CORPORATE GOVERNANCE AND

BANK PERFORMANCE IN NIGERIA

AMIENYARU ENOBAKHARE



Research report presented in partial fulfilment
of the requirements for the degree of
Masters of Business Administration
at the University of Stellenbosch



Supervisor: Danil Malan



Degree of Confidentiality: A December 2010
ii
DECLARATION
By submitting this research report electronically, I, Amienyaru Enobakhare, declare that the
entirety of the work contained therein is my own, original work, that I am the owner of the
copyright thereof (unless to the extent explicitly otherwise stated) and that I have not
previously in its entirety or in part submitted it for obtaining any qualification.



A. Enobakhare September 2010

Copyright 2010 Stellenbosch University
All rights reserved

iii
ACKNOWLEDGEMENTS
I give my sincere thanks and gratitude to almighty God for seeing me through this research
period as well as the MBA programme. Also I appreciate the words of encouragement and
emotional support from my family Mr. And Mrs E P Enobakhare, Dr. Egbe , Etinosa,
Oghomwen, Ibude and Iriagbonse. I also thank my study leader Daniel Malan for his
guidance, inputs and patience with me. Finally I will say a big thank you to Cynthia Swarts for
her tremendous support through out the programme.

iv
ABSTRACT
The purpose of this study was to determine the relationship between corporate governance
and the profitability of banks in Nigeria. This has been done in line with previous studies in
other parts of the world where it was discovered that the corporate governance culture of a
firm does have an effect on its profitability.
The corporate governance variable employed in this study was that of ownership. Four types
of ownership were used as the independent variables, namely board ownership, Institutional
ownership, foreign ownership and government ownership. Whilst the dependent variables
employed were return on assets (ROA) and non performing loans ratio (NPL). Information on
banks return on assets and non performing loans was generated from year end financial
statements and yearly bank reviews from a Nigerian based research firm called Agusto and
Company. Also the banks ownership variables information was also pooled from financial
reports, the Agusto report on banking industry as well as bank websites.
A descriptive statistic data was generated to review the trend of banks return on assets and
non-performing loan performance indicators, whilst a Pearson correlation table was generated
to review the correlation between the ownership variable and the performance of banks.
The results generated were found to be similar to what has previously been done. This study
makes a significant contribution to research by exposing the importance of corporate
governance, a concept which has been neglected in the Nigerian corporate world. Finally it
provides further justification to do further research in this area in the Nigerian banking and
corporate environment.
v
Table of contents
Page
Declaration ii
Acknowledgements iii
Abstract iv
List of tables Error! Bookmark not defined.
List of figures viii
List of acronyms ix
CHAPTER 1 INTRODUCTION 1
1.1 INTRODUCTION 1
1.2 DEFINITION 1
1.3 CONCEPT OF COPORATE GOVERNANCE IN THIRD WORLD COUNTRIES 4
1.4 THE NIGERIAN ECONOMY 5
1.4.1 The Nigerian Banking Industry 7
1.5 STATEMENT OF PROBLEM 9
CHAPTER 2 LITERATURE REVIEW 10
2.1 INTRODUCTION 10
2.2 AGENCY THEORY 10
2.3 STAKEHOLDER THEORY 12
2.4 STEWARDSHIP THEORY 13
2.5 RESOURCE DEPENDENCY THEORY 13
2.6 ORGANISATIONAL THEORY 14
2.7 BOARD OF DIRECTORS 14
2.8 BOARD CHARACTERISTICS AND STRUCTURE 14
2.8.1 Board structure 15
2.8.2 Board size 15
2.8.3 Board leadership 15
2.8.4 Board composition 16
2.8.5 Board diversity 16
2.9 CORPORATE GOVERNANCE IN NIGERIAN COMPANIES 16
2.9.1 Corporate governance for banks operating in Nigeria 18
2.10 CODE OF BEST PRACTICES ON CORPORATE GOVERNANCE 21
vi
2.10.1 Equity ownership 22
2.10.2 Organisational structure 22
2.10.3 Quality of board membership 23
2.10.4 Board performance appraisal 24
2.10.5 Reporting relationship 24
2.10.6 Industry transparency and disclosure requirements 24
2.10.7 Risk management 25
2.10.8 Role of auditors 26
2.11 PROCESS AND PROBLEMS OF CORPORATE GOVERNANCE IN THE NIGERIAN
BANKING INDUSTRY 27
2.11.1 Environmental pressure 28
2.11.2 Instability of tenure 29
2.11.3 Government action 29
2.11.4 Board/management relationship 29
2.11.5 Executive chairmanship/vice chairmanship 30
2.11.6 Ownership crisis 30
2.11.7 Insider dealings 31
2.11.8 Quality of bank directors 32
2.12 PRE-REQUISITES FOR EFFECTIVE CORPORATE GOVERNANCE IN NIGERIA 32
2.12.1 Knowledge 32
2.12.2 Information 33
2.12.3 Strong management team 33
2.12.4 Power 33
2.12.5 Auditors 34
2.12.6 Motivation 35
2.12.7 Time 36
2.13 CORPORATE GOVERNANCE AND FIRM PERFORMANCE 36
CHAPTER 3 RESEARCH DESIGN AND METHODOLOGY 40
3.1 INTRODUCTION 40
3.2 INSTITUTIONAL OWNERSHIP 40
3.3 FOREIGN OWNERSHIP 41
3.4 BOARD OWNERSHIP 42
3.5 GOVERNMENT OWNERSHIP 43
3.6 RESEARCH DESIGN AND METHODOLOGY 44
vii
3.7 VARIABLE MEASUREMENT 45
3.8 INDEPENDENT VARIABLES 45
3.9 DEPENDENT VARIABLE 47
3.10 RESEARCH MODEL 47
3.11 DATA 48
CHAPTER 4 RESULTS 51
4.1 INTRODUCTION 51
4.2 DEPENDENT VARIABLE (NON-PERFORMING LOANS AND RETURN ON ASSETS
PERFORMANCE INDICATORS) 51
4.3 DESCRIPTIVE STATISTICS 51
4.4 DEPENDENT VARIABLE: RETURN ON ASSETS 53
4.4.1 Institutional ownership 53
4.4.2 Foreign ownership 53
4.4.3 Board ownership 54
4.4.4 Government ownership 54
4.5 DEPENDENT VARIABLE: NON-PERFORMING LOANS RATIO 55
4.5.1 Institutional ownership 55
4.5.2 Foreign ownership 55
4.5.3 Board ownership 56
4.5.4 Government ownership 56
CHAPTER 5 SUMMARY, CONCLUSION AND RECOMMENDATIONS 57
5.1 INTRODUCTION 57
5.2 CONCLUSION 57
5.3 RECCOMENDATIONS 58
5.4 FOR FUTURE RESEARCH 59
REFERENCES 61
Appendix 1: Performance descriptive statistics: Return on assets and non-performing
loan ratio 64
Appendix 2: Banks Return on Assets Ratio 65
Appendix 3: Non-performing loan ratio 66
Appendix 4: Ownership Variables 67
Appendix 5: Summary output: return on assets 68
Appendix 6: Summary output: non performing loans 69

viii
LIST OF FIGURES
Page
Figure 1.1 GDP Growth per cent 6
Figure 2.1 Ownership structure of Nigerian banks 30
Figure 2.2 Functions of corporate governance 35

ix
LIST OF ACRONYMS
AGM Annual General Meeting
BGL BGL Services Limited
BOD Board of Directors
BOFID banks and other financial institutions decree
CBN Central Bank of Nigeria
CCO Chief Compliance Officer
CEO chief executive officer
ECA Economic Commission for Africa
GDP Gross Domestic Product
IT Information Technology
MD/CEO managing director/chief executive officer
NDIC Nigerian Deposit Insurance Corporation
NPL non performing loans
OECD Organisation for economic corporation and development
OLS Ordinary Least Square
PAT profit after tax
ROA return on assets
SEC Security Exchange Commission
SPV Special Purpose Vehicle
UK United Kingdom
US United States

