum score of 100%, while on average the Board financial literacy score was 69%. With such a high average score, it implies that on average most Banking Institutions in Abia State are financially literate and understands the basic financial concepts. This is further explained by the fact that there is also a significant number of Banking Institutions with 100% score in Board financial literacy, especially the ones operating in formal sector. On the other hand, the lowest score for Banking Institutions profitability is 20%, maximum score was 95% while average score was 59.74%. This means that on average, most Banking Institutions in Abia State are highly performing and have been in business for more than five years, have experienced high revenue and market share growth in the first five years, and have at least 3 permanent employees.
In correlation analysis table, its shows that the correlation between profitability rate and Board financial literacy is significant at 0.01 levels (2-tailed). This implies that change in profitability score is attributable to Board financial literacy. Further, since the r value is so small (less than 0.5) there was consequently no evidence of multi-co linearity.
As shown in regression analysis, correlations between Board financial literacy and Banking Institutions profitability R at 0.772 and R² at 59.7%, this means that significant amount of Banking Institutions profitability can be explained by Board financial literacy and 40.3% is explained by other factors.
From coefficients analysis table, the results indicate that there is a linear relationship between Banking Institutions profitability and Board financial literacy. However taking the independent variable at zero, then a unit increase in Board financial literacy will lead to 0.781 increases in profitability. It is in agreement with the study done by Simeyo (2011) his study came out with a significant positive impact on the profitability of the microenterprises with a standardized beta coefficient of 0.281which indicated that a unit increase in the provision of training to SSEs resulted to a28.1% increase in profitability. It further suggests that the model applied can statistically significantly predict the outcome of variable. Further, Table 4.6, shows that both constant and Board financial literacy contribute significantly to the model and that Banking Institutions profitability can be predicted by using a linear equation Banking Institutions Y(Profitability) = 5.575 + 0.781X(Board financial literacy).
In general from the research findings, it’s evident that a positive strong effect of financial literacy on Banking Institutions profitability exists. The finding shows that more performing Banking Institutions employs more than four permanent employees, have been in business for more than five years, has an annual revenue growth of more than 30% and are basically financial literate. Ma
This study concludes that there is a strong positive effect of Board financial literacy on profitability of Banking Institutions. Banking Institutions that are more successful are run by Board who are financial literate and understand key financial concepts that include, risk management, debt management, record keeping and budgetary skills. Board financial literacy regarding the budgeting skills assist in reducing the Banking Institutions running costs and ultimately enabled advance planning on loan repayment. In addition, Board financial literacy skills enhanced the ability to do a audit that enabled beneficiaries to identify resource leakages and ensure proper channeling of resources towards credit management. This revelation appears to compliment Miller’s (2009) argument that Board financial literacy helps in empowering and educating investors so that they are knowledgeable about finance in a way that is relevant to their business and enables them to use this knowledge to evaluate products and make informed decisions. It is widely expected that greater financial knowledge would help overcome recent difficulties in advanced credit markets. Board financial literacy prepares investors for tough financial times, through strategies that mitigate risk such as accumulating savings, diversifying assets, and purchasing insurance. This is in line with Greenspan (2002) who argues that Board financial literacy helps to inculcate individuals with the financial knowledge necessary to create household budgets, initiate saving plans, and make strategic investment decisions. Board financial literacy exposes Board to better decision making skills that lead to borrowings, risk taking, diversifications, and investments. The study also concludes that there is a higher a chance for financially literate Banking Institutions board to be more successful.
5.4 Policy Recommendations
The study recommends that Banking Institutions should consider enrolling in Board financial literacy program or any other related programs to enhance their capability. The study recommends the formation of mergers for those Banking Institutions facing constraints in the market in order to remain competitive in the market. Banking Institutions need physical access to markets and help with registration, assistance in finding staff and managing cash flow. Considering the fact that majority of Banking Institutions in informal sector scored poorly in profitability and Board financial literacy, both Abia State government and national government needs to ensure that all Banking Institutions have the basic Board financial literacy. This is very important owing to the fact that, Banking Institutions plays a paramount role in economy and growth in this sector means growth in economy. The providers of various Board financial literacy programs should consider implementing a program which fits the culture and traditions of the context targeted and avoid one size fits all because different Banking Institutions have different experiences. For Board financial literacy programs to achieve better results should be provided by neutral providers who may not have any other interest to derive from the program apart from benefiting the target beneficiaries. The providers of various Board financial literacy programs should consider implementing a program which fits the culture and traditions of the context targeted and avoid one size fits all because different Banking Institutions have different experiences. The provision of technology based financial services must be preceded with the necessary
infrastructures to make its implementation realistic like electricity, network connectivity, general improvement of local population literacy levels and identification of business opportunities and ways of exploitation for the entire population to be economically active and then can discern the relevance of Board financial literacy training and its influence in usage of technology based financial services and products. Linkages between the Banking Institutions should be developed especially within the associations to enable better operation, coordination and collective benefits.
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