Thesis Abstract

Abstract
Corporate governance practices are crucial for the efficient functioning of banks and the overall financial system. This study investigates the relationship between corporate governance practices and bank performance in Nigeria. The research employs a quantitative approach by analyzing data from Nigerian banks and their corporate governance practices over a specific period. The study utilizes various corporate governance indicators such as board independence, board size, CEO duality, ownership structure, and board meetings to assess their impact on bank performance. Financial indicators such as return on assets (ROA), return on equity (ROE), and net interest margin (NIM) are used to measure bank performance in the study. The findings suggest that corporate governance practices significantly influence bank performance in Nigeria. Specifically, board independence and board size have a positive impact on bank performance, indicating that a more independent board structure and optimal board size can enhance the overall performance of banks. Conversely, CEO duality, where the CEO also serves as the chairman of the board, shows a negative impact on bank performance, highlighting the importance of separating the roles of CEO and chairman for effective governance. Moreover, the study reveals that ownership structure plays a vital role in bank performance, with a more dispersed ownership structure positively affecting performance. This implies that diversified ownership can lead to better monitoring and oversight of management, resulting in improved financial performance. Additionally, the frequency of board meetings is found to positively correlate with bank performance, indicating that more frequent board meetings enhance decision-making processes and governance effectiveness. Overall, the research underscores the significance of robust corporate governance practices in enhancing bank performance in Nigeria. The study provides insights for policymakers, regulators, and banking institutions to strengthen corporate governance frameworks to improve overall financial stability and performance in the banking sector. By promoting transparency, accountability, and independence in governance structures, banks can mitigate risks, build investor confidence, and ultimately contribute to the sustainable growth and development of the Nigerian banking industry.

Thesis Overview

1.1 BACKGROUND TO THE STUDY

The importance of a vibrant, transparent and healthy banking system in the mobilization and intermediation of fund, for the growth and development of the economy need not to be over-emphasized. Worthy is of the fact that the level of functioning of the financial sector depends on the perception and patronage of the citizens towards its services (Al-Faki, 2006). The situation where the public losses confidence in the financial institutions, can result in panic and consequential financial and economic woes. The absence of confidence in any organization is attributable to opaque management practices and deleterious effect on its performance. The measure of performance in this case is not limited to the financials (turnover and profit) but also customer satisfaction, employee welfare, social corporate responsibility, indeed the whole gamut of balanced score card.

Given the fury of activities that have affected the efforts of banks to comply with the various consolidation policies and the antecedents of some operators in the system, there are concerns on the need to strengthen corporate governance in banks. This will boost public confidence and ensure efficient and effective functioning of the banking system (Soludo, 2004a). According to Heidi and Marleen (2003:4), banking supervision cannot function well if sound corporate governance is not in place. Consequently, banking supervisors have strong interest in ensuring that there is effective corporate governance at every banking organization. As opined by Mayes, Halme and Aarno (2001), changes in bank ownership during the 1990s and early 2000s substantially altered governance of the world‟s banking organization. These changes in the corporate governance of banks raised very important policy research questions. The fundamental question is how do these changes affect bank performance?

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). 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 shareholders’ value by enhancing corporate performance and accountability, while taking into account the interest of other stakeholders (Jenkinson and Mayer, 1992). Corporate governance is therefore, about building credibility, ensuring transparency and accountability as well as maintaining an effective channel of information disclosure that will foster good corporate performance.

In 1929, Means found that in only 11% of the 200 largest non-financial corporations the largest owner hold a majority of the firm’s shares. Further, establishing ownership of 20% of the stock as a threshold minimum for control, 44% of those firms had no individual who owned that much of the stock. These 88 firms which were classified as management-controlled also managed to account for 58% of the total assets held among the top 200 corporations. Two trends were indicated: the growing concentration of power and the increasing dispersal of stock ownership resulting in a widening gulf between share ownership and executive control within large corporations. In order to address these deficiencies, this study examined the role of corporate governance in the financial performance of Nigerian banks. Unlike other prior studies, this study is not restricted to the framework of the Organization for Economic Cooperation and Development principles, which is based primarily on shareholder sovereignty. It analyzed the level of compliance of code of corporate governance in Nigerian banks with the Central Bank’s post consolidated code of corporate governance.

1.2 STATEMENT OF THE RESEARCH PROBLEM

Banks and other financial intermediaries are at the heart of the world’s recent financial crisis. The deterioration of their asset portfolios, largely due to distorted credit management, was one of the main structural sources of the crisis (Fries, Neven and Seabright, 2002; Kashif, 2008 and Sanusi, 2010). To a large extent, this problem was the result of poor corporate governance in countries’ banking institutions and industrial groups. Schjoedt (2000) observed that this poor corporate governance, in turn, was very much attributable to the relationships among the government, banks and big businesses as well as the organizational structure of businesses.

In some countries (for example Iran and Kuwait), banks were part of larger family-controlled business groups and are abused as a tool of maximizing the family interests rather than the interests of all shareholders and other stakeholders. In other cases where private ownership concentration was not allowed, the banks were heavily interfered with and controlled by the government even without any ownership share (Williamson, 1970; Zahra, 1996 and Yeung, 2000). Understandably in either case, corporate governance was very poor. The symbiotic relationships between the government or political circle, banks and big businesses also contributed to the maintenance of lax prudential regulation, weak bankruptcy codes and poor corporate governance rules and regulations (Das and Ghosh, 2004; Bai, Liu, Lu, Song and Zhang, 2003).

In Nigeria, before the consolidation exercise, the banking industry had about 89 active players whose overall performance led to sagging of customers’ confidence. There was lingering distress in the industry, the supervisory structures were inadequate and there were cases of official recklessness amongst the managers and directors, while the industry was notorious for ethical abuses (Akpan, 2007). Poor corporate governance was identified as one of the major factors in virtually all known instances of bank distress in the country. Weak corporate governance was seen manifesting in form of weak internal control systems, excessive risk taking, override of internal control measures, absence of or non-adherence to limits of authority, disregard for cannons of prudent lending, absence of risk management processes, insider abuses and fraudulent practices remain a worrisome feature of the banking system (Soludo, 2004b). This view is supported by the Nigeria Security and Exchange Commission (SEC) survey in April 2004, which shows that corporate governance was at a rudimentary stage, as only about 40% of quoted companies including banks had recognised codes of corporate governance in place. This, as suggested by the study may hinder the public trust particularly in the Nigerian banks if proper measures are not put in place by regulatory bodies.

The Central Bank of Nigeria (CBN) in July 2004 unveiled new banking guidelines designed to consolidate and restructure the industry through mergers and acquisition. This was to make Nigerian banks more competitive and be able to play in the global market. However, the successful operation in the global market requires accountability, transparency and respect for the rule of law. In section one of the Code of Corporate Governance for banks in Nigerian post consolidation (2006), it was stated that the industry consolidation poses additional corporate governance challenges arising from integration processes, Information Technology and culture.

The series of widely publicized cases of accounting improprieties recorded in the Nigerian banking industry in 2009 (for example, Oceanic Bank, Intercontinental Bank, Union Bank, Afri Bank, Fin Bank and Spring Bank) were related to the lack of vigilant oversight functions by the boards of directors, the board relinquishing control to corporate managers who pursue their own self-interests and the board being remiss in its accountability to stakeholders (Uadiale, 2010). Inan (2009) also confirmed that in some cases, these bank directors’ equity ownership is low in other to avoid signing blank share transfer forms to transfer share ownership to the bank for debts owed banks. He further opined that the relevance of non- executive directors may be watered down if they are bought over, since, in any case, they are been paid by the banks they are expected to oversee. As a result, various corporate governance reforms have been specifically emphasized on appropriate changes to be made to the board of directors in terms of its composition, size and structure (Abidin, Kamal and Jusoff, 2009)