The study assessed the impact of corporate governance on profitability of selected banks in Nigeria.
The study adopts the ex post facto design which involves the collection of historical data from secondary sources and analyzing the relationship among variables using econometric techniques. The panel regression modelling technique was employed to estimate the model. Data for the study was obtained from the annual financial reports of eleven selected commercial banks in Nigeria. The period covered in the study spanned between 2010 and 2019.
The study reviewed that board size had significant negative impact on the profitability of selected banks while board independence contributed positively and significantly to profitability. Ownership concentration (measured by the equity shareholding percentage of major shareholders with more than five percent stake) had negative but mild impact on profitability of selected banks within the period under review.
The study concluded that corporate governance is a significant predictor of bank profitability in Nigeria, system that aims to instil policies and rules that helps maintain the cohesiveness of an organization. The study further recommends that; Banks should ensure higher level of independence on their board for effective oversight functions; Decision about the size of the boardroom should be based on the scale and complexity of the company’s operations; The code of corporate governance of the Central Bank of Nigeria needs to be periodically revised to reflect the emerging governance needs of commercial banks; Strategic training programmes for directors and senior management should be organized or improved upon; The need for banks to continue to recognize internal and external auditors as important part of corporate governance cannot be over-emphasized; Banks need to ensure transparency in their dealings; To improve the quality of corporate governance on performance of banks in a consolidated Nigerian banking sector.
1.1 Background to the Study
The management and decision making process of large companies involve complex process which requires many process and top level mangers. However, the successful management of firms cannot be achieved without best practices with sound corporate governance playing leading role.
Corporate governance is a set of process and principles that guide the operation of an organization. According to Ghalib (2018); Omware, Atheru and Jagongo (2020); corporate governance comprises of processes, customs, polices, laws and institutions that influence the direction, administration and management of a corporation. It also involves set of rules and regulations that guide the conduct and relationship among organizations stakeholders such as shareholders, management, board of directors, accountants, auditors, employees, suppliers, customers, lenders, regulators and the community at large. Almoneef and Samontaray (2019) opined that corporate governance entails structures and systems which govern an institution and its relationship with communities and stakeholders to achieve organizational and stakeholders’ objectives.
The need for corporate governance arises in order to ensure smooth running of an organization with which board of directions and other top level managers with the organization play leading role. Xavier, Shukla, Oduor and Mbabazize (2015); Agbaeze and Ogosi (2018) asserted that corporate governance is aimed at ensuring that managers are transparent, accountable, adequately disclose information and report data regarding an organization efficiently. According to Ibitamuno, Onuchuku and Nteegah (2018), good corporate governance reduces the gap between shareholders and other stakeholders’ expectations which may arise due to conflicting interest.
The need to promote sound practices in the banking system results from the significant role of commercial banks in economy. While banks manager are entrusted with shareholders funds and must ensure that shareholders wealth increase, they are also answerable to depositors who entrust them with their funds and must maintain adequate liquidity to meet depositors’ withdrawal demand (Dalwai, Basiruddin, & Rasid, 2015; Sani, Aliyu & Bakare, 2020). Moreover, commercial banks play germane role in enhancing growth and development through management of economy liquidity position and rending of diverse services to different customers. Thus, without adequate corporate governance in the banking system, the growth of the economy may be threatened due to liquidity crisis and imminent failure which may result from unsound practices (Khanifah, Hardiningsih, Darmaryantiko, Iryantik & Udin, 2020). This has been the case in some countries with some banks and companies like Enron Corporation in the USA, Polly Peck in US, Maxwell Communication and Bank of Credit and Commerce Industry (BCCI) collapsed due to bad corporate governance (Olayiwola, 2018; Rashid, Zobair, Chowdhury & Islam, 2020).