1
CHAPTER 1
INTRODUCTION
1.1 INTRODUCTION
This chapter basically introduces the concept of corporate governance by analysing the
importance thereof and reviewing different definitions from scholars. A brief history of the
concept is discussed with specific reference to cases like that of Enron and the role played
by the neglect of corporate governance. In addition, since this thesis is based on Nigerian
banks it became imperative to briefly discuss the Nigerian economy and the current trend
of the banks. Finally the chapter addresses weaknesses of implementing corporate
governance in Africa in the past and addresses the need for the continent to strengthen its
governance culture which ultimately will lead to its economic growth and development.
1.2 DEFINITION
Why should an issue such as corporate governance become so important that institutions
world wide are not only adhering to its policies but also setting up units within the
organisation to look at it? Does it affect the corporate profitability of organisations giving
that the main focus is on corporations ways of acting? Then the big puzzle is that if
corporate governance does not directly affect the bottom line, it must be value adding
since it is embraced by institutions world-wide.
The issue of corporate governance has shown strong significance in the corporate world
given the rate at which multinationals have closed doors as a result of their acts. These
are organisations that were termed world class and assumed to act in line with acceptable
ethical standards. Amongst these organisations was the fall of Arthur Anderson with its
role in the tragic Enron story. Other examples of organisations that have either gone down
or suffered loss of income as a result of the way they have acted, are Worldcom, Shell in
Nigeria and the more recent incidence of the Indian telecommunications firm.
This now brings us to the issue of corporate governance. What exactly does this term
mean since business is naturally affected by the people and culture where it operates.
Does it mean something in a certain country while it means an entirely different thing
somewhere else? However, before proceeding with definitions, a brief history of the
concept is necessary.
2
The history of corporate governance dates back to the 19
th
Century when state corporation
laws enhanced the rights of corporate boards without unanimous consent of shareholders.
This was done in exchange for statutory benefits like appraisal rights and was believed to
make corporate governance more efficient. Early debates came up after the wall street
crash of 1929 where legal scholars like Adolf Augustus Berle, Edwin Dodd and Gardiner
C. Means questioned the changing role of the modern corporation.
These debates have become much stronger and with increased globalisation another
major cry has been on the issue of labour exploitation from foreign multinationals. All
these, amongst others, have brought about a continued high call for the modern
corporation to act in acceptable ways when its operations are carried out in different
countries where they exist. However this is in line with the issue that effective corporate
governance has been identified to be critical to all economic transactions especially in
emerging economies (Dharwardkar et al., 2000).
The concept of corporate governance has been defined in many ways by scholars world
wide. The president of World Bank, J. Wolfensohn, defines corporate governance as
promoting fairness, transparency and accountability. While scholars like Shleifer and
Vishny define corporate governance as that concept which deals with the ways in which
suppliers of finance to corporations assure themselves of getting a return on their
investment.
Another school of thought does have a view that seems to have caught up in some cycles.
This group defines corporate governance as the way in which directors and auditors
handle their responsibilities towards shareholders. In simple terms it also explains
corporate governance as ways of bringing the interest of investors and managers into line
and ensuring that firms are run for the benefit of investors (Mayer, 1997).
A broader and more acceptable definition is that corporate governance as a subject, as an
objective, or as a regime is to be followed for the good of shareholders, employees,
customers, bankers and indeed for the reputation and standing of our nation and its
economy (Maw et al., 1994: 1).
Finally the OECD in 1999 defined corporate governance principles as the system by which
business corporations are directed and controlled. The pillars of good corporate
governance have been known to shareholder rights, transparency and board
accountability. Corporate governance is also very much concerned with board structure,
executive compensation and shareholder reporting. There is a general assumption that the
3
board is responsible for managing the business and the companys trading future. Hence,
the likelihood of a link between good corporate governance and corporate profitability.
This concept is relatively new in Africa when compared to developed places like Europe
and America. However, it has taken hold in Africa with corporate Africa embracing its
principles in line with the different regulating bodies. Nevertheless it is of importance to
note that good economic and corporate governance are fundamental preconditions for the
renewal of Africa. It certainly matters to Africa because African countries contribute to
macro-economic stability, enhance a governments ability to implement development and
reduce poverty with scarce resources.
Much of the crisis in the emerging economies has led to the issue of corporate governance
being given the required attention. The East Asian crisis and recent corporate scandals,
both those perpetrated by the private investors and governments at large, have given
more prominence to this concept. Much research has been done on these issues in the
United States (US) and the United Kingdom (UK) with some degree of neglect being
experienced in Africa. This lack of adequate research in the field of corporate governance
in some aspects of Africa has been a major source of concern. However, there is a
gradual change in this trend. Some landmark achievements have been made in this field
over the last decade with one of them been the setting up of a corporate governance unit
in Stellenbosch, South Africa.
Guidelines for enhancing corporate governance in Africa were set up by the Economic
Commission for Africa (ECA). However, it is not a one size fits all, which means that
individual best practices should be identified for countries. This also means that each
African government should identify those components and mechanisms that provide a
good fit with its circumstances and will enable it to have good corporate governance. In
view of this the journal on good corporate governance in Africa by the economic
commission for Africa suggests relevant codes and standards that African countries should
give priority to which will enable the continent to be on the right path to achieving these
values.
The importance of good corporate governance cannot be overlooked in the present day
economy as it seems to flow into all spheres of the economy. This includes both the
private and public organisations. A major influence is that which it has on the attraction of
private investment through globalisation. Africas leaders recognise that globalisation can
facilitate much needed inflows of private investment and transfers of technology, in
4
addition to increasing access of their countries exports to world markets. Africa as a
continent has yet to fully tap into globalisation and although it has its controversial aspects,
it is still well known that globalisation also has positive angles to it.
The negative perception of the continent as a result of its poor governance culture has
been one of the reasons for its inability to effectively attract adequate foreign direct
investments, including capital flows. This further reiterates the importance of good
corporate governance in the continent.
In a country like Nigeria the issue of corporate governance has been one that has brought
about serious debates both from international and domestic institutions. It has been
addressed as one of the major factors that has led to a reduction in capital flows and
subsequent slow economic growth in the country. This is believed to be attributed to the
long military rule experienced by the country. However, with the advent of democracy in
May 1999, there has been a steady trend towards implementing good governance
structures both in public and private sectors.
A major sector where there has been a loud cry for good corporate governance values is
that of banking. The importance of banks in any economy cannot be understated
especially with the recent world financial crisis. The Nigerian financial sector has
experienced many changes over the last two decades which included bank distress and
reforms of major financial institutions.
There was the issue of weak corporate governance and institutional capacity which
needed to be addressed if the banking consolidation that took place in 2005 was to be
successful. This saw the Apex bank, central bank of Nigeria, coming up with a corporate
governance code for Nigerian banks which was to be effective from 3 April 2006. In this
code Nigerian banks were mandated on corporate governance values which should be in
line with the industry standard and will help to further strengthen the sector. The big
question being asked is how well these banks are acting in line with the corporate
governance codes from the Apex bank. Also, if they are acting in line with these laid down
rules, has it had a positive impact on the firms profitability?
1.3 CONCEPT OF COPORATE GOVERNANCE IN THIRD WORLD COUNTRIES
As stated previously, corporate governance has taken a stronger foothold in developed
countries when compared to emerging economies. Opinions differ on the content,
boundaries and relevance of the theory of corporate governance in the third world because
5
of the underdevelopment, unstructured and informal nature of the economies (Yahaya,
1998). However, the issues of good corporate governance can not be overlooked in this
part of the world because of its perceived role in development and economic prosperity.
In line with the recent trend where most African countries have decided to formalise their
economy, the clamour for good corporate governance has increased. This is also in line
with recent policies in other African countries. A major theory of corporate governance that
is of utmost importance in Nigeria is ownership structure. Most companies are either family
owned or major shares are held by a few investors. Ultimately this leaves control of the
firm within a small group of people. These theories will be discussed in the next chapter.
The theories are agency theory, stakeholder theory, stewardship theory and resource
dependency theory.
1.4 THE NIGERIAN ECONOMY
Nigeria, also named the Federal Republic of Nigeria, is a country located in West Africa.
The country is bordered by the Republic of Benin in the West, Cameroon in the east while
in the northern part is the country called Niger. Nigeria is the most populous black nation
and eighth most populous country in the world. It has a population of 140 million people
with about 250 ethnic groups. It is highly diverse in terms of culture and religion, which
tends to play a role in the way business is being conducted.
Nigeria is rich in natural mineral resources especially crude oil, and termed the 12
th
largest
producer of petroleum, 8
th
largest exporter and has the 10
th
largest proven reserves. The
countrys macro-economic performance for the last 12 months has been mixed with the
GDP growth rate hitting an estimated figure of 6.8 per cent (BGL financial monitor). The
non-oil growth was at 9.5 per cent while the oil sector declined by 4.5 per cent. Crude oil
plays a major role in Nigerias economy, accounting for 40 per cent of GDP and 80 per
cent of government spending. Agriculture used to be the countrys largest source of foreign
exchange, however, with the discovery of crude oil there was a total neglect of this sector.
A country that used to provide food for its citizens as at 1960 and provided about 98 per
cent of the nations consumption suddenly became an importer of food and agricultural
produce.
The country took on foreign debt to finance structural developments in the 1970s during
the oil boom. Unfortunately many of these infrastructural projects that these funds were
taken for were inefficient and funds were grossly mismanaged by corrupt leaders. In the
1980s when the world experienced the oil glut, Nigeria was unable to service its loans
6
which resulted in its defaulting of the loans. This incident led to the nation servicing only
the interest portions of its loans.
With the election of a democratic government in 1999 which had amongst its top priorities
to free the nation of all outstanding debt, things began to turn around. Fortunately, after a
long campaign by the nations democratic leaders, it was finally agreed with Paris club
creditors that Nigeria should repurchase its debt at a 60 per cent discount. The other 40
per cent debt was paid off using the profit from oil sales.
The payment of the above debt led to the availability of about $1.15billion which will now
be channelled into poverty alleviation programmes. This payment of debt has also helped
the nation to a great deal by resulting in positive signs of economic growth. Nigeria then
recorded a GDP real growth rate of 6.4 per cent (2007 est.), GDP purchasing power parity
of $296.1billion and per capita GDP purchasing power parity of $2,100. Currently Nigeria
has an unemployment rate of 4.9 per cent (2007 est.), a labour force of about 50.13 million
and has recorded an inflation rate of 5.4 per cent in 2007. However, the year on year
inflation for 2008 stood at 14.6 per cent while core inflation (non-food) was 9.2 per cent.

Figure 1.1: GDP Growth per cent
Source: BGL Research
The country has set goals for itself and it has forecasted double digit growth which has not
been met yet. However, given an improvement in the countrys economy, critics have
questioned how realisable and sustainable these developments will be, given the low level
of corporate governance in the country. Also, other critics have argued that corporate
governance only relates to corporations. In hindsight, the growth of corporations ultimately
plays a role in a countrys economic growth.
7
Many economic reforms have been made by the present administration of President Musa
Yaradua who was elected in May 2007. The nation hopes these economic reforms are
implemented quickly and in a transparent manner so that the nations economy can
experience more growth. The International Monetary Fund forcasted that the economy
would grow by 9 per cent in 2008 and 8.3 per cent in 2009. However, the overdependence
on crude oil, which is a major factor for the countrys tremendous growth, still poses a
serious threat to the long-term growth sustainability.
1.4.1 The Nigerian banking industry
The major function of banks both in a developed and developing economy is to act as a
financial mediator between the region of surplus and deficit. The Nigerian financial sector
of the economy has experienced many changes over the last two decades which include
the distress and reforms of some major financial institutions.
There was an initial crisis in the mid 90s (19941995) that saw the distress of about five
banks while a further escalation of the crisis was noticed in the late 90s (19971998) with
another 26 banks closing shop. All of this happened under the military rule of the late
dictator, General Sanni Abacha, as the then president of the country.
Fortunately with the advent of the democratic government in May 1999, the financial
sector, especially the banks, started to stabilise. The market did not witness any more
crashes but there was still a major constraint in the financing capabilities of the banks
which was as a result of their minimum required capital base by the central Bank of
Nigeria. The capital base required by before 2005 was approximately US$17million. As a
result of this the 89 banks could not compete internationally and were unable to fund large
ticket transactions. In June 2005, the Central Bank of Nigeria (the Apex bank) announced
that all banks were given till end of the year to increase their capital base to a minimum of
about $210million. This new policy resulted in a major change in the banking sector which
saw a flight to capital market to raise funds. Those that were not successful in raising the
new minimum required capital via public offers had to merge with other banks or be
acquired. This new trend resulted in a dramatic reduction in the number of banks from 89
to 25 in 2005 and subsequently 24 in 2007 as a result of the merger between a South
African and a local bank.
It is important to note that prior to 2005 the Nigerian banking system could not deliver on
these defined roles. This was attributed to a couple of reasons, namely low aggregate
banking credit to the domestic economy (18.4% as percentage of GDP), systemic crisis
8
where banks were frequently out of clearing inadequate capital base and over dependence
on public sector funds. Other reasons include the payment system that encouraged cash-
based transactions, low banking/population density, poor corporate governance and the
oligopolistic structure that had 10 out of 89 banks accounting for over 50 per cent of total
banking system assets (Ogbechie & Koufopoulos, 2009: 87).
This new minimum capital base has helped the local banks to compete internationally as
well as comfortably finance large investments in the country and beyond. Presently the
countrys 24 banks are referred to as mega banks because of their financial strength,
presence in other African countries and in financial hubs around the world such as London
and New York. This is contrary to the initial belief that Nigerian banks are inferior
compared to foreign banks, despite the fact that much still needs to be done (African
Review of Business & Technology, 2005).
The main purpose of the recapitalisation exercise, according to the Central Bank of
Nigeria, was to establish a banking system that will rapidly drive Nigerias economic
growth and development. Also, this was to ensure the integration of the Nigerian banking
system into the global financial system. Finally, the Central Bank of Nigeria also targets a
local bank to feature in the top 100 banks in the world within the next 10 years and in the
long term to make Nigeria Africas financial hub (Ogbechie & Koufopoulos, 2009: 90).
The outcome of the above transformation has been impressive with asset base
experiencing a 277 per cent growth between 2003 and 2007. By February 2008 11 banks
had over $1billion in tier 1 capital and had operations in 16 African countries and in seven
countries outside Africa. Twenty one of these banks are listed on the Nigerian stock
exchange accounting for about 60 per cent of market capitalisation in 2008.
Nevertheless, it goes without doubt that the banking system is one that is built on trust and
public confidence. This makes it important to employ good corporate governance practices
in the industry. The banking sector is very important for the countrys economic growth as
a result of mobilisation of funds, allocation of credits to various sectors of the economy,
payment and settlement systems, and the implementation of monetary policy. An effective
corporate governance practice is therefore essential to maintain public trust and
confidence in the banking system. This in turn will determine the profitability of these
institutions.
9
1.5 STATEMENT OF PROBLEM
In view of the above, it is important to note that Nigerias neglect of core issues, which
have been regarded as a nations building blocks, has had a negative impact on the
country. Amongst these issues were proper rules and regulations from all governing
bodies, especially the banking sector. This lack of respect for rule of law also impacted
negatively on the way business was done, subsequently affecting corporate governance.
Presently Nigerian banks are regarded as big banks and have been able to weather the
recent economic storm so far. However, there is a cry for full disclosure of their activities
especially their exposure to the capital market. This will reveal which banks comply with
corporate governance measures that have been set by the Apex bank.
In view of the above, the research question in this study is to test if there is a relationship
between corporate governance and banks performance. Taking it a step further,
ownership structure is the arm of corporate governance which is being used to test the
relationship with banks operating in Nigeria. The research question follows what has been
done in other countries, both developed and developing economies, where ownership
structure is broken down further to board ownership, institutional ownership, foreign
ownership and government ownership.

