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APPRAISAL OF NIGERIAN BANKS COMPLIANCE WITH CBN CODE OF CORPORATE GOVERNANCE AND IT’S EFFECT ON BANK PERFORMANCE
- Background of the Study
The situation where the public loses confidence in the financial institutions can result in panic and consequentially financial and economic woes. The absence of confidence in any organisation is attributable to opaque management practices with deleterious effect on its performance Adegbemi, Ofoegbu and Ismail (2012). Corporate performance is an important concept that relates to the way and manner in which financial, material and human resources available to an organization are judiciously used to achieve the overall corporate objective of an organization. Adegbemi, et al (2012). It keeps the organization in business and creates a greater prospect for future opportunities.
Zingales (1998) defined corporate governance as a group of mechanism that stakeholders use to guarantee that directors effectively manage corporate resources, a task that includes the way in which quassi-rents are developed and distributed. Shleifer and Vishny (1997) defined corporate governance as the way in which suppliers of finance to corporation ensure themselves of getting a return on their investments.
The bank corporate governance process is a complex framework. This governance framework encompasses a bank’s stockholders, its managers and other employees, and the board of directors Jegede, Akinlabi and Soyebo (2013). Separation of ownerships and controls of bank induces the problem of internal corporate governance. Managers (employees) who act as the agents have particular interests which may differ from those of consumers and owners of the bank. In order to reduce the agency conflict of interests between managers (agents) and owners (principals), a continuous improvement on compensation and incentive system should be provided by the bank owners. The owners also select and govern the board of directors who have high credibility and capability to serve them better. This mechanism refers to internal corporate governance. Through this mechanism, the owners expect managers to have the same perception and direction as well as owners about risk management (risk-taking behaviour) which is related to return or bank performance Eduardos, Hermeidito, Putu, Supriyatna (2007). Banks further operate under a unique system of public oversight in the form of bank supervisors and a comprehensive body of banking laws and regulations. The interaction between all of these elements determines how well the performance of a bank will satisfy the desires of its stockholders, while also complying with public objectives. For investors and regulators, bank corporate governance framework is thus of critical importance to a bank’s success and its daily operations. As a result, understanding the corporate governance of banks is especially important because of the systematic risk that banking activity poses for the economy at large as evidenced by the U.S. savings and loan crisis in the 1980’s, the Asian financial crisis in the 1990’s and the more recent supreme mortgage crisis Jegede et al.( 2013) citing Alexander (2006).
The Nigerian banking system has undergone remarkable changes over the years in terms of the number of institution, ownership structure and the depth and breadth of the operations. These changes have been influenced largely by the opportunities presented by the deregulation of the financial sector, globalization of operations, technological advancements, impact of global economic downturn and the adoption of regulatory guidelines that conform to international standards. The developments in the Nigerian banking industry show that absence of good corporate governance was mainly responsible for the dismal performance of the industry which should act as a catalyst for economic growth.
According to the Central Bank of Nigeria (2006), the weaknesses in the corporate governance for banks in Nigeria among others include
Disagreement 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 control and operation procedures
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
Technical incompetence, poor leadership and administrative inability.
As a result of the above weaknesses in bank’s corporate governance, the central bank of Nigeria enacted a code of Corporate Governance for Banks in Nigeria post consolidation in 2006. The code covered six major areas such as;
Organizational structure which comprises of; Separation of powers, board size, Establishment of committees, Board diversity.
Industry transparency, Due processed Data Integrity and Disclosure Requirements.
Role of Auditors.
The code was discussed in detail in chapter two.
1.2. Statement of the Problem
Corporate performance is an important concept that relates to the way and manner in which financial, material and human resources available to an organization are judiciously used to achieve the overall corporate objective of an organization. It keeps the organization in business and creates a greater prospect for future opportunities. The overall effect of good corporate governance should be the strengthening of investor’s confidence in the economy of our country. Corporate governance is therefore about building credibility, ensuring transparency and accountability as well maintaining an effective channel of information disclosure that would foster good corporate performance. It is therefore crucial that banks observe a strong corporate governance ethos.