The Nigerian banking system in the recent years has been witnessing significant expansion in terms of size and activities. This is due to the important roles of commercial banks in the development process of the economy through the direction of funds to deficit sector and mechanism through which monetary policy is transmitted to the economy. In Nigeria, the issue of commercial banks corporate governance is germane to regulatory authorities and given important role among other regularity activities (Agbaeze & Ogosi, 2018). This is because of the need to prevent liquidity crisis which has been faced by commercial banks and bank failure (Emeka & Alem, 2016; Okoye, Olokoyo, Okoh, Ezeji & Uzohue, 2020). Commercial banks corporate governance in Nigeria is aimed at building banks credibility, prevent liquidity crisis, promote stability, ensure transparency, accountability and ensure sound lending practices as well as maintaining an effective channel of information disclosure that will foster not only great shareholders wealth maximization but also stimulate economic growth (Emeka & Alem, 2016).
In Nigeria, the acts and regulations that made provision for corporate governance of banks and other companies are the “Company and Allied Matters Act (CAMA) of 1990, the Prudential Guidelines, the Statement of Accounting Standards (SAS 10), the Banks and Other Financial Institutions (BOFI) Act of 1991, Central Bank of Nigeria (CBN) Act of 1991, CBN Circulars, the Nigeria Deposit Insurance Corporation (NDIC) Act of 1988, and the Investment and Securities Act (ISA) of 1999” (Ibitamuno, et al., 2018, p. 36). These regulations are put in place to promote sound practices and corporate governance among commercial banks in Nigeria in order to promote performance. Thus, this study examines the effect of corporate governance on banks profitability in Nigeria.
1.2 Statement of the Problem
Corporate governance ensures that management and board of directors comply with best and sound practices in carrying out their duties through the establishment of principles and procedures (Olayiwola, 2018; Rashid, et al., 2020). Policy frameworks were formulated by regulatory authorities in Nigeria to ensure that commercial banks comply with corporate governance practices. However, Agbaeze and Ogosi (2018); Sani, et al., (2020) asserted that commercial banks have not been complying with regulations on corporate governance which has eroded customers’ confidence in the system.
The Nigerian financial environment is being affected by governance problems, systemic instability and failure of financial institutions to comply with lending and financial reporting practices which has affected the growth and development of the economy (Agbaeze & Ogosi, 2018). Ibitamuno, et al., (2018); Okoye, et al., (2020) argued that the recent global financial crisis and erosion of commercial banks investment in Nigeria results from lack of compliance with credit management practices and weak corporate governance.
The consolidation policy of 2006 which led to reduction in commercial banks from 89 to 25 is an indication of erosion in best practices in the banking industry which resulted in liquidity crisis (Emeka & Alem, 2016). Weak corporate governance practices by Oceanic Bank, Intercontinental Bank, Union Bank, Afri Bank, Fin Bank and Spring Bank in 2009 and Skye Bank in July, 2016 affected the stability of the Nigerian banking industry (Ibitamuno, et al., 2018).
Given the high rate of instability in the banking system which resulted in the takeover of some banks like Skye Bank and Intercontinental Bank the major concern of regulatory authority is on the need to enhance sound practices among banks through the improvement of corporate governance. Studies have indentified inefficiency corporate governance as factors that can impede banks performance. Morshed (2020) asserted that, insufficient audit size may imposed constraints on the efficiency of corporate governance to influence performance positively. Owiredu and Kwakye (2020) stated underperformance of some banks in developing countries may be attributed to inability of banks to operate under adequate audit committee which limit the efficiency of carrying out its functions effectively.
Also number of board size have been identified corporate governance indices that may affect performance of banks. Okoye, et al., (2020) opined that board undersize create decision problems in the banking system. Omware, et al., (2020) averred that, inability of corporate to enrich banks value and create confidence in the banking system is correlated to board composition and lack of enough board size to initiative the corporate governance mechanism of banks. Rashid, et al., (2020) agreed that inability of board members to carry out operations effectively which is constraints by ability to recruit enough board members many negatively affect performance.
Audit committee number of meetings may also contrast the performance of banks (Almoneef & Samontaray, 2019). Without frequent meetings, audit committee may find it difficult have the enough time institute the audit changes and reforms that are required to influence the performance of banks (Akingunola, Adekunle & Adedipe, 2015). Failure of audit members to meet at the required time and the statutory fixed meetings by regulatory are some of the challenges facing corporate governance of audit frameworks. Inability of audit committee to meet regularly may affect audit report quality and hence performance (Emeka & Alem, 2016).
