EFFECT OF CORPORATE GOVERNANCE ON THE PERFORMANCE OF COMMERCIAL BANKS IN TERMS OF PROFITABILITY

Abstract

This research examines the impact of corporate governance on performance of commercial banks in Nigeria in terms of profitability. The background of corporate governance dates back to the 19th Century when state corporation laws enhanced the rights of corporate boards without unanimous consent of shareholders. The concept propounds that corporation should have a good board structure in order to enhance performance. It is firmly rooted on the assumption that good corporate governance practices enhance corporate performance. However, there is no consensus on the impact of corporate governance on performance.

CHAPTER ONE

INTRODUCTION

• Background of the study

The concept of corporate governance has attracted a good deal of public interest in recent years, because of its apparent importance on the economic health of corporations and society in general. Basically, corporate governance in the banking sector requires judicious and prudent management of resources and the preservation of resources (assets) of the corporate firm; ensuring ethical and professional standards and the pursuit of corporate objectives, it seeks to ensure customer satisfaction, high employee morale and the maintenance of market discipline, which strengthens and stabilizes the bank Recently, the banking industry in Nigeria has been undergoing serious reforms over the past couple of years arising from the central bank of Nigeria’s requirement for banks to increase their capital base (share) to a minimum level of twenty five billion naira (N25B), (Ogbeche, 2006:1). This triggered off several mergers and acquisitions that have reduced the number of players from eighty nine (89) to twenty five (25) banks as at the beginning of 2006 (Kama, 2006; 66). It is imperative to note that at the end of the consolidation exercise, the total capitalization (the value of all equities of the banks came to N775.0 billion compared to the figure of N327 billion before the commencement of this program in July 2004. (Adedipe, 2004: 52). The issue of corporate governance has recently been given a great deal of attention in various national and International forays. This is in recognition of the critical role of corporate governance in the success or failure of companies. Corporate governance refers to the processes and structures by which the 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 account the interest of other stakeholders. Corporate governance is therefore about building credibility, ensuring transparency and accountability as well as maintaining an effective channel of information disclosure that would Foster good corporate performance.

The strategy for addressing the challenges of corporate governance has taken various forms at both the national and International levels and have culminated in initiatives such as: the OECD Code; the Cadbury Report; the Basel Committee Guidelines on Corporate Governance; the King‟s Report of South Africa etc. It is therefore necessary to point out that the concept of corporate governance of banks and very large firms have been a priority on the policy agenda in developed market economies for over a decade. Further to that, the concept is gradually warming itself as a priority in the African continent. Indeed, it is believed that the Asian crisis and the relative poor performance of the corporate sector in Africa have made the issue of corporate governance a catchphrase in the development debate (Berglof and Von -Thadden, 1999).

Performance may be defined as the reflection of the way in which the resources of a company (bank) are used in the form which enables it to achieve its objectives. According to Heremans, (2007), financial performance is the employment of financial indicators to measure the extent of objective achievement, contribution to making available financial resources and support of the bank with investment opportunities.

These are factors which play a role in shaping the financial status of a company. Most studies divide the determinants of commercial banks’ financial performance into two categories, namely internal and external factors. Internal determinants of profitability, which are within the control of bank management, can be broadly classified into two categories, i.e. financial statement variables and nonfinancial statement variables, (Linyiru, 2006). While financial statement variables relate to the decisions which directly involve items in the balance sheet and income statement; non-financial statement variables involve factors that have no direct relation to the financial statements. The examples of non-financial variables within the this category are number of branches, status of the branch (e.g. limited or full-service branch, unit branch or multiple branches), location and size of the bank, Sudin (2004).

Several events are therefore responsible for the heightened interest in corporate governance especially in both developed and developing countries. The subject of corporate governance leapt to global business limelight from relative obscurity after a string of collapses of high profile companies. Enron, the Houston, Texas based energy giant and WorldCom the telecom behemoth, shocked the business world with both the scale and age of their unethical and illegal operations. In developing economies, the banking sector among other sectors has also witnessed several cases of collapses, some of which include the Alpha Merchant Bank Ltd, Savannah Bank Plc, Societe Generale Bank Ltd (all in Nigeria), The Continental Bank of Kenya Ltd, Capital Finance Ltd, Consolidated Bank of Kenya Ltd and Trust Bank of Kenya among others (Akpan, 2007). In Nigeria, the issue of corporate governance has been given the front burner status by all sectors of the economy. For instance, the Securities and Exchange Commission (SEC) set up the Peterside Committee on corporate governance in public companies. The Bankers‟ Committee also set up a sub-committee on corporate governance for banks and other financial institutions in Nigeria. This is in recognition of the critical role of corporate governance in the success or failure of companies (Ogbechie, 2006:6). Corporate governance therefore refers to the processes and structures by which the business and affairs of institutions are directed and managed, in order to improve long term share holders‟ value by  enhancing corporate performance and accountability, while taking into account the interest of other stakeholders (Jenkinson and Mayer, 1992).

• STATEMENT OF THE PROBLEM

In developing economies, the banking sector among other sectors has also witnessed several cases of collapses, some of which include the Alpha Merchant Bank Ltd, Savannah Bank Plc, Societe Generale Bank Ltd (all in Nigeria).  In Nigeria, the issue of corporate governance has been given the front burner status by all sectors of the economy. For instance, the Securities and Exchange Commission (SEC) set up the Peterside Committee on corporate governance in public companies. The Bankers‟ Committee also set up a sub-committee on corporate governance for banks and other financial institutions in Nigeria. This is in recognition of the critical role of corporate governance in the success or failure of companies (Ogbechie, 2006:6). Corporate governance therefore refers to the processes and structures by which the business and affairs of institutions are directed and managed, in order to improve long term share holders‟ value by enhancing corporate performance and accountability, while taking into account the interest of other stakeholders. It is in view of these that the researcher intends to investigate the effect of corporate governance on the performance of commercial banks in Nigeria.

• OBJECTIVE OF THE STUDY

It is pertinent to note that the main objective of the study is to investigate the effect of corporate governance on the performance of commercial banks in Nigeria. But to aid the completion of the study, the researcher intends to achieve the following objectives

1. To investigate the effect of corporate governance on banks performance
2. To ascertain the relationship between corporate governance and profitability

• To investigate the effect of noncompliance to corporate governance principle on the profitability of the banks

1. To ascertain if there is any change in the banking sector since corporate governance was adopted
   • RESEARCH HYPOTHESES

For the successful completion of the study, the following research hypotheses were formulated:

H₀: corporate governance have no effect on the performance of the banks

H₁: corporate governance have effect on the performance of the banks

H₀: there is no relationship between corporate governance and profitability of the banks

H₂: there is a significant relationship between corporate governance and profitability of the banks

• SIGNIFICANCE OF THE STUDY

It is believed that at the completion of the study, the findings will be of great importance to the central bank of Nigeria who are charged with the responsibility of regulating the activities of the commercial banks to ensure strict compliance with the corporate governance guideline. The study will also be of great importance to the managers of commercial banks as the findings will remind them of the tremendous benefit of corporate governance practice.

The study will also be of great benefit to researchers who wishes to embark on a study in similar topic as the study will serve as a guide to them. Finally the research will be of great importance to student, teachers, lecturers, academia’s and the general public.

1.6 SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers the effect of corporate governance on the performance of commercial banks in terms of profitability. In the course of the study, the researcher encounters some constrain which limited the scope of the study. Some of these constrain are stated below:

• Availability of research material: The research material available to the researcher is insufficient, thereby limiting the study.
• Time: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
• Finance: The finance available for the research work does not allow for wider coverage as resources are very limited as the researcher has other academic bills to cover.
  • DEFINITION OF TERMS

Management

Management (or managing) is the administration of an organization, whether it is a business, a not-for-profit organization, or government body.

Banks  

A bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets.

Corporate Governance

The methods by which suppliers of finance control managers in order to ensure that their capital cannot be expropriated and that they earn a return on their investment.

Commercial banks

Bank that dealing with businesses: a bank whose primary business is providing financial services to companies

• Organization of the study

This research work is organized in five chapters for easy understanding as follows Chapter one is concern with the introduction which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study it’s based thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion and recommendations made of the study.

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