Corporate governance has become a major concern to both the public and the private sector of the Nigerian economy. The Basel Committee on Banking Supervision has called attentiveness to the need to improve the corporate governance of financial institutions Ujunwa, Okoyeuzu and Nwakoby (2012). There is a strong belief that corporate governance practice is necessary to guarantee a sound banking system that instills confidence on banking sector. In the immediate past two decades financial services industry has experienced fluctuating fortunes leading to high profile cases of corporate failure and consequent near loss of public confidence and hence, the banking reform kick-started in 2004. The industry’s problems are consequences (directly or indirectly) of bad corporate governance, Chukwudire (2004). The lack of effective corporate governance in Nigeria has worked to the detriment of shareholders and created a class of stakeholder who has lost interest in the banking system. The corporate governance culture in Nigeria has persistently failed to be responsible to the stakeholders and has no deep rooted mechanisms to a balance among the major players (board of directors, shareholders and management) in the system or economy.
Poor corporate governance was identified as one of the major factors in virtually all known instances of financial institutions distress in the country, and hence the CBN enactment of a code in 2006. Several authors such as Olayinka (2010), Adegbemi et al. (2012), Adeusi et al. (2013), Ujunwa, et al. (2013) and Okoi et al. (2014) concentrated on the relationship or effect of certain Corporate Governance indices on bank performance. However, none has appraised the level of compliance by banks in Nigeria to this code since inception in 2006 and its effect on banks’ performance.
- Objectives of the Study
The general objective of this study is to appraise Nigerian banks compliance to the CBN code of Corporate Governance as well as its effect on banks performance.
The specific objectives of the study are to:
- Determine the extent to which commercial banks in Nigeria complied with the Central bank of Nigeria code of corporate governance.
- Evaluate the effect of banks’ compliance to CBN code of corporate governance on the performance of banks in Nigeria.
1.4. Research Hypotheses.
Specifically, the following alternate hypothetical statements were tested.
- “Nigerian commercial banks significantly complied with the central bank of Nigeria code of corporate governance”
- Banks’ compliance to the CBN code of corporate governance has significant effect on the performance of banks in Nigeria.
1.5. Scope of the Study
This study was limited in scope to deposit money banks in Nigeria. Reforms in the Nigerian banking sector have been an age long activity. Specifically, this study focused on the immediate past and ongoing bank reform that commenced in 2004 and with corporate governance issue as one of the core agenda of the reform of which a code of corporate governance was enacted for banks in Nigeria by CBN in 2006.
It ascertained the corporate governance practices of the Nigerian deposit money banks and their performance, and the codes of corporate governance used in the study was limited to board size, board composition, board diversity, power separation and audit committee. This work in terms of time covered a period of five years (2010 – 2014).
1.6. Significance of the Study
The relevance of any study stems from its importance to respective users or beneficiaries of such researches. Hence, this study will be of immense significance to the following categories such as Policy Makers in the Banking Industry, Government, Shareholders, Scholars and so many others. Policy makers in the Banking Industry will benefit immensely from the study as it is expected to redirect and refocus their attention to the significance of corporate governance in the financial service industry.
The Government at all levels (federal, state and local government) will find this work very interesting as it will reveal the extent of corporate governance code in Nigeria in relation to banking business. Corporate governance code was designed to ensure that banks operating within the shores of Nigeria have at the back of their mind the interest of fund providers as well as militating against agency problem. Shareholders and all other stakeholders in the industry will be willing to commit their hard earnings into an environment where it is safe and promises a desirable return. Hence, this study will reposition the confidence of all the parties in the banking industry against their investment. By extension, the potential investors will in no small way benefit as well.
Finally, scholars, researchers and students will find the work useful as it adds to existing literature and provides reference for future studies.