Ebun and Emmanuel (2019); Al-Qudah, Azzam, Shakhatreh and Mahmoud (2019) opined that board meetings failed to influence performance in Nigeria due to shortage of boards meetings that results in weak corporate governance mechanism. Aliyu, Yahaya and Mohammed (2021) asserted that Nigerian banking system has long been affected by inability of banks to comply with the number meetings set by regulatory frameworks. Azar, Rad and Botyari (2014); Al-Daoud, Saidin and Abidin found that board number of meetings failed to positively performance of firms due to lack of enough mechanism through which corporate governance principles would be transformed to operational activities.
Though, studies have been corporate governance and banks performance in Nigeria, there is paucity of studies in the subject area in the recent years. Thus, this study would disaggregate corporate governance into audit committee size, board size, audit committee number meetings and board number meetings for adequate and robust analysis to investigate their relationship with banks performance in Nigeria.
1.3 Research Questions
In line with the aforementioned gap, the following questions are formulated to guide the study:
i. What is the impact of the size of the board on commercial banks’ performance in Nigeria?
ii. How does the independence of the board impact the performance of Nigerian commercial banks?
iii. What is the impact of ownership concentration on the performance of Nigerian commercial banks?
1.4 Objectives of the Study
The broad objective of this study is to examine the effect of corporate governance on commercial banks’ performance in Nigeria. The specific objectives are to:
i. Examine the impact of the size of board on commercial banks’ performance in Nigeria.
ii. determine the effect of board independence on commercial banks’ performance in Nigeria
iii. Establish the relationship between ownership concentration and commercial banks’ performance in Nigeria.
1.5 Research Hypotheses
The following research hypotheses will be tested in this study:
i. Board size has no significant effect on commercial banks’ performance in Nigeria
ii. Board independence has no significant effect on commercial banks’ performance in Nigeria.
iii. Ownership concentration has no significant effect on commercial banks’ performance in Nigeria.
1.6 Significance of the Study
The need to ensure that commercial banks adopt best and sound practices by keeping to corporate governance has been important issue to regulatory authority in Nigeria. This is because of the enviable roles of commercial banks in the growth and stability process of the economy. Thus, this study would be of great significance to the banks and regulatory authority.
Findings from this study would enable regulatory authority to have clearer knowledge about corporate governance of commercial banks and how it affects banks performance. This will facilitate the formulation and implementing of policies that would ensure that commercial banks comply to best and sound practices in dealing with all stakeholders.
Furthermore, commercial banks would appreciate the findings of this study by being informed on their level of corporate governance and how to improve corporate governance activities. It will enable them to see corporate governance as important tool that can enhance their performance and responsibilities to both internal and external stakeholders.
Finally, this study would contributes to the few studies on the relationship between corporate governance and banks performance in Nigeria by taken into consideration important variables of corporate governance which were ignored. This research would provide supports to other researchers who are interested in carrying further study either relating to banks or other sector in Nigeria.
1.7 Scope of the Study
This study seeks to examine the effect of corporate governance on commercial banks performance in Nigeria. This study would cover the period of 2016 to 2020. This period will be selected to capture the post consolidation era. The scope of the study is constricted to the listed Nigerian banks and they include: Access Bank Plc, United Bank for Africa Plc, First Bank Holdings Plc, Zenith Bank Plc, Stanbic IBTC, FCMB Plc, Fidelity Bank Plc, Wema Bank Plc, Sterling Bank Plc, Union Bank Plc, and Guaranty Trust Bank Plc. These banks are selected because they are listed on the Nigerian Stock Exchange and they are well known brands in the Nigerian banking industry.
1.8 Operational Definition of Terms
Commercial Banks: These are institutions that engage in deposit collection, granting of loans and advances and rendering of other financial services to customers for profit motive.
Corporate Governance: This involves the set of rules and regulations that guide a firm’s activities and its dealings with different stakeholders.
Financial Intermediation: This is the collection of savings from surplus unit and lending of such savings to the productive or deficit sector in the economy.
Profitability: This is the financial measurement of an organization’s performance in terms of return on asset, return on equity and earnings per share among others.