10
CHAPTER 2
LITERATURE REVIEW
2.1 INTRODUCTION
This chapter addresses the various variables of corporate governance such as agency
theory, stewardship theory, board ownership and so on. Afterwards a review of the
corporate governance and its effects as seen from past research conducted by scholars in
the Nigerian business environment is analysed. A more focussed analysis is further seen
on the relationship between corporate governance and Nigerian banks; that is steps taken
by the Central Bank of Nigeria, securities and exchange commission as well as the
Nigerian deposit insurance corporation. The focus is on past corporate governance
measures and whether they have been adhered to by the banks. However, the concept
also poses as a challenge to Nigerian banks, hence its review in this chapter and a look at
the pre-requisites for effective corporate governance in the Nigerian banks. Finally, this
chapter addresses the core of this research which is the relationship between corporate
governance and a firms performance. A review of past research has been analysed as
well as the corporate governance variables which have been employed to reach the
various conclusions. Hence, this has formed a basis for the intention to research and
determine whether this relationship exists in Nigerian banks.
2.2 AGENCY THEORY
Many theories have emerged to highlight the objective of the firm and how it should
respond to its obligations. This concept has a long history, but in a formal sense it
originated in the early 1970s. Those that influenced this theory include property-right
theories, organisation economics, contract law and political philosophy The most
prominent is the agency theory in the corporate governance literature. This theory revolves
around an individual referred to as the principal who hires another individual (the agent)
and delegates decision making authority to the agent (Jensen & Meckling, 1976). The
agency relationship in business is between stockholders and managers. It also spans to
the relationship between debt holders and stockholders. This relationship comes with
conflict normally termed agency conflicts or conflicts of interest between the principals and
the agents.
According to this theory, the fundamental agency problem in modern firms is due to the
separation between finance and management (Coleman, 2008: 3). It is believed that
11
modern firms suffer as a result of separation of the ownership which invariably results in
the firm being run by professional managers. These professional managers of agents
cannot be held accountable by the dispersed shareholders.
The fundamental problem is how the managers follow the interest of the shareholders to
ensure that cost is reduced. Also, the principals are confronted with a couple of problems,
amongst which are: how to select the most capable manager and also ensure that
managers are given the right incentive to take decisions that are aligned with
shareholders interest. Also, the challenge that the managers might extract prerequisites
(or perks) out of other sources leading them to be less concerned about the overall welfare
of the firm, is possible. They advertently become less interested in other profitable new
ventures as a result of their selfish needs.
The cost of the above is known as agency cost. It is the cost borne by shareholders to
encourage managers to maximise shareholder wealth rather than act in their own self
interest. This theory is most associated with a seminal 1975 Journal of Finance paper by
Michael Jensen and William Meckling. They insinuated that corporate debt and
management equity levels are influenced by the agency cost. Agency costs have been
divided into three major types. One of them is cost spent on managerial activities such as
audit cost while the second is expenditures to structure the organisation in way that will
limit undesirable managerial behaviour. This includes appointing non executive directors,
business restructuring and restructuring management hierarchy. Finally, opportunity cost is
incurred when restriction by shareholders limits the ability of managers to take actions that
positively impact shareholders wealth.
It is therefore important to reduce agency cost to increase firm value. A way of ensuring
that firm value is preserved is by the composition of a board of directors. The board of
directors should constitute more non-executive directors. This will ensure that they are
unbiased in their judgements, reduce conflict of interest and ensure the boards
independence in monitoring and passing fair judgement (Coleman, 2008: 3).
Also, the issue of CEO duality can help in reducing agency cost, namely increasing firm
value. Separating the positions of chief executive officer (CEO) and board chairperson will
help spread power and reduce undue influence of management and board members.
12
2.3 STAKEHOLDER THEORY
This theory centres on the issues concerning the stakeholders in an institution. It stipulates
that a corporate entity invariably seeks to provide a balance between the interests of its
diverse stakeholders in order to ensure that each interest constituency receives some
degree of satisfaction (Abrams, 1951). However, there is an argument that the theory is
narrow (Coleman, 2008: 4) because it identifies the shareholders as the only interest
group of a corporate entity. However, the stakeholder theory is better in explaining the role
of corporate governance than the agency theory by highlighting different constituents of a
firm (Coleman, 2008: 4).
In an original view of the firm the shareholder is the only one recognised by business law
in most countries because they are the owners of the companies. In view of this, the firm
has a fiduciary duty to maximise their returns and put their needs first. In more recent
business models, the institution converts the inputs of investors, employees, and suppliers
into forms that are saleable to customers, hence returns back to its shareholders. This
model addresses the needs of investors, employers, suppliers and customers. Pertaining
to the scenario above, stakeholder theory argues that the parties involved should include
governmental bodies, political groups, trade associations, trade unions, communities,
associated corporations, prospective employees and the general public. In some scenarios
competitors and prospective clients can be regarded as stakeholders to help improve
business efficiency in the market place.
This theory has become prominent because researchers have realised the actions of a
corporate impact on the external environment. These actions require accountability of the
entire institution to a wider and more sophisticated audience than just its shareholders. In
view of this, another school of thought proposed that companies are no longer an
instrument of shareholders alone but exist within the society and hence its responsibilities
to the community from which it operates (McDonald & Puxty, 1979). This is in line with
people coming together collectively to increase economic value in an organisation or firm.
Further to the above, stakeholder theory was criticised (Jensen, 2001) for assuming a
single valued objective. Invariably the performance of a firm should not be measured by
the gains to shareholders. It should offer soft issues such as flow of information from
senior management to junior management, interpersonal working relationships, working
environment and so on.
13
2.4 STEWARDSHIP THEORY
This theory links the success of firms with that of the managers. It tends to argue against
the agency theory which posits that managerial opportunism is not relevant. This theory
stipulates that a managers objective is first to maximise the firms performance because a
managers need of achievement and success are met when the firm is doing well
(Coleman, 2008: 4). This theory addresses the issue of trust which the agency theory
refers with respect for authority and inclination to ethical behaviour.
A fall out of this theory is that it attacks the following areas for effective corporate
governance in an organisation. The areas include board of directors and leadership issues
in a firm. Under the board of directors, it is believed that the involvement of the non
executive directors is important in enhancing the board activities. This is so, because the
executive directors have complete knowledge of the firms operations. Complete
participation of non executive directors enhances decision making and ensure
sustainability of the business.
Under leadership this theory is contrary to that of the agency theory. Stewardship theory
supports the idea that CEO and board chair should be the same individual. This is to
ensure that decisions are taken quickly and promptly which is believed to impact positively
on the firm (Donaldson & Davis,1991: 49-64).
Finally, this theory stipulates that small board sizes should be encouraged to enhance
effective communication and decision making. Nevertheless, the theory does not stipulate
how an optimal board size should be determined.
2.5 RESOURCE DEPENDENCY THEORY
This theory addresses the availability of resources of the firm to the general public.
However, this is in addition to the separation of ownership and control within the firm.
Availability of resources of the firm ensures that the organisation is protected from
uncertainty of external influences. The theory also postulates the presence of firms board
of directors in other organisations. This helps in building relationships between
organisations in order to have access to resources in the form of information which can
then be utilised to the advantage of the firm.
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2.6 ORGANISATIONAL THEORY
This theory recognises the peak of organisation structure as the sit of the chief executive
officer. Given this stance, the theory goes further to say that the board of directors is a
mere imposition and is not completely relevant. It is given that most decisions will be taken
by the CEO and the board of directors will have to go in accordance. This theory draws its
application from lower developed countries organisation structures. Most of these
organisations have ownership and control stemmed together because they are mainly
small businesses and their size do not warrant the type of corporate democracy witnessed
in big multinationals like Mobil, Barclays and so on (Yakasai, 2001: 2).
2.7 BOARD OF DIRECTORS
Looking at the above theories, there is no doubt that the essence of corporate boards
cannot be underplayed in the issues of corporate governance in a firm. This is in relation to
the direction in which the structure of laws and accountability has moved in recent times. It
has become more glaring that given the wrongful acts of corporates, directors are being
held responsible for the success and failures of the companies they govern. This is
because the board of directors is the apex of decision making in an institution. Also, they
ought to monitor the activities of top management ensuring that the interest of
shareholders, general public and regulations are complied with (Jensen, 1993).
The board of directors is the single most important corporate governance mechanism
(Blair, 1995) and regarded as the institution where the managers of a company are
accountable before the law of a companys activities (Coleman, 2008: 6). Further research
has shown that the board of directors is effective in monitoring managers. In addition to
this, it is believed that more non-executive directors on the board will increase its
monitoring capabilities. Amongst other functions of the board is to select, evaluate and, if
necessary, replace the CEO based on performance.
2.8 BOARD CHARACTERISTICS AND STRUCTURE
In line with a previous study that has been done in Nigeria, the effect of board
characteristics on corporate governance in the Nigerian banking industry was researched.
The variables employed under the board characteristics included board structure, board
size, board leadership, board composition and board diversity.
15
2.8.1 Board structure
This has drawn a lot of attention in the field of economics, finance and strategic
management and its effect on the organisation. The board structure refers to how the
organisation is structured in terms of the board of directors. Its major focus is on size and
the division of labour between the board chair and the managing director/chief executive
officer (MD/CEO) and finally the composition (Ogbechie & Koufopoulos, 2009: 92).
2.8.2 Board size
This can be simply defined as the total number of directors that a corporate organisation
has on its board. It goes without doubt that the number and quality of directors in a
company has an effect on how well the board functions, hence its performance. Given this,
it becomes a challenging task to determine the ideal board size for an organisation.
The possibility of a large board has the likelihood of more knowledge and skills at their
disposal. Also, a large board size might also help to reduce the effect of an authoritative
and dominant CEO. It is believed that the board becomes more effective in carrying out its
duties as more directors are recruited into the board.
However, another school of thought believes that large board sizes pose more harm than
good for the corporate institution. There is the view that the larger the board size, the more
difficult it becomes to control and hence achieve results. Also, large boards are more
prone to formation of fractions, thereby delaying decision making processes (Ogbechie &
Koufopoulos, 2009: 92).
2.8.3 Board leadership
This is another key component of the board structure as the leadership tells the direction
of board meetings, hence the outcomes. In the Nigerian corporate world, an independent
structure exists where two different individuals serve in the roles of CEO and board
chairman. A scenario where these two roles are held by an individual who brings about the
theory of CEO duality. CEO duality can lead to accumulation of power in one person
thereby vesting all powers on a single individual even if the outcome will be negative.
However, another school of thought does not accept the superiority of the separation of
power. From their own perspective they see it as a crisis measure for distressed
companies. This was shown in a study by Dobrzynski (1991). Also, stewardship theory
proposes that joint structure leadership provides cohesive company leadership that
16
eliminates doubt of the individual leading the organisation (Ogbechie & Koufopoulos, 2009:
95).
2.8.4 Board composition
The board composition is used to denote the difference between the directors within the
company and those brought from outside the company. It is simply the percentage of
outside directors currently sitting on the board. The directors within the company are those
that are also managers or current officers in the firm while outside directors are normally
referred to as non executive directors; because they do not partake in the day to day
running of the company. It is also believed that outside directors contribute more to a firms
growth as a result of their independence from the firms management. Also they normally
have an unbiased view given their origin coupled with their experience (Ogbechie &
Koufopoulos, 2009: 96)
2.8.5 Board diversity
In the global marketplace a company that employs a diverse workforce is better positioned
to understand the market in which it does business and hence has the capability to thrive
in such environments. The term diversity refers to a mixture of men and women, people
from different age brackets, people with different ethnic groups and racial backgrounds.
Scholars have emphasised the importance of improved board diversity as a result of the
different perspectives from board members. It is believed that by corporate governance
scholars that board have either a direct or indirect effect on the firm. Though board
diversity might be a constraint according to Goodstein; nevertheless it goes without doubt
that for boards to be effective there is need for diverse perspective (Ogbechie &
Koufopoulos, 2009: 99).
2.9 CORPORATE GOVERNANCE IN NIGERIAN COMPANIES
The Nigerian corporate world is one that has increasingly come under scrutiny, both
domestically and on the international scene. The core issues hover round the board of
directors, responsibilities of members, roles of directors and the use of independent
auditors. The challenge with most companies in Nigeria is that the management mark their
own scripts, score themselves distinctions and sing their praises. However, to equity
owners the fantastic financial reports are engineered, as the effects are not felt in the real
economy.
17
The above has been one of long dispute between the general public and the banking
community. The argument has been that, despite the impressive results posted by the
