The Effect Of Corporate Governance On The Nigerian Banking Sector

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The Effect Of Corporate Governance On The Nigerian Banking Sector


Abstract


The study was conducted to examine the effect of corporate governance in the Nigerian Banking sector. The specific objectives of the study were to determine effect of corporate governance on bank performance and to ascertain the relationship between corporate governance, loans and bad debts in banks while making recommendations on how to boost corporate governance and reduce the rate of bad debt and insolvency in the Nigerian banking sector. In order to achieve these objectives, the field study of the cross-sectional survey method, were employed. Using these approaches, data were collected from secondary sources and analyzed using the non-probability sampling technique with the Taro Yamane formula for determining sample size and the student’s t-test to test the hypothesis. From the analysis, it was discovered that there is a strong relationship between corporate governance and bank performance. It was also found out that poor corporate governance contributes to bad debts on banks also that the growth and success of the entire banking sector depends on good corporate governance and so it was recommended that banks should follow the principles of good corporate governance given by the Basel Committee which emphasizes on board responsibility to approve and oversee the implementation of bank’s strategic objectives, risk strategy, corporate values, and also to employ well train and experienced personnel for credit granting and risk mangers for the right position in other to reduce bad debt and bank failure.


Chapter One


Introduction

1.1 Background of the Study

In recent years, Commercial Supremacy has become crucial in many developing economies. A convenient corporate governance structure in an organization leads to an amazing number of benefits to the organization as sought by shareholders; corporate managers & executive directors (McGee, 2008). Countries with strong corporate governance structures attract funds easily. Firms that guarantee investor rights and have proven corporate governance practices like timely and adequate corporate disclosure and sound board practices attract both domestic and international investors than those which do not. Special attention is targeted towards the effects of corporate governance on firm performance.

The reason is that the performance of a firm can be affected by corporate governance especially in scenarios where there exists a struggle of curiosity flanked by the stockholders and the management or between the minority and controlling shareholders. Managers are always entrusted with a lot of power as they characterize the welfares of the board associates and controlling shareholders. The power of controlling shareholders however depends on their capability to manipulate board decisions through majority voting and other ways of expressing opinion. Increase in the voting ratio to cash flow rights increases the distortionary policies (Melissa, 2012).

Several theories have emerged expounding on corporate governance. The agency theory advanced by Means & Berlie (1932) characterizes the association between the agent and the principal to be that of mistrust and competing interests. Conversely, the Stewardship theory replaces mistrust with goal congruence. It suggests that managers’ need for achievement and success can only be realized when the organization performs well. The Stakeholders theory (Clarkson, 1994) recognizes existence of other stakeholders including suppliers, customers, other organizations, employees and the community. The Resource dependence theory (Pfeffer, 1972) introduces organization’s accessibility to resources in addition to separation of ownership. Information resource and strategic linkages with other organizations through the Board are considered to be critical resources for a firm’s good performance.

The debate on company supremacy debate is majorly anchored on the level of power possessed by the Board of Directors regarding the level at which executive management need to be participants in the process of formulating decisions. The traditional approach has a different approach to corporate governance and it argues that firm owners do not have any influence on the decisions of board and the top management. Concrete studies have however not been conducted in corporate governance which deal with the complexities that are ingrained in the process of corporate governance. This could be said to be the greatest problem of corporate governance. According to Hugh et al., (2011), owner investment choices and preferences are determined by their risk taking levels among other factors.

The effect of corporate governance on Nigeria ’s banking sector will be investigated in this study. Several guidelines have been developed by the Capital Markets Authority to encourage good practices in corporate governance by the listed public companies in Nigeria so as to adequately respond to the increasing relevance of the governance matters in both the growing and emerging economies and for the promotion of regional and domestic growth of the capital market. It also recognizes the contribution of good governance in maximization of the value of shareholders, capital formation, protection of the rights of investors and corporate performance.

For the purpose of the mentioned guidelines, corporate governance is thus described as the structure and process used in the directing and management company’s business affairs to enhance corporate accounting and prosperity so as to attain the long term objectives of the all the stakeholders. The above guidelines were formulated in under consideration of the efforts of several jurisdictions through several committees and task forces which include the South Africa, United Kingdom, the Common wealth Association Malaysia, for OECD and Corporate Governance.


1.2 Statement of Problem

Various studies have indicated that the objectives pursued by shareholders and corporate managers tend to differ and are contradictory with regards to their individual interests and this has given rise to corporate governance which is said to minimize the spill over. Good corporate governance practices enables firms to keep off from scandals and fraud and enhance the organization’s image on public domain. It is also important for companies to improve the performance of the firm, enhances investment atmosphere, ensures investor rights, as well as promote economic development (Shastri & Braga, 2011).

A number of studies have been done at the global and local level on corporate governance and how it affects the performance of the firm . Zhaoyang and Udaya (2012) in their study concluded that the firms’ panel scope and composition of non-executive managers in the whole panel structure revealed an undesirable correlation to the worth of the firm, also the effect of non-executive directorship on financial performance was negative. Yermack (1996) examined board size on the firm’s performance and his conclusion was that smaller board size translated into better performance and he proposed that the appropriate size would be of 10 or less members. Oluyemi (2005) contemplates corporate governance to be significant in facilitating achieving a stable economy and banks’ strategy. In order to accomplish this, there should be strict compliance to lending standards, whereby high risky loans need to be well secured. Najjar (2012) in his conclusion stated that the effect business supremacy has on presentation of businesses in the insurance industry was considerable from a research carried out in Bahrain.

In Nigeria , cases of corruption has brought about many debates in many business and legal sectors which have in turn influenced the confidence of both local and foreign investors(Munyuru,2005).For example, the recently published huge losses and numerous unresolved court cases of Nigeria Airways and Kenol Kobil have thrust corporate governance practices into the limelight (Mboka, 2014).Scandals involving poor corporate governance of the directors and managers have been reported in sectors like Euro Bank, Uchumi supermarkets, the NBK, the near collapse of unga group, and the discovery of secret accounts by some CMC Motors directors (Madiavale,2011). Nigeria n companies need to focus on corporate governance which would mitigate against some of the risks of doing business. Previous researchers have been only concentrating on Banking and other service industries thereby ignoring other sectors like automobile sectors which are still prone to Corporate Governance issues.

Good business supremacy creates an enabling environment for good firm performance and sets good performance measures since it lowers the risk associated with poor performance (Braga &Shastri, 2011). Issues of collapse, placement under statutory management and fraud in some banks raise the question on whether good corporate governance practices and principles are adhered to, if the governance pillars are clearly outlined and practiced and if the roles and responsibilities of the governance facilitating structures are clear. Scholars who have conducted studies on this area concentrated so much on the structures of corporate governance majorly board of directors. However, the study analyzed the following variables which were not reviewed by earlier researchers: board size, board diversity, board independence, number of meetings and several committees and how they affect performance of banking sector in Nigeria .The study’s wish is to surfeit these probe gaps by providing an involve to the question: What is the effective of corporate governance on the performance of the banking sector.


1.3 Objectives of the Study

The main objective of this study is to examine The Effect Of Corporate Governance On The Nigerian Banking Sector.

Specifically, the study aims :

  1. To determine the effect of corporate governance on the performance of firms
  2. To determine the relationship between the effective corporate governance and auditor’s independence
  3. To determine the relationship between corporate governance and the composition of the board of directors.

1.4 Significance of Study

The study is beneficial to the companies at the NSE listing to understand the linkage between corporate governance and performance, which is paramount to the need of having a strong team of decision makers with a broad range of perspectives and abilities crucial to the financial success and in building trust among companies’ stakeholders. The findings of the study are also helpful to the policy makers more understanding on the structures of corporate governance which result in the growth of the private sector and contribute to national economic growth and stability at large.

This study’s findings would create more understanding on corporate governance theories and practices. The study also contributed to the existing knowledge on the association between corporate governance and organizational performance of the banking sector and also fill the gap on the relationship between these variables for future reference by other researchers. Future researchers may also benefit from this research as enables them to have a look at what has been researched before and identify gaps that have not yet been researched on.

This study is also of importance to all institutions both public and private who have adopted corporate governance practices in Nigeria since it equips them with knowledge on the ideal application of corporate governance. It also empowers chief executive officers and board of directors of private sector organizations with knowledge on practices of corporate governance.


1.5 Research Hypotheses

The following Hypotheses shall be empirically tested through the adoption of Product

  • Hypothesis 1: There is no significance relationship between auditor’s independence and the effective corporate governance.
  • Hypothesis 2: There is no significance relationship between corporate governance and the
    composition of the board of directors.

1.6 Scope of the Study

This work is empirical in nature and will utilize data of banks listed on the Nigerian Stock Exchange between 2000 and 2006.


1.7 Limitations of the Study

Company information is confidential and proprietary. Most of the respondents did not want to give out information fearing that it might be used to create a negative perception about their banks. This was handled by the researcher through giving assurance to them that the information would be handled with confidence and only be utilized for the intended purpose.

The accuracy of the results of this study was largely based on the respondents’ opinions about the effect of corporate governance on the performance of banking sector. The researchers seeking clarifications from the respondents on any weird responses. Lastly, the study faced the challenge resources and time thus limiting the scope of the study. This led to delays in the delivery and picking of the questionnaires.


Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

The study’s summary, conclusion and recommendations are presented in this chapter. The study’s objective was to establish the impact of corporate governance on the performance of banking sector. The chapter also presents recommendations for practice and policy as well as suggestions for future studies.


5.2 Summary of Findings

The study’s objective was to explore the effect of corporate governance on the performance of Banking sector in the NSE . In order to establish the effect of corporate governance on the performance, regression analysis using SPSS. The components of corporate governance that were considered are: board diversity, board size, number of committees and number of meetings and board independence.

The study established that smaller boards improve the performance of the firm although larger size boards are more capable in the provision of resources.. The study further established that boards of Banking sector at the NSE are diverse in terms of gender and that the appointment of board members considers a mix of skills required in the stewardship of the organization such as education and industry experience. The study also established that the boards of Banking sector at the NSE are independent since there were more non- executive than the Executive and therefore adds value to the firms since they have attachment to the firms. Further, the study found out that the existence of independent committees and the number of board meetings held annually enhances the organization’s financial performance .

Regression findings revealed a stong association (R= 0.723) exists between corporate governance and financial performance with corporate governance accounting for 52.3% of the total variance in firms performance. Further, the study established that corporate governance components.


5.3 Conclusion

It can be concluded from the findings that a strong association exists between corporate governance and the bank performance. Corporate governance accounts for 52.3% of firm performance of the companies at the NSE listing. It also concludes that corporate governance components (board size, board independence, board diversity, number of committees, number of meetings) have positive and strong impact on the performance of banking sector.


5.4 Recommendations

The study found out that board diversity, number of committees and number of meetings affects firm performance positively. This study therefore recommends that the shareholders should promote board diversity, promote independence of audit committees and increase the frequency of the board meetings as this translate to improved firm performance. The study also established that number of non-executive (independent) directors and the affects firm performance of listed companies positively. The study therefore recommends that the shareholders of banking sector should keep the number of independent directors higher than the insiders as this allow them to make appropriate and non-partisan decisions.


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