THE IMPACT OF CORPORATE GOVERNANCE IN THE NIGERIA FINANCIAL SYSTEM

ABSTRACT

The  Project    is  on  the  Impact  of  corporate  governance  in  the  Nigerian financial system. The objectives of the study were: to identify the principles of corporate governance  in the Nigerian   financial  system; to evaluate  the challenges  of  corporate  governance  in  the  Nigerian  financial  system;  to identify  why  corporate  governance  is  relevant  in  the  Nigerian  financial system.  The study used both primary and secondary sources of data. A total number  of  327  copies  of  questionnaire  were  administered  and 300  were collected   and   analyzed.   Statistical   tools   for   analyses   include,   tables, percentages,  bar charts and chi-square. The findings indicate that rights of share holders, transparency and adequate disclosure of information are some of the principles of corporate governance; Inadequate management capacity and inadequate  financial  controls are some of the challenges of  corporate governance. The study concludes that; there is high level of  malpractice in the Nigerian financial system; inadequate operational and financial controls affect  the  Nigerian  financial  system.  The  study  from  its  findings  made recommendations such  as organizations should ensure that board members are  qualified  for  their  positions  and  that  organizations  should  conduct corporate governance in a  transparent  manner.

CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND OF THE STUDY

Corporate   governance   are   processes   and   structures   by   which business and affairs of an institution are directed and managed in order to improve long term shareholder value by enhancing corporate  performance and   accountability,  while  taking  into  consideration  the  interest  of  other shareholder.    Corporate    governance    is   building    credibility,    ensuring transparency  and  accountability  and  maintaining  an  effective  channel  of information  disfiguration  that  would  foster  good  corporate  governance. Corporate  governance  that entails an  integration  of laws, regulations  and practice of integrity in corporations aids in mobilizing both foreign and local capital.  Nigeria  needs  to  develop  a  mechanism  that  will  attract  foreign investors.   Differences   in   culture   and   values   will   influence   corporate governance laws and practices because of the theory of path dependence.

In Nigeria and all market based economies the promulgation of good investment  or  corporate  law  is  significant  for  attracting  foreign  private

capital.  Law  creates  a  climate  for  the  operations  of  markets  in  which entrepreneurship, efficiency and growth will be encouraged.

Legislation on corporate governance in Nigeria has followed a pattern

laid down. The various laws are made to regulate the practice of a particular trade or profession  in order to protect investors  and ensure  a  sustainable business environment. In Nigeria, we have the Central Bank of Nigeria Act (1991),  the  Banks  and  other  Financial  Institutions  Act  (BOFIA)  1991  as amended,  Investment  and  Security  Act  (ISA)  1999,  the  Nigeria  Deposit Insurance  Corporation   Act  (NDIC)  1985   as  amended  and  other  laws. However, the basic law governing all companies operating in Nigeria is the companies and Allied matter Act (CAMA) 1990.

The Act provides that the board of directors of a company has  the duty to prepare financial statements of the operations of the company during its  financial  year  which  must  and  at  a  specified  period.  The  five  year financial summary of the company must be prepared in order to chart the progress of the company. The five year financial summary of the company must be prepared in order to display the progress of the company.

The law requires that the company’s external auditors appointed by

the Directors and approved at the AGM by the shareholders. Employers of the company are not allowed to act as auditors. In the case of a  bank, no person who has any interest in the bank other than a depositor is a firm in which  a  director  of a  bank  has interest  as  a  director  or  partner,  who  is indebted  to  the  bank,  shall  be  an  auditor.  The  CBN  must  approve  the appointment of any firm or a person as an auditor of a bank as provided for in the BOFIA. The Audit committee made up of equal number of directors and   representatives    of   the   shareholders    shall    examine    and   make recommendations to the AGM based on its findings.

All companies that operate in Nigeria should file their annual venture

to the corporate affairs Commission (CAC) which registers all companies. In respect of the capital market, all accredited capital market operators must file both  quarterly  and annual  return  to  SEC.    All  licensed  banks  and  other financial institutions must also render regular return to the CBN and NDIC.

All  insurance  companies  are  expected  to  submit  regular  returns  in  the prescribed format to National Insurance Commission    (NAICOM). Also the financial  statements  of  the  company  must  be  audited  and  certified  by approved external auditors.

The fact that share holders of the company. Corporate governance is a term

that  is  commonly  used  to  describe  the  way  business  organizations  are managed. The organisations may be for profit or not-for-profit. Either way, the enshrined in certain objectives) and the way its activities are managed should enhanced those objectives.

In very broad terms, corporate governance covers every aspect of the

organizational  set-up, right from how resources  are generated  up to  how they   are  deployed   and  utilized.   Good   corporate   governance   requires judicious and prudent management of resources, both  internally and from the social responsibility perspective. For instance, if a chief executive officer overpays himself or herself, it is in violation of  good practice of corporate governance. This indeed was why the erstwhile boss of the New York stock exchange (Richard  Grasso) lost his  job – he gave himself a pay packet of US$140million per annum!

The same violation would count against a bank executive who hires a relative  of his/hers  for the sole purpose  of facilitating  easy  access  to the organizations resources, beyond normal entitlement, or where it is done with intent to defraud the organization. In which case, corporate governance also concerns  the  recruitment  process  –   whether   it  is  fair  and  allows  the organization to attract and retain the most suitable caliber of people for its type of business.

Corporate   governance   thus   requires   that   all   things   done    in organizations  (profit  or  not-for-profit)  must  be  aimed  at  achieving  the organizational objectives. Naturally, the test of every action or decision rests on  its  contribution   to  organizational   objective,   or  otherwise.   Where  a decision   or   action   vitiates   or   compromises   the   corporate   objectives, especially   when   it   is   done   deliberately,   a   return   of   poor   corporate governance is given.

The external dimension to corporate governance also requires that if a decision enhances corporate objective to the detriment of public good, then there  is  poor  corporate  governance.  This  immediately  makes  the  issue relevant at both the micro (i.e individual)  and macro  (societal)  levels. The general  mood  is  that  good  corporate  governance  at  the  individual  level aggregates into the same at the macro level.

1.3      STATEMENT OF THE PROBLEM

The financial system of the Nigeria financial system is pivotal to the growth of other sectors of the economy. Therefore the absence of corporate governance in the financial service industry will no doubt adversely affect the economic development  of the country. The  unethical  business practice and weak regulatory framework show lack of corporate governance among financial institutions in the country.  This  created lose of confidence  in the banking sector and consequence  of mass withdrawal of deposits by banks customers.  The  recent  crises  in  the  banking  sector  is  a  manifestation  of inadequate and ineffective corporate governance. There were alleged wrong doing  of  bank  chief   executives,  poor  or  non-existent   collaterals,  weak processes and procedures and lack of rigorous process for granting of loan facilities. Based on the above scenario, the central Bank of Nigeria sacked the managing  directors  and  executive  directors  of  five  banks  in  the  country (www.cenbank.org.2009).  Additionally, lack of corporate governance results in bank liquidation and withdrawal of operating licenses.   Thus, the study intends  to  investigate  the  role  of  corporate  governance  in  the  Nigerian financial system.

1.3      OBJECTIVES OF THE STUDY

The specific objectives of the study include the following:

1.     To   identify   the   principles   of   corporate   governance   in  the

Nigerian financial system.

2.     To  evaluate  the  challenges  of  corporate  governance  on  the

Nigerian financial system.

3.     To identify why corporate governance is relevant to the Nigerian financial system.

1.4      RESEARCH QUESTIONS

  What  are  the  principles  of  corporate  governance  in  the  Nigerian

Financial system?

  What  are  the  challenges  of  corporate  governance  to  the  Nigerian

Financial System?

  Why  is  corporate  governance  relevant  to  the  Nigerian  Financial

System?

1.5      RESEARCH HYPOTHESES

To  guide  this  study  in  achieving  its  objectives,  The  following  null  and alternate hypotheses are formulated.

1. Ho  :  Rights  of  shareholders,  transparency  and  adequate  disclosure  of information are not some of the principles of corporate governance.

H1:  Rights  of  shareholders,   transparency   and  adequate   disclosure   of information are some of the principles of corporate governance.

2. Ho:   Inadequate management capacity and inadequate financial controls are  not  some  of  the  challenges  of  corporate  governance  on  the Nigerian Financial System.

H1: Inadequate management capacity and inadequate financial controls are some  of  the  challenges  of  corporate  governance  on  the  Nigerian Financial System.

3. Ho: Corporate governance is not relevant to the Nigerian financial system because it stipulates judicious and prudent management of resources both internally and from social responsibility perspective.

H1:  Corporate  governance  is  relevant  to  the  Nigerian  financial  system

because it stipulates judicious and prudent management of resources both internally and from social responsibility perspective.

1.6      SIGNIFICANCE OF THE STUDY

To the shareholders, the study would enable them to know whether an organization is viable. It would enable the management to look inwards whether they are complying with laid down rules and regulations  that were set  by    management  and  other  regulatory  bodies.  To  employees  good corporate governance would enable them to know their stake in business. It is to ensure that they get better conditions of service and that their salaries and  wages  are  paid  regularly.  And  moreover  the  security  of  the  job  is assured. Customers of banks are assured that they receive interest on their deposits  and  equally  find  out  whether  there  is normal  bank  charges  on interest on loans. Again it would make top management and policy makers to  introduce  appropriate  and  better  policy  guidelines  which  would  have favourable  impact on the economy.

1.8      SCOPE OF STUDY

The  scope  of  this  research  consist  of  the  principles  of  corporate governance,  Challenges  of  corporate  governance,  Relevance  of  corporate governance,  etc. The  study  was carried  out in First Bank  of  Nigeria  Plc, AICCO Insurance Plc, United for Africa Plc, Union  Bank   Plc and Federal Mortgage Bank of Nigeria Plc within Enugu metropolis.

1.8      LIMITATION OF THE STUDY

This study has the following constraints.

Time

The researcher does not have sufficient time to carry out this  study. There was constraint of time in going to places where data and information relevant to the study could be obtained.

Finance

Such an empirical research demands much money for its  successful completion.  Much  money  was required  to cover  transportation  costs  and materials used for the study.

Attitude of the Respondents

Some  of  the  respondents   were  unwilling  to  corporate  with   the researcher  because  they  felt  they  would  not  benefit  from  the  study  and equally have the mind set that the secret of the organization will be exposed.

1.9      DEFINITION OF TERMS Corporate Governance:

Corporate  governance  is  a  system  of  structuring,  operating  and controlling  a  company,  be  it  a  bank  or  non-bank  with  a  view  towards attaining  long term strategy  to maximize  shareholders  wealth  and satisfy other stakeholders. (employees, depositors,  suppliers, other  customers and other stakeholders.

Nigerian financial system

The  Nigerian  Financial  system  is  the  hub  of  financial  institutions, financial instruments and financial markets.

Financial markets

The financial markets are markets which performs the essential function of bringing together those who have funds and those who wish to borrow to finance  production  and consumption.  Thus the markets  consist of money and capital markets.

Financial Instruments

Financial instruments are issued by financial institutions in order to acquire funds from the public such as stocks, shares and bonds.

Money market

The money market deals in short term instruments with maturities ranging from one to two years.

Capital Markets

The capital market is the markets for dealing in longer term loanable funds.

The Central Bank of Nigeria

The Central Bank of Nigeria (CBN) is the apex regulatory authority in the Nigerian financial system.

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