EVALUATING THE IMPACT OF CORPORATE GOVERNANCE ON THE NIGERIAN BANKING SECTOR (A CASE STUDY OF THREE SELECTED BANKS IN LAGOS STATE)

ABSTRACT

The study is aimed at Evaluating the Impact of Corporate Governance on the Nigerian Banking Sector.

The two major objectives of the study were to evaluate the principles of corporate governance and to identify the challenges of corporate governance on the Nigerian banking sector.

Primary and secondary sources of data were used to obtain information for the study.  The questionnaire was designed in five point Likert scale format, in line with the objectives set out to achieve the study.

In calculating the sample size, the researcher applied the statistical formula for selecting from a finite population as formulated by Yamane. The Chi-square (X2) statistical test method was used to test the hypotheses.

Findings indicate that the principles of corporate governance include role and responsibilities of the board, disclosure and transparency, rights and equitable treatment of shareholders and the challenges of corporate governance on the Nigerian banking sector includes technical incompetence of board and management, increased levels of risks, and inadequate management capacity.

Based on the findings, the study recommends that the central bank of Nigeria should put more efforts to establish or promulgate regulations which will enforce compliance to the principles of corporate governance by boards of the Nigerian banks and that efforts should be made to educate the Nigerian public especially the shareholders of banks on the place and need for corporate governance so that they can insist on it when they go for annual general meetings (AGM).

CHAPTER ONE INTRODUCTION

1.1                  BACKGROUND OF THE STUDY

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or  controlled.    Corporate  governance  also  includes  the relationships among the many stakeholders involved and the goals for which the corporation is governed.   The principal stakeholders are the shareholders, management, and the board of directors.    Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large (Wikipedia, 2010:1).

Corporate governance is a multi-faceted subject.  An important theme of corporate   governance   is   to   ensure   the   accountability   of   certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem (Wikipedia, 2010:1).

It is incontrovertible that corporate governance is one of the most critical issues in the business world today.   There was a time when this topic would not have elicited much attention.  But, with episodic failures of many corporations, corporate governance has taken a central stage in business discuss and any intellectual gathering on business management (Oladimeji, 2007:1).

Corporate governance  is  also  a  system of structuring, operating and controlling a company, be it bank or non-bank, with a view towards attaining long term strategic goals to maximize shareholders wealth and satisfy other stakeholders, employees, depositors, suppliers, other customers, and other stakeholders (Phillips, 2007:7).

Corporate governance is concerned with improved stakeholder performance viewed from this perspective, corporate governance is all about  accountability,  boards,  disclosure,  investor  involvement  and related issues.  Research has shown that firms with stronger shareholder rights had higher firm value, higher profits, higher sales growth, lower capital expenditure and fewer corporate acquisition (Oladimeji, 2007:2).

Corporate governance is important for the survival of companies and indeed of national economies in the increasingly global economy. For transition economies, such as Nigeria’s which are faced with the double challenge of restructuring for  greater  efficiency  and  creating  foreign

investment-friendly environment, good corporate governance is crucial for success (Anyaoku, 2010:1).

The day-to-day operations of business have raised the need to install an appropriate frame work for ensuring transparency and accountability in the  management of the business ventures.   Thus, the research topic, “Evaluating the Impact of Corporate Governance on Nigerian Banking Sector”.

1.2      STATEMENT OF THE PROBLEM

The number of bank failures and financial crises during the last two decades raised questions on the competency of the governance practices of the banking system.  The undesirable banking practices were as much responsible in causing banking crises which shook the banking sectors of Nigeria (Ogidefa, 2008:5).

The Central Bank of Nigeria identified the problems in the banks which adherence to corporate governance will solve as:

             Disagreements between Board and Management giving rise to Board squabbles.

        Ineffective Board oversight functions

        Fraudulent  and  self-serving practices  among  members  of  the  board,

management and staff.

        Overbearing influence of chairman or MD/CEO, especially in family –

controlled banks

        Weak internal controls

             Non-compliance   with   laid-down   internal   controls   and   operation procedures.

             Ignorance  of  and  non-compliance  with  rules,  laws  and  regulations guiding banking business.

        Passive shareholders

        Poor  risk  management  practices  resulting  in  large  quantum of  non-

performing credits including insider-related credits.

        Abuses in lending, including lending in excess of single obligor limit.

             Sit-tight Directors-even where such directors fail to make meaningful contributions to the growth and development of the bank.

             Succumbing  to  pressure  from  other  stakeholders  e.g  shareholder’s appetite  for  high dividend and  depositors quest  for  high  interest  on

deposits.

        Technical incompetence, poor leadership and administrative ability.

        Inability to plan and respond to changing business circumstances.

        Ineffective management information system.

1.3      OBJECTIVES OF THE STUDY

The main objective of this study is to evaluate the impact of corporate governance on the Nigerian banking sector.   The subsidiary objectives include the following:-

1.        To evaluate the principles of corporate governance.

2.         To identify the challenges of corporate governance on the Nigerian banking sector.

3.         To identify the prospects of corporate governance on the Nigerian banking sector.

4.         To   identify  the   extent  to   which  banks  operate  by  corporate governance.

1.4      RESEARCH QUESTIONS

The following research questions will guide the conduct of this study;

1.        What are the principles of corporate governance?

2.         What are the challenges of corporate governance on the Nigerian banking sector?

3.         What  are the  prospects of corporate governance on the  Nigerian banking sector?

4.        To what extent do banks operate by corporate governance?

1.5      RESEARCH HYPOTHESES

For the purpose of this research work, some research hypotheses have been put forward. They include:

Hypothesis 1

Ho1:   The principles of corporate governance do not include role and responsibilities of the  board,  disclosure and  transparency, rights and

equitable treatment of shareholders.

HI:       The principles of corporate governance include role and responsibilities of the board, disclosure and transparency, rights and equitable treatment of shareholders.

Hypothesis 2

Ho2:     The challenges of corporate governance on the Nigerian banking sector do not include technical incompetence of board and management, increased levels of risk, and inadequate management capacity.

HI:       The challenges of corporate governance on the Nigerian banking include Technical incompetence of Board and management, increased levels of risk, and inadequate management capacity.

Hypothesis 3

Ho3:     The prospects of corporate governance on the Nigerian banking sector do not include technical competence of board and management, decreased

levels of risks, and adequate management capacity.

HI:       The prospects of corporate governance on the Nigerian banking sector include  technical  competence  of  board  and  management,  decreased levels of risks and adequate management capacity.

Hypothesis 4

Ho4:     The extent to which banks operate by corporate governance is low.

HI:       The extent to which banks operate by corporate governance is high.

1.6      SCOPE OF THE STUDY

This research focuses on evaluating the impact of corporate governance on the Nigerian banking sector.    The study evaluates the principles of corporate governance, extent of corporate governance practices in Nigerian organizations, challenges of corporate governance in Nigeria, the prospects of corporate governance on the Nigerian banking sector.

This study is carried out in three selected banks in Lagos State namely; First Bank of Nigerian Plc, Guaranty Trust Bank Plc and United Bank for Africa Plc.

1.7      LIMITATION OF THE STUDY

The main constraints of the study include these.

Time Constraints

The time given for this research work was limited and this made the researcher  unable  to  source  for  additional  materials  to  augment  the

existing ones.

Attitude of the Respondents

Some  of  the  respondents  were  unwilling  to  co-operate  with  the

researcher because they feel they have nothing to benefit from the study.

Financial Constraints

The finance available to the researcher was inadequate and so he had to restrict his access to people, materials and places.

1.8      SIGNIFICANCE OF THE STUDY

This study will be of immense benefit to the banking public, the government,  bank  management,  shareholders  and  stakeholders  as  it would reveal the extent to which the corporate governance concept has been accepted and practiced in the Nigerian banking sector.

It would also provide a yard stick for further research in this field.

1.9      DEFINITION OF TERMS

For the purpose of clarification and understanding of this study, some concepts requires definition.

Board of Directors

A group of people who have power to make decisions and control a

company or other organization (Hornby 2000:115).

Shareholders

Owners of shares in a company or business (Hornby 2000:1084).

Stakeholders

Persons or companies that are involved in a particulars organization, project, system etc, especially because they have invested money in it

(Hornby 2000:1161).

Regulator

A person or an organization that officially controls an area of business or industry and makes sure that it is operating fairly (Hornby 2000:986).

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