banks (profit after tax [PAT] got as high as 1000%), no real effect has been felt on the real
economy which spans across manufacturing, agriculture, mining, and the real estate
sector amongst others. All these have done nothing but give credence to the above
speculation that the results might actually have been doctored (Yakasai, 2001: 241).
It gets more difficult when a comparison is made between unstructured private limited
liability and public liability companies. While the private companies are known for their
simplicity, effective management, innovation and creating wealth, the public liability
companies are associated with lethargy, nonchalance and lack of personal touch due to
the legal separation of ownership and control.
In Nigeria the conventional wisdom that shareholders determine board membership and
influence corporate direction is false. This is as a result of the fact that individual
shareholders are unable to exercise any influence unless they pose sufficient
shareholdings and influence. However, some blue chip companies go the extra mile to
ensure that their shareholders are carried along in making corporate decisions. This is
done through various meetings, published materials, videos of AGMs, shareholders
forums and so on (Yakasai, 2001: 241).
Corporate governance in the private sector is of general interest, however, the Nigerian
public has taken a keen interest in that of the banks operating in the Nigerian bank
landscape. This is in view of the banks published figures and their dominance in the
Nigerian stock exchange. Another major reason is that most economies world wide have
migrated to a money and exchange economy. The basic instrument to facilitate
international trade and exchange is money. Apparently these banks happen to be the
custodian of these financial instruments. As a result of this sensitive role their corporate
governance is of keen interest to government, depositors, shareholders and the general
public.
Nevertheless, these stated bodies all have different interest in these financial institutions.
The general public and government do look forward to a safe, sound and stable banking
system while the depositors are more interested in returns on deposits and the quality of
service being rendered. Simply put: the government looks for safety of the banks, while
shareholders are concerned about their profitability. It is essential to take another
stakeholder group, the employees, into consideration. The workers are interested in
18
sustained employment through the continued existence and profitability of their employer-
banks.
Given the above diverse interest from stakeholders, governance in Nigerian companies
and banks has become political and volatile. Also, the governance of Nigerian banks has
been claimed to be centrally located in the hands of the board of directors (BOD) (Yakasai,
2001: 241). Given the multiplicity in any bank, this increases the role of the BOD of any
Nigerian bank. With all these in sight, there are strict laws in appointing people to be BOD
in banks and it is different from other private institutions in the country (NDIC).
To satisfy the numerous and diverse interests of bank shareholders, general public and
regulatory bodies; the banks BOD are mandated to have some core responsibilities. One
of the most important is the development of corporate vision, mission and business
strategy. This is to ensure that all members are on the same page regarding the banks
focus. This also goes further to comply with the Central Bank of Nigerias corporate
governance code that demand members of banks BOD to be knowledgeable enough to
contribute meaningfully to the banks affairs (CBN code). A fallout of this is another
responsibility which is to monitor and supervise that the banks strategic goals for effective
results and deliverables to shareholders are met.
Also, given that BOD is the highest oversight body, it must be satisfied that adequate
information, control and audit systems are in place. This is in addition to its responsibility of
corporate compliance with legal and ethical standards imposed by the law and the banks
own statement of values. Another key responsibility is to manage crisis and ensure a
proper risk management system (Yakasai, 2001: 242). This in turn will ensure that good
loans are extended, thereby guaranteeing the safety of depositors funds.
The responsibilities stated above are amongst what a banks BOD should have, however
there are no laid down rules on how these tasks should be performed. Nevertheless, one
of the surest ways is to ensure that the board is composed of people of integrity, good
judgement, with knowledge and experience to help the bank in achieving its strategic
goals.
2.9.1 Corporate governance for banks operating in Nigeria
After the bank consolidation in 2005, it became imperative for tightening of their activities
by a regulatory body, Central Bank of Nigeria (CBN). The outcome of this was the release
19
of a code of corporate governance for Nigerian banks post consolidation. This was
released and became effective on 3 April 2006.
The code started by stating the importance of corporate governance and also retention of
public confidence. This was given the role of the finance industry given its mobilisation of
funds, allocation of credit to the needy sectors of the economy, the payment and
settlement system and the implementation of monetary policy.
The essence of the code became more important as a result of the outcome by the
security exchange commission (SEC). The report published in April 2003 revealed that
corporate governance was at a rudimentary stage with only about of 40 per cent with a
recognised code of corporate governance in place. Specifically in the financial sector, poor
corporate governance was identified as a major factor in virtually all identified reasons for
the failure of financial institutions in the past. Also, without doubt, it was known that the
ongoing consolidation will bring about challenges, especially on issues bordering on IT,
culture and integration processes. The code from CBN also identified that two-thirds of
mergers failed world wide as a result of challenges posed by personnel integration, IT
integration, corporate culture and management squabbles. The report further stated that a
standardised code of corporate governance will help in addressing such issues.
Nevertheless it is important to state that prior to this code of corporate governance from
CBN, the Nigerian Securities and Exchange Commission released a code of best practices
on corporate governance for public quoted companies. Banks were expected to adhere to
these as well as a corporate governance code from the bankers committee.
In the post consolidation corporate governance code released by CBN, weaknesses and
challenges of corporate governance in Nigeria banks were identified and explained in
details. This was to ensure that all institutions involved reviewed it to see where they erred
in order to ensure measures to be taken to reduce and eliminate such weaknesses.
Amongst the weaknesses listed are ineffective board oversight, disagreement between
board and management, overbearing influence of chairman or MD/CEO and weak internal
control measures. Other weaknesses highlighted, included non-compliance with laid down
control measures, non-compliance with rules and laws from regulatory authorities, passive
shareholders, lending abuses and excess of one obligor limit and having sit tight directors.
Sit tight directors in this case refer to directors that fail to make meaningful contributions in
meetings or in the affairs of the banks.
20
The challenges listed in code were to address existing ones and those that are likely to
occur after the banking consolidation. A major challenge was the technical incompetence
of board and management to effectively redefine, re-strategise, and restructure in the
areas of corporate identities, new business acquisitions, branch consolidation, expansion
and product development.
Another challenge was that of the relationship amongst the directors. This is bound to
arise in boardroom squabbles especially in institutions that were formerly one man or
family owned. The new idea of contending with new directors, especially in the areas of
making decisions, will pose as a challenge in these new institutions. An offshoot of the
above challenge will be that of the relationship between staff and new management. The
work environment might become strained as a result of changes in work policies.
Examples of this include changes in pay structure, changes in reporting lines and
knowledge gaps between the existing staff and the new ones.
The major reason for the consolidation exercise was to ensure that banks increase that
capital base, thereby giving them the capacity to fund large ticket transactions. Hence in
meeting this new requirement it becomes imperative for the banks to have proper risk
management structures in place. This will help to manage the risk of these institutions as
the level of risk will be more than the institutions have ever seen. This poses a serious
challenge to the banks post consolidation and will need to be given serious attention. The
management of risk in transparent and ethical manners will have an effect on the banks
governance.
Another challenge that appeared is ineffective merger of the banks after the general
process. It is believed that scenarios where an investment bank merges with a commercial
bank are not properly implemented and might result in a situation where both institutions
will still run parallel, especially if both managing directors are in charge of the various
banking units. Inadvertently this will pose as a challenge for the institution as a whole.
Given the number of banks involved in the consolidation process, coupled with the amount
involved, the tendency to have an average of three different banks merging to bring about
a new entity is high. The outcome will be an institution that will have options regarding
choice of IT and different accounting systems. The use of technology will increase to
power the new consolidated business. This will definitely need to be well managed to
ensure efficient operations and quality of service. An offshoot of this challenge is an
inadequate management capacity. Given the challenge stated above, it becomes
21
imperative for the level of management capacity to increase to ensure the effective running
of the new big banks.
According to the corporate governance code released by the Central Bank of Nigeria
(2006), issues concerning insider loans and transparency were also raised as challenges.
It was stated that if consolidation failed to achieve transparency through diversification of
bank ownership; it will result in other negative aspects of the bank operations. Amongst
the effects will be insider related trading and rendition of false returns. Rendition of false
returns to regulatory authorities and concealment of information to bank examiners will
mean early detection of troubled banks.
A major challenge in a bigger bank will be that of getting the right choices given the very
diverse interest involved. A good example is an audit committee which ought to comprise
of both directors and shareholders. The outcome of this is selection of people without the
necessary skills and expertise to handle such a task, thereby making the committee
ineffective. This might also reflect in operational controls as a result of the larger size of
the institution.
Finally, the disposal of surplus assets and use of such funds will pose a challenge in the
post consolidation of these banks. After the consolidation, branches that are too close will
have some disposed to reduce operational cost and increase efficiency. Assets such as
cars, computers and other assets will also be disposed off. These items can be sold for
prices lower than their market value, which is wrong. The income from such sales should
be properly recognised and not used in boosting profits to cover operational losses and
inefficiencies.
2.10 CODE OF BEST PRACTICES ON CORPORATE GOVERNANCE
The CBN corporate governance code went a step further by focussing on best practices of
corporate governance in the sector. These were termed as initiatives that will promote
good corporate governance post consolidation in the Nigeria banking system. Some of
these principles are as listed below.
i. Carefully crafting out the banks overall strategic objective, its corporate values with
clear lines of responsibility and accountability.
ii. The banks management team should be proactive and committed to the above
goals. They should also function in line with the corporate strategy to have a clear
sense of direction and achievement.
22
iii. The board of directors should be committed and carry out its oversight function in a
professional manner. Also, the board should be well constituted to ensure
meaningful contributions in meetings.
iv. Given the creation of new entities there is bound to be dispute among the different
stakeholders of the bank. In view of this it is imperative that the institution should
have measures in place to resolve disputes that arise amongst board, management
and staff of the bank.
v. The new entities will be large corporations and a clear succession plan will have to
be in place. Shareholders need to be responsive, enlightened and responsible.
vi. Another challenge should be that the bank should ensure they have an effective
and efficient audit committee of the board. Also the auditors should be of high
integrity, independence and competent. These auditors should include both internal
and external auditors.
2.10.1 Equity ownership
Another issue that came up in the CBN study was that of the banks ownership structure
prior to consolidation. The present practice, pre consolidation, poses a challenge as a
non-restrictive equity holding. This has led to serious abuses by individuals and family
members as well as government in the management of banks. Given this unhealthy
scenario and to encourage private sector-led economy, the code stipulated that holdings
by individuals and corporate bodies should be more than that held by government. The
code also noted that individuals who form part of management of banks in which they also
have equity holdings will be compelled to manage the companies better. In view of this it is
right to say that the code favoured board ownership in these banks.
The above positions were further streamlined regarding positions individuals and
government can take in these banks. It was stated that governments direct and indirect
holdings in any bank should be limited to 10 per cent by the end of 2007. The CBN stated
in the code of corporate governance, post consolidation, that any equity holding exceeding
10 per cent by an investor is subject to confirmation.
2.10.2 Organisational structure
Historically in the Nigerian banking sector a major source of conflict has been in the
structure of the organisation where the board ask for senior positions to be able to
23
exercise undue power. Given this, a major issue under the organisational structure was on
executive duality. Amongst the issues raised was that the chairman and MD/CEO roles
should be clearly separated. This will ensure that no one has unfettered powers of
decision making by occupying the two positions at the same time. The position of the
executive vice chairman is no longer recognised in the new structure. In the earlier section
under equity ownership it was noted that individuals and family members held large stakes
in the banks, leading to unhealthy lending practices. To fight this trend it was then
resolved that no two members of the same extended family should occupy the position of
chairman and that of chief executive officer or executive director of a bank at the same
time.
2.10.3 Quality of board membership
The board of the banks has been a long standing issue where it is stated that the board
should be effective and composed of qualified people that are conversant with its oversight
functions. The CBN further stated that these people should be knowledgeable in business
and financial matters for them to be considered to be on the board. Given that the right
people have been selected, it is imperative that there should be regular training and
education of board members. To make this more tenable, it is important that the banks
should budget for it at the start of the financial year.
With the capability of the board in place it is important for the board to have necessary
powers to chart the bank in the right direction. A major concern is for the board to have the
powers to hire consultants that will advise it on the way forward for the bank.
The code also looked at the composition of the board of directors to other directors; this is
to ensure that the board is not skewed to one direction and thereby influencing decisions
taken. The code stated that the number of non-executive directors should be more than
that of executive directors. This is subject to a maximum board size of 20 members. The
board should comprise of a minimum of two non-executive directors who must have been
appointed based on merit. They should not represent any shareholder group and also
have no business interest in the bank. This is to ensure that they give a fair and outside
opinion on the affairs of the bank.
Taking it a step further, the remuneration for the non executive directors should be limited
to sitting allowances, directors fees as well as hotel expenses. Finally, there should be a
fixed tenor for the banks board which should be not more than three terms of four years
24
each (12 years). This should also include top bank executives as they should have a clear
succession plan for them.
2.10.4 Board performance appraisal
It goes without doubt that the board should be appraised to see if all set targets and
deliverables are met. The need for board performance reviews and appraisals to ensure
exceptional performance was stated as a necessity in the code of corporate governance
post consolidation by the Central Bank of Nigeria. However, for the board performance to
be properly appraised, a couple of steps need to be taken. The first step is to determine
the skills, knowledge and experience of board members. And having ascertained this to be
in order, the next step will be to define the company future strategic goals, strategic
objectives and the critical success factors needed to achieve this. With all these in place
the board should ensure it works as a team to achieve its goals with a periodic review or
self assessment. This can be done annually, preferably by an outside consultant with the
report being presented at the AGM while the CBN is sent a copy.
2.10.5 Reporting relationship
The reporting relationship is very key in an organisation, including the banking sector, as
to a large extent it determines the degree of transparency and disclosure that will occur.
Given the importance of this, it became important for the corporate governance code to
highlight that the structure of any bank should show clearly acceptable lines of
responsibility and hierarchy. Also, all designated officers should be aware that they will be
held accountable for duties and responsibilities attached to the offices they occupy. This
will further ensure that people are focussed and regulatory matters taken seriously and
adhered to.
2.10.6 Industry transparency and disclosure requirements
The stakeholders of the banking sector are immensely important and it goes without doubt
that their confidence in the institutions says a lot about the corporate governance
structures in place. Therefore, to ensure that stakeholder confidence is retained, the issue
of transparency and disclosure must be complied with according to regulatory
requirements.
A major point to note here is the issue concerning related party transactions. Where the
board directors or other bodies related to them are engaged as service providers or
suppliers to the bank, disclosure should be made to all parties involved including the CBN.
25
Another key issue in attracting and retaining stakeholder confidence is that regarding
disclosure of company financial reports. The code requires the chief executive officer and
chief finance officer of the banks to certify on all reported financial reports that they have
reviewed the reports. Their signatures will also specify that, based on their knowledge, the
report does not contain any untrue statement of a material fact. Also, the financial
statements and reports fairly represent the financial conditions and results of the banks for
the period that have been covered. Falsifying reports will attract a fine and six months
suspension of the bank CEO for a first time offender. However, in the case of a
reoccurrence, a removal and blacklisting of the CEO will be the case. Also, all staff
connected will be referred to professional bodies for disciplinary actions.
The code went further to analyse all loans given to directors and related parties, stating
that the practice of anticipatory approvals by board committees should be limited strictly to
emergency and should have a lifeline of one month after which it should be ratified. Also,
any director whose loan or related interest loans are non-performing for more than one
year should cease to be on the board of the bank. If the facility in question is not
regularised within a period, the person will be blacklisted from being on the board of any
other bank.
In addition to monitoring compliance with money laundering requirements, bank chief
compliance officers should also monitor the implementation of the corporate governance
code. The banks should encourage whistle blowing by staff to ensure strict adherence to
rules and regulations. An easy way of ensuring whistle blowing will be by the enactment of
a special medium such as special email or hotline to both the bank and CBN. With this in
place, a means of monitoring should be enacted which is basically the CCO making
monthly returns on compliance and corporate governance status to CBN. Finally, it was
mandated that the CEO and CCO should certify each year that no code in the corporate
governance was breached in the course of business.
2.10.7 Risk management
The past bank failures were highly attributed to a lack in their risk management units, and
therefore the code of corporate governance post consolidation for Nigeria specified what
was needed from this unit. Firstly, the risk management committee should establish
policies for risk oversight and management. It was stated that banks should have a risk
management framework in place as well as a unit which will be lead by a senior executive
of the bank. This new unit will run according to the directives of the board of risk
26
management. Given this it becomes important for the internal control system to be well
documented and designed to achieve a high degree of bank operations. Also, the system
should be structured to ensure that the reliability of financial reporting and compliance with
rules and regulations from all levels in the bank are in place. To ensure that the above
codes are monitored, external auditors are mandated to report to CBN on the banks risk
management culture.
2.10.8 Role of auditors
2.10.8.1 Internal auditors
In the Nigerian banking system there exist the internal and external auditors. The internal
auditors are staff of the banks that have been recruited to monitor the affairs of the various
branches and units of the bank on a day to day basis. These groups of staff ought to be
largely independent, highly competent and people of integrity. Given the responsibility of
the unit, the code specified that the head of this unit should not be less than an assistant
general manager and should be a member of a professional body. In terms of reporting
style, the AGM should report directly to the board audit committee, however, a copy of the
report should be sent directly MD/CEO of the bank. Also, on arrival of CBN examiners,
these quarterly reports should be made available to them.
The combination of the board audit committee was also an issue for the code. It was
stated that members of the board audit committee should be non executive directors and
ordinary shareholders. These people should normally be appointed in annual general
meetings. Amongst the appointed people should be the chairman of the committee and
also all members should be knowledgeable in internal control measures.
Finally, these groups of people will act as an intermediary between the external auditor
and the bank. Hence, amongst their duties will be to ensure that the banks financial
reporting is of acceptable standards and that the bank has adhered to all rules and
regulations of CBN.
2.10.8.2 External auditors
External auditors play a key role in the issue of banks in Nigeria and therefore deserve the
focus and attention they presently receive. Firstly, the appointment of the external auditors
will a task to be approved by CBN; one advantage of this is to ensure that the relationship
between these auditors and the banks is not compromised as this might lead to ethical and
27
governance issues. Regarding tenor, the external auditors are only allowed to work with
the banks for 10 years. Afterwards a break of 10 years is required before the auditor can
come back to audit the bank.
If CBN doubts the work done by the external auditors, quality assurance auditing should
be engaged by the CBN. If the results from this team support the fact that the auditors
have erred, then they will be blacklisted from auditing banks and other financial institutions
for a time frame to be determined by the CBN.
In order to avoid conflict of interest, it is advisable that an audit firm should not provide
services to a bank in some scenarios. On such scenario is if one of the banks top officials
was employed by the firm and worked in the banks audit during the previous year. Finally,
the external auditors should not provide any of the services, namely bookkeeping for the
banks, valuation services, actuarial services, internal audit outsourcing as well as human
resource functions.
2.11 PROCESS AND PROBLEMS OF CORPORATE GOVERNANCE IN THE NIGERIAN
BANKING INDUSTRY
In Nigeria, the Companies and Allied Matters Act of 1991 places great responsibility in the
hands of BOD. However, this is further strengthened by Nigerian deposit insurance
corporations placing additional rules guarding the activities of bank directors. In Nigeria,
bank governance can be seen from three perspectives, namely:
i. Composition in terms of competence, knowledge, experience and business
network. The usual practice is to look for highly qualified and experienced people
with business connection. The search can be first conducted in-house amongst staff
members and if not successful then an outside search is resorted to. It is important
to note that this is seen in the big and medium sized banks; however, for the new
generation banks recruitment is done on ownership, family members and allies.
ii. Tenure of board members, organising and running the board entails first and
foremost to determine the ratio of executive to non-executive directors. In Nigeria
the big banks normally have bigger board members when compared to the smaller
generation banks. The table below illustrates the ratio of executive to non-executive
directors. Also, there should be a clear distinction between the board chairman and
MD/CEO, and the frequency of meetings should be agreed upon.
28
The present situation is one where the big banks hold frequent meetings whereas
the smaller banks dislike holding meetings. They prefer using the time in marketing
for deposits which is probably partially due to the fact that they have less loan
portfolio size.
The tenure of board members should be agreed upon and should include issues
such as , age limit, knowledge and experience of intending board members. Finally,
the maximum number of tenures for directors should be agreed upon that is,
where the contract is renewable.
iii. Action is necessary in terms of responsibility, commitment, performance indicators,
monitoring and evaluation. The general trend in most organisations is for duties to
be delegated to senior management who in turn process it and present it to the
board of directors. In line with this very few questions are asked, which is where the
knowledge of the board members becomes key and comes into question. However,
one key performance indicator is the banks profitability which the board should take
seriously, as this is used at AGMs to judge their own performance.
Given the above as the process for a board of directors, it is important to also note the
peculiarity of the banking business in Nigeria. This peculiarity poses some problems which
will be discussed briefly.
2.11.1 Environmental pressure
Given the present business environment, pressure normally comes from two sources,
namely from family and close allies and from the underground or informal sector (Yakasai,
2001: 243). It is a norm to find friends and relatives putting pressure on board members for
favours. These favours may span across awarding contracts, employment of under-
qualified candidates and extending of loans without proper risk management practices
adhered to.
The other pressure can emanate from a number of sources. A major one is compromising
ethics for business relationships. These are situations where the bank is forced to part with
a certain amount of money to get business. These kinds of acts adversely affect the banks
corporate governance which ultimately impacts negatively on the country (Yakasai, 2001:
243).
29
2.11.2 Instability of tenure
The BOD constitutes a serious part of good decision making in any organisation. Given its
sensitive nature, it is important that the members tenure be stable to ensure that ideas are
cultivated and implemented, otherwise the institution on its own becomes unstable. In the
early 1990s, the Nigerian private sector experienced high volatility in dissolving the board
members. This was particular with industries that were operating in the strategic sectors
such as petrochemical and banking industries.
The federal government, however, divested from the banking industry in 1993 and there
has been an improvement in the erstwhile public banks in which board dissolution was
high. It is important to note that an unstable board breeds insecurity of board members
which might lead to them having a different focus such as enriching themselves through
any means within the shortest possible period. The effect of instable boards results in the
lack of a strategic goal being developed for the bank which subsequently leads to
ineffectiveness in the day to day running of the bank. All these will lead to a reduction in
profitability of the banks bottom line.
2.11.3 Government action
This problem emanates from two schools of thought, namely governments interference in
the appointment of incompetent personnel as a result of affirmative action and quota
system in the country (Yakasai, 2001: 244). This ultimately leads to compromising
recruiting standards and gives forth to staff that are incompetent which invariably impacts
negatively on the banks overall performance.
Also, it is believed that government agencies such as the NDIC and CBN are interested in
ensuring stability, safety and soundness of banks but their actions prove otherwise. This is
particularly the case when a banks huge exposure to the government and its parastatals
has not been properly addressed, leading to the crisis such as in 1998. The issues were
then resolved with the payment of only principal amounts and the interest payments were
waived. This kind of interference leads to a decline in profit line, bearing in mind that the
probability of government also recruiting some members of directors is present.
2.11.4 Board/management relationship
It is paramount for the relation between the BOD and banks management team to be
mutual and complimentary to flag a good message to the investing public. However, the
supervisory role of the BOD cannot be compromised. Given this, there is bound to be
30
conflict if the BOD engages in the day-to-day operations of the bank rather than in policy
and strategic issues. This was witnessed in the 1990s amongst the big four banks at the
time. The consequence of such conflicts is that the governance of the banks will suffer
because the boards will waste their energies on operational and tactical problems. Also,
there will be rivalry amongst the two groups where one will see the other as a foe; leading
to divergent opinions and behaviours.
This was the case in state owned banks in the 1990s and even carried over to the year
2000 when the banks had been privatised.
2.11.5 Executive chairmanship/vice chairmanship
This is a scenario where the chairman/vice chairman of the board is not satisfied with
moderating the excesses of the managing director of the bank. The chairman then seeks
to be executive chairman of the bank so he/she could sit over the judgment of his/her
activities. This observation has also exposed the moral issue on the expected
transparency, accountability and police role of the chairman/vice chairman (Yakasai, 2001:
245).
2.11.6 Ownership crisis
At various points, there has been conflict over ownership structures of the Nigerian
banking institutions. This scenario has played out in the private as well as government
owned banks. In government owned banks, the board was dissolved by the Ministry of
Finance Incorporated which held shares in trust for the government, while at private owned
banks throwing of chairs and punching at board meetings and annual general meetings
was the case.
31

Figure 2.1: Ownership structure of Nigerian banks
The consequence of such a crisis is the instability that accompanies such boards. When
such crisis persists, the regulatory authorities such as CBN will be forced to come in by
instituting an interim management board (Yakasai, 2001: 245). However, it is important to
note that ownership crisis can also evolve as a result of a forceful takeover of one bank by
another. In scenarios like this, the CBN is always called in to resolve such issues. This is
synonymous with the recent ownership structure that ensued between Bank PHB and
Spring Bank of Nigeria Plc.
2.11.7 Insider dealings
Like all other industries where raw materials are converted into finished and processed
goods for clients, the banking sector is not excluded from this process. The sectors raw
materials comprise of the depositors funds which are in its custody. These raw materials
or funds are used to create risk assets which are then repaid with interest to the share
holders and depositors.
Without doubt the creation of these risk assets, which bring forth the loan/advances portion
of the balance sheet, comprises an important part of the banks balance sheet. Given this
importance, it is imperative for bank directors to disclose all related borrowings as
stipulated by the banks and other financial institutions decree (BOFID). This also extends
to scenarios where bank directors create companies to borrow money or grant loans to
relatives or close allies that are not worthy of it. These acts were amongst those that led to
the banking crisis in the mid 90s. Also, history is replaying itself in the country where some
banks are being indicted for indiscriminate lending to capital market players as well as the
32
downstream petroleum sector. The origination of this is a fragile governance structure and
neglect of laid down rules which will lead to loss of profit, thereby reducing the banks
performance. The proportion of private owners in Figure 2.1 gives credence to the high
rate of insider trading that took place in the country.
2.11.8 Quality of bank directors
There is no doubt that there is a high correlation between board performance and quality
of directors. Evidence in the 90s revealed that this was compromised and unfit persons
were appointed to boards of banks. The consequence of this was the directors lack of
capacity to contribute at board meetings. However, occasionally when they did, such
contributions were either below par or not relevant at all (Yakasai, 2001: 246). The
outcome of this was a negative effect on quality issues of governance and leadership by
the board, a situation that further worsened the remaining fragile reputation of bank
directors.
2.12 PRE-REQUISITES FOR EFFECTIVE CORPORATE GOVERNANCE IN NIGERIA
To categorically state factors that will ensure good corporate governance in the Nigerian
banking system will be a huge task. However, given the present operating environment, it
is essential to explore some factors that are capable of affecting the governance
environment.
In a research by Yakasai (2001) it was agreed that the board is the ultimate governing
body responsible for the growth of the bank. In view of this, given the level of importance
required from this body; it goes without saying that there are some qualities which should
be inherent in board members (Yakasai, 2001: 247). These factors should include the
following: knowledge, information, strong management, power, independence and time.
2.12.1 Knowledge
Considering the complexity of our financial system which has made the banking industry
more complicated, it is important to have people of high qualities at the helm of affairs.
These directors should be from diverse and complementary backgrounds, have knowledge
and experience, and should network. It is advisable that each board member should have
expertise in more than one area of specialisation so that the membership will not be
unskilled. This will ensure that knowledge from board members is broad and deep enough
to match the demands facing the industry (Yakasai, 2001: 247).
33
In addition to the above, regular evaluations of board members have to be carried to
determine the right mix. This exercise will also ensure that knowledge gaps, level of
professional competence and academic background requirements are continuously met.
This same approach should be employed in all other committees within the organisation. It
will ensure that things are done properly and help in strengthening the risk profile of the
banking institutions.
2.12.2 Information
Information is without doubt the key for board members to be able to work effectively and
timely, given the spate of events in this present day financial system. Board members
should have an open door policy to ensure information is received from employees,
shareholders, customers, regulators and fellow colleagues. The sources of this information
should be well processed to ensure that boards are not acting on rumours which will
inadvertently go against the initial intention.
2.12.3 Strong management team
It is imperative to have a management team with relevant knowledge and entrepreneurial
spirit, core cultures and values for the organisation. However, the board should create an
enabling environment for this management team to exhibit entrepreneurial traits. It is these
managers that provide a clear sense of direction for the entire organisation since they
have a perfect understanding of the internal structures of the bank.
2.12.4 Power
The essence of power in a board cannot be under-estimated. However, there must be a
balance between a supervisory tier and executive tier of the board A body can be effective
if it has the authority to make decisions and to ensure top management approves and
implements them. One of the most important ways to ensure separation of powers is to
separate the offices of the chairman and chief executive officer.
It is, however, paramount to note that with the presence of power, the next requirement is
the knowledge base of its members. This is so, because, to ensure effective use of board
power, a clear sense of direction should be present. However, a clear sense of direction is
a function of the inherent capabilities of board members. Given all these, it becomes
essential that in bringing in new members, there should be a transparent process where
skills set and conflict of issues matters will be looked into (Yakasai, 2001: 248).
34
A simple test to indicate if the board has value will include asking questions like: Does a
balance of power exist between the executive and non executive directors? Who controls
the agenda of the meeting? Does the board have a clear sense of direction? Also: Can the
board call the executive directors to order when boundaries are overstepped? Affirmative
responses to these questions will indicate that the board has power (Yakasai, 2001: 248).
2.12.5 Auditors
In the Nigerian banking landscape, internal auditors as well as external auditors exist. The
internal auditors are staff members with the entire unit reporting to the chief executive
officer. The essence of internal auditors is to review internal audit trails and ensure the
level of exceptions are reduced, depending on when external auditors come to audit the
bank. They also help to reduce fraud and keep an eye on staff in up country branches,
ensuring that the banks culture is preserved and adhered to.
The role of external auditors cannot be over-emphasised given the assumption about
shareholders willingness and ability to scrutinise the banks affairs and call erring board
and management to judgement (Yakasai, 2001: 248).
The appointment of external auditors is a requirement by the Central Bank of Nigeria in
accordance with statutory provisions of Acts establishing the roles of corporate affairs
commissions, companies and allied matters, Central Bank of Nigeria, other banks and
other financial institutions (Yakasai, 2001: 248). Given all these, the major role of auditors
both internal and external is to ensure that one of the functions of corporate
governance, which is accountability, is adhered to, because shareholders, both
institutional and small shareholders, do not have the luxury of time to do it themselves.
35


Accountability
Direction
Supervision
Executive Action

Figure 2.2: Functions of corporate governance
Source: Corporate Governance is a Third World country with particular reference to Nigeria
2.12.6 Motivation
Similar to other spheres of business, motivation has remained a key factor in the
deliverables and outputs of employees. This is the case with board of directors of banks.
The right incentives and perks should be in place to align bank directors interest with
those of stakeholders they represent. These stakeholders include shareholders,
employees and customers (Yakasai, 2001: 249).
The reward system is an effective means that can be used to influence the performance
and motivation of bank directors. Although the reward system usually extends beyond the
amount of money paid, it should also include share options for board members.
A downside to this exists where intending board members turn their focus to the monetary
benefits they will get from being nominated. In view of this, it is important that after an
attractive package has been offered, the nominating committee should have suitable
nominees who will be concerned about the challenges and not the financial gains.
36
2.12.7 Time
This issue relates to two options, one of which is the utilisation of time in board meetings
and tenures associated with board members. Regarding the issue of tenures of board
members, it is essential to have staggered retirements which will ensure the presence of
knowledgeable and experienced directors at any point in time. This adds to the credibility
and efficiency of the board in duly executing its functions.
The other issue of time is more delicate, as it deals with the importance for board
members to be very intelligent and experienced people, as stated above. However, it is
also important that board members prepare properly for meetings so that meetings focus
on crafting and execution of corporate strategies (Yakasai, 2001: 249).
2.13 CORPORATE GOVERNANCE AND FIRM PERFORMANCE
Considering the current economic conditions, it has become paramount to cite the
importance of the financial sector for economic growth (Nada, 2004). However, a lot of
reasons have been named for the failure of banking institutions world-wide. Amongst these
reasons was the quality of corporate governance in the banking institutions. It is a general
belief that good corporate governance enhances a firm performance. However, there have
been some studies that have gone against this notion. For this reason it is inconclusive or
inconsistent to say that corporate governance and firm performance are directly correlated.
In a study by Akyereboah-Coleman (2008), the effect of corporate governance on
performance of firms in Africa was carried out. The data used was drawn from 103 firms in
Africa over a five year period from 19972001. These firms cover a range of sectors which
included the industrial, manufacturing, mining, agriculture and services sectors. The study
employed return on assets and Tobins Q as its performance measures. This research
employed the use of market and accounting based performance measures to ensure that
a clear relationship between corporate governance and performance can be arrived at.
Some results from the study contradict past research, while others conformed to past
findings. The contradicting data included studies that have shown that a long tenure does
not augur well for firm performance. This was drawn on the basis that the CEO spends
energy and time building an empire to control. It was also discovered that board activity
intensity had a negative relationship with return on assets and a weak positive relationship
with Tobins Q. The board activity intensity was measured by the frequency of board
37
meetings. It is worthy to note that this confirms past research that high frequency of board
activities is always as a result of corporate problems (Coleman, 2008: 16).
The conclusion of the research was to further emphasise the importance of corporate
governance in firms. It states that it constitutes the organisational climate for the internal
activities of a company. However, the research was not targeted towards a particular
industry, but covered a wide range of sectors. Also, it was targeted at African companies
giving more credence to the positive side of good corporate governance in the African
corporate world. A key feature of the research was the results from the regression which
showed that the direction and extent of impact of corporate governance is dependent on
the performance measure being examined (Coleman, 2008: 20). The results showed that
large boards enhance corporate performance and when they are dominated by non-
executive directors, the firms value is enhanced. Also, CEO duality does not significantly
impact on Tobins Q, the market based performance measure used. It, however, does
have a negative relationship with firm profitability.
Finally, the study concluded by stating that for enhanced performance, the positions of
CEO and board chair should be held by different persons and that firms should be
encouraged to maintain relatively independent audit committees. It was suggested that a
broader spectrum of variables should be employed, however, the result of the research
should not be compromised.
A study conducted in the Middle East and North Africa also shows that there is a
relationship between corporate governance and bank performance (Nada, 2004). This
study research used data from 249 banks from 20 countries in the above stated region.
The corporate governance parameter used was ownership structure and findings were
related to past research. It was discovered that foreign banks are significantly better
performers than all sample groups. However, government owned banks were discovered
to perform poorly when compared to the others.
A similar research using ownership structure was conducted on Indian banks (De, 2003).
However, the performance indicators used were accounting measures which comprised of
return on assets, net interest margin and operating cost ratio. The outcome of the study
showed there is a significant positive relationship between return on assets and private
ownership, but the research also showed that there is no significant relationship between
return on assets and ownership variables.
38
An empirical analysis was also carried out in Kenya, between the relationship of corporate
governance and bank performance (Barako & Tower, 2007) This research was done using
return on assets and non performance loans as the dependent variables. However, the
independent variables used were the ownership structure of the banks. The research was
to empirically examine the relationship between ownership structure and bank
performance (Barako & Tower, 2007: 139). The areas reviewed under the ownership
structure included the following: proportion of board ownership, level of foreign ownership,
institutional and government ownership.
The ordinary least square model was applied as a multivariate test to assess the influence
of each of the independent variables on performance. In line with past work done, the
result of the OLS regression provides strong support for the proposition that ownership
structure influences bank performance. The level of board ownership, foreign and
government ownership was seen to be associated with performance of financial
institutions in Kenya. (Barako & Tower, 2007: 140). A compelling result of the research is
negative relationship between state ownership and bank performance on the performance
indicators used. This goes to show that government ownership of banks has a negative
impact on the banks performance in Kenya.
Another fall out of this research is its acceptance of entrenchment hypothesis, which says
that board ownership of financial institutions increases conflict of interest between owners
and borrowers. It also spills into the risk taking nature of the financial institution concerned.
The impact of this is the inability of managers to take good and decisive decisions resulting
in the creation of substandard risk assets and invariably low performance.
The performance indicators; return on asset and non performing loans showed that
institutional shareholders have no significant influence on financial performance of banks
(Barako & Tower, 2007: 140). This is contrary to findings in the Western economies, where
institutional investors have spurred changes especially in promoting sound corporate
governance; the reverse is the case in Kenyas financial system.
Finally, the ordinary least square of the research shows that there is a positive relationship
between foreign ownership and bank performance. However, this is in line with previous
research findings and with the general belief that local banks are influenced by policies
and procedures of the parent companies, which may provide a better basis for evaluating
and mitigating risks. However, this is not to say that local banks with sound corporate
governance cannot do as well as its peers with foreign owners.
39
Another impediment to corporate performance is the agency theory, between the
principals (owners) and the agents (managers). It is believed that managers have
additional information about the firm when compared to the owners. This is as a result of
the insider information which is available to the managers. The outcome of this is that
owners are faced with the challenge of managers not acting in their best interest (Jensen
& Meckling, 1976).
Relating the above scenario to a bank is complicated as a result of the various parties
involved. Conflict of interest exists between the shareholders and depositors as well as
between shareholders and the managers of the bank. The risk in banks is being adopted
by the banks managers to increase the companys share price and this is usually contrary
to the risk appetite levels of the depositors or shareholders. Given this, it is therefore
correct to state that corporate governance in banks should encapsulate all stakeholders
involved that is, from the depositors to employees to shareholders.
Other studies have also been done in other parts of the world where little or no correlation
was found between firm performance and corporate governance. In a study conducted on
the emerging markets of Ukraine and Russia (Rachinsky, 2007) the financial ratios used
were return on assets, return on equity and net interest income. The conclusion of the
research was that there was no significant relationship between good governance and
performance in Russia. However, in the case of Ukraine, a slight relationship was found
between governance and performance. Nevertheless, the research further claims that
there might be some shortcomings which were stated as being related to accuracy of the
financial data and unreliable governance data. Also, the sample of banks used was rated
from bad to less bad rather than bad to good and finally the report states that the sample
was small and perhaps insufficient to generate strong statistical significance.

40
CHAPTER 3
RESEARCH DESIGN AND METHODOLOGY
3.1 INTRODUCTION
This study has been done in line with past research that has been carried out in
developing economies, with specific emphasis on Africa. It is also in line with an earlier
stated study, Corporate Governance and Bank Performance, Does Ownership Matter?
Evidence From The Kenyan Banking Sector by Dulacha and Greg. The focus was on
ownership structure. The ownership structure parameters were board ownership, foreign
ownership, institutional ownership and government ownership. The dependent variable
used in this study was the banks return on assets (ROA) and its non performing loan to
total advances (NPL) ratio. The independent variable was the corporate governance
variables.
A more recent study was done by Kyereboah-Coleman (2008) with the focus on
companies in various parts of Africa. The study also looked at a correlation between
corporate governance and the firms performance. While that of Kenya specially
researched banks in Kenya, the latter researched a broad range of companies in Africa.
The parameters used were board size, board independence, board activity intensity, CEO
duality, CEO tenure and audit committee. The final parameter used, which had a similarity
with the former, was institutional ownership. In both studies, institutional ownership was
termed to have a positive relationship with firm performance.
The dependent variable that was employed here also had similarity with that of Kenya. It
included return on asset (ROA) and Tobin Q. A careful analysis of this method would
reveal that a non performing loan ratio is an important tool in measuring how profitable a
bank will be, because a bank can only be profitable if its risk assets are performing and of
acceptable standards. Given that this research is a focus on banks in Nigeria, return on
assets and non performing loan ratio have been employed as the dependent variables.
Nevertheless, the independent variables will comprise of parameters from both studies.
3.2 INSTITUTIONAL OWNERSHIP
A firms ownership structure dictates its governance; past research has shown that
governance does have an effect on the profitability. It can be stated that a firms ownership
structure should have an effect on its performance, given its ties with its corporate
governance (Barako & Tower, 2007: 136).
41
It is believed that when the bulk ownership of a firm lies in hands of a few, the possibility of
equitable treatment of all stakeholders is likely (Coleman, 2008: 11). These groups or
institutions help to monitor the operations of the firm given their relatively high level of
investment. The fallout of the above is that institutional shareholders have greater
incentives to monitor corporate performance than scattered smaller groups. It is believed
that institutional shareholders help to resolve free ride problems commonly associated with
corporations where shares are widely held (Barako & Tower, 2007: 136).
In view of the above, it can be stated that institutional shareholder activism causes
changes in governance structure, which also results in a significant increase in
shareholders wealth. It is also important to note that institutional ownership is measured
by percentage volume held by institutions. Institutions in the Nigerian context will be
referred to as companies formed to have shareholdings in these banks as there is a high
likelihood of this form of ownership.
Based on the foregoing, the following hypothesis is set up:
ROA ratio Hypothesis 1a: The presence of a banks institutional ownership is positively
associated with the banks profit, based on its ROA.
NPL ratio Hypothesis 1b: The presence of a banks institutional ownership is negatively
associated with the level of non-performing loans.
3.3 FOREIGN OWNERSHIP
Much research has been done on firm performance with foreign ownership used as a
variable. The results have, however, been inconsistent with some research showing a
strong correlation and others not showing any relationship. A good example was seen in
the studies cited by Nada which indicated that foreign owned banks are less efficient than
the domestic ones. The shortcoming of this research, also stated by Nada, is that this
research was conducted mainly in the developed economies while neglecting developing
countries. It is, however, important to note that in these developed economies the
domestic banks are highly regulated, and older and more sophisticated than the foreign
banks.
Nevertheless, another research was conducted by Claessens and Demirguc-kunt in 2000
and 1999 respectively, stating that foreign owned banks report significantly higher interest
margins and higher net profitability than domestic banks. A lot of reasons are attributed to
the good performance of foreign ownership in comparison to domestic ownership.
42
These reasons include prudent management of risks as influenced by the policies of the
parent company, and strict focus on profitability to maximise shareholders wealth creation
capacity. This can be compared to domestic banks which suffer from inefficiencies, outside
interference and the possibility of not focussing on maximising returns. All these affect the
companys earnings and its capacity to grow (Barako & Tower, 2007: 136).
It is also believed that foreign banks have superior ability to diversify risks and render
services to multinational clients that domestic banks may not be able to offer, especially in
developing economies. It therefore almost follows that with entrants of foreign banks or
investors into an economy, there is the likelihood that domestic banks will tend to
strengthen their local systems in line with what is obtainable overseas so that they can
compete effectively.
Based on the foregoing, the following hypothesis is set up:
ROA ratio Hypothesis 2a: The higher the proportion of a firms foreign ownership, the
higher the profit; based on the return of assets ratio.
NPL ratio Hypothesis 2b: The higher the proportion of a firms foreign ownership, the
lower the level of the non performing loans.
3.4 BOARD OWNERSHIP
Board ownership, simply defined, means a scenario where owners form part of the
management of the company. This scenario of owner-managers in organisations is
believed to be beneficial to the organisation because of the high probability that their
interest is more aligned to that of the stakeholders. However, it is important to note that
board ownership varies between banks and companies due to their difference in operating
models.
The agency theory which states that there is positive association between managerial
ownership and financial performance because of the convergence between managers and
owners interest is in line with research by Jensen and Meckling (1976). It is thus possible
to deduce that Board ownership has a positive relationship with firm performance (Barako
& Tower, 2007: 135).
Other research has also been done in different sectors which further signifies the positive
relationship between board ownership and firm performance. A major example was the
43
study by Palia and Lichtenberg (1999) using a sample of 255 manufacturing firms between
the period 19821993.
However, the above scenario might not be applicable in the case of banks, because of the
difference in the ownership structure and stakeholders involved. It is believed that with
increased board ownership, there might be greater conflict of interest with the depositors
and shareholders (Barako & Tower, 2007: 136). In a research in the Argentinean banking
industry, it was reported that high board ownership stake led to higher loan portfolio risk.
This higher loan portfolio invariably leads to a higher degree of non-performing loans in the
banks portfolio. In work that was carried out by Pinteris (2002), agency conflict between
bank owners and bank depositors was identified as amongst the causes of this negative
relationship. To further add to the above research is the work done by Fogelberg and
Griffith (2000) and Hirsschey (1999), which further correlates the results from the
Argentinean banking study.
In view of the above, the following hypothesis is set up:
ROA ratio Hypothesis 3a: The higher the level of a firms board ownership, the lower the
profit using return on assets ratio.
NPL ratio Hypothesis 3b: The higher the level of a firms board ownership, the higher the
level of non-performing loans.
3.5 GOVERNMENT OWNERSHIP
Government ownership of banks has many perspectives from different groups of people
which also affects the outcome or possible results of the banks. Two common
perspectives from past research include those from the development side and the political
side (Barako & Tower, 2007: 137). It is believed by past research that this kind of
ownership is prevalent in countries with low levels of per capita income productivity. This is
in line with research conducted by Rafael la Porta, Florencio Lopez-De-Silanes and Andrei
Shleifer (2002).
The development theorists are of the opinion that government ownership of banks
increases the chances of allocating credit to long-term socially desirable projects that
otherwise may not get private funding. This optimistic view is associated with Alexander
Gerschenkron who focussed on the necessity of financial development for economic
growth.
44
However, the political theorists believe that when government own banks, they are used to
fund projects that are politically inclined and not that which is desired. To further explain
the point of the political theorist, government ownership of banks creates an avenue for
promoting and propagating political patronage that adversely affects performance of these
institutions (Barako & Tower, 2007: 137). Past research has shown that government
ownership of banks impacts negatively on the banks performance. Examples of research
that proved this include studies done by Barth, Caprio and Levine (2002). A study
conducted in Argentina banks by Allen et al. (2002) also strongly confirms that government
ownership is associated with poor performance.
Based on the foregoing, the following hypothesis is set up:
ROA ratio Hypothesis 4a: There is negative relationship between a firms government
ownership and bank profitability performance.
NPL ratio Hypothesis 4b: There is positive relationship between a firms government
ownership and bank performance measured as non-performing loans.
3.6 RESEARCH DESIGN AND METHODOLOGY
The sample of this study was drawn from the financial institutions operating in Nigerias
financial system with the licence to carry out banking activities. Nevertheless, a couple of
criteria had to be used for the banks that will be included in the research report. The
conditions include the following:
i. Banks must have been in existence for the period under review which is 2003
2008. It is important to note that, as a result of the consolidation that took place in
2005/2006, an important criterion will be to include banks that scaled the
consolidation process. Also, for the banks that came up as a result of the merger,
the financial ratios of the most dominant bank in the group prior to merger before
opting for the post consolidation figures will be used.
ii. All relevant information on ownership and performance must be available for the
period under review. The performance is in relation to banks that have consistently
published their annual financial reports for each year under review; while those that
have not published theirs will be excluded from the research.
45
3.7 VARIABLE MEASUREMENT
In the research report, two dependent variables were looked at, namely return on assets
and ratio of non-performing loans of the banks. Return on assets was selected because of
its relative use in past research work in determining how profitable a bank or firm is. A
good example in the case of banks is the research on bank performance and corporate
governance by Barako and Tower (2007). Also, in more recent research work by Coleman
(2008), where a study of corporate governance and firm performance was carried out with
emphasis on African firms; return on assets was also employed to determine how
profitable a firm was. To further buttress the reason for opting for the return on assets
ratio, is that it is a clear indication of how well banks are able to utilise their raw materials
which in this case is the cash deposits from depositors and equity from stakeholders.
A major determinant of a banks profitability is its level of non-performing loans in its
portfolio. Non-performing loan ratio is the total non-performing loans to total advances from
the bank. It determines how stable a bank is (Barako & Tower, 2007: 137) and also the
degree of impaired assets in a banks custody. This ratio goes further to indicate the
strength and expertise of a banks risk management structure. It indirectly reveals a banks
lending behaviour, which is connected to the banks corporate ownership and controls. It is
therefore important to use the non performing loan ratio as it has a direct relationship to
the banks corporate governance system and invariably its performance.
3.8 INDEPENDENT VARIABLES
The independent variable used in this research report is investigation of the corporate
governance mechanism which is the ownership structure. Under the ownership structure
the categories of variables studied are: level of board ownership, foreign ownership,
institutional ownership and government ownership.
In past research done, institutional ownership was defined by scenarios where a clearly
identifiable body owns a certain percentage of the shareholding of its total share value. In
the study done by Barako and Tower on the banking sector, a minimum holding of 30 per
cent shareholding was used as the criteria for identifying institutional shareholders.
However, it is believed that there is an absence of strong institutional investors in the
Nigerian banking industry (Ogbechie & Koufopoulos, 2007: 118). This is also believed to
make it impossible for these people to influence the decisions of the banks. Nevertheless,
for the purpose of this research, and given the peculiarity of the Nigerian banking
shareholding, a system has been adopted to look for individual investors or registered
46
companies that have relatively large shareholding compared to other shareholders. This
has been adopted as this group of individuals or companies do possess the ability to steer
the decisions of the banks, thereby acting like institutional investors. Nevertheless, in
circumstances where it is apparent that institutional investors are present, the study will
opt for what was done in prior research.
Under the government ownership, this will include banks where the Nigerian government
has shares. The Nigerian government in this context includes the three tiers of
government, namely local government, state government and federal government. To
further align this research to the Nigerian context, government ownership has been
extended to include apparent cases of related ownership. This is a scenario where people
in government or strongly related parties, such as family members, own stakes in these
banks. This has been adopted as a result of the possibility of influence of the banks
decisions from such parties due to their relative high positions in the society. A careful
review of this ownership brings to light the use of special purpose vehicles by government
to own substantial stakes in banks. Where this is discovered, it will be assumed that the
SPV ownership is taken as government ownership.
Using foreign ownership variables, has been termed as Nigerian banks in which foreigners
own a substantial amount of shareholdings. This group of people can either be individuals
or corporations. To further extend this foreign ownership structure, multinational
subsidiaries of foreign banks have been included and those owned by other foreign
organisations operating within the Nigerian financial landscape.
Due to the peculiarity of the banking industry and how it has evolved in the Nigerian
environment, there undoubtedly exists a strong relationship between a banks performance
and board ownership. Most banks in Nigeria were built around a few people that raised the
initial sum to set up the banks. Also, during the economic boom in 2005 where most banks
came to the market to raise capital, these investors still retained a substantial amount of
their shareholding. In addition to this, most of these board members also partake in the
day to day running of the companies, given their high vested interest. In this research
report the board ownership variable will be taken as the proportion of board shareholding
to the total value of shares of the banks. This information was extracted from the banks
financial year statements, the Agusto report on banking and the Nigerian stock exchange
website.
47
3.9 DEPENDENT VARIABLE
In line with past research done, the performance measures used were non performing
loans to total loans and return on assets. These ratios were used in the research done on
corporate ownership and control in the Kenyan banking system by Barako and Tower
(2007). These variables were also used in research done by Claessens (2000) and
Mahajan (1996).
To get a proper view on the ratio used, it is imperative that the meanings are explained
which further buttress the reasons they were chosen. In the Nigerian context, non-
performing loans are loans that have defaulted in one way or the other either in not
paying principal or interest due within a stipulated period. However, it should be noted that
this should be in line with the terms on the offer letter. Generally a loan is termed to be
substandard where interest or principal is over 90 days past due, but not more than 180
days past due. In this scenario, a minimum provision of 10 per cent is required under the
prudential guidelines. However, the term doubtful loans refers to scenarios where interest
and/or principal is over 180 days past due but not more than 360 days past due. Given
these circumstances, a minimum provision of 50 per cent is required under the prudential
guidelines. Finally, when a loan is termed as a lost loan, it is when interest and/or principal
is over 360 days past due. For this a 100 per cent provision is required under the
prudential guidelines. This is line with the Nigerian banking industry standard and was
recently published by Agusto & Co. (2008). In summary, the non performing loan ratio
used in this study shows a cumulative loan loss provision as a percentage of gross loans
and advances.
A banks return on assets ratio is defined as the net profit before tax divided by the
average total net assets of the bank. It defines how profitable a bank is as well as returns
that are derived from the total assets that have been extended to its clients. It is imperative
to note that a banks assets comprise not only of its fixed assets, but also the loans that
have been advanced which will be referred to in this study as risk assets. However, the
banks liability comprises primarily of shareholders funds and liabilities generated from
customers.
3.10 RESEARCH MODEL
This study has tried to determine any correlation between the banks performance and
ownership structure in the Nigerian banking sector. Given the number of independent
variables, a multi regression model was used to analyse the data and relationship between
48
the variables. This tests the influence of each of the independent variables on the
performance ratios, which is the dependent variable. The test is based on the statistical
model below and is line with what was done in the Kenyan banking system by Barako and
Tower (2007).
PERF
it
=
0
+
1
BODOWN +
2
FOROWN +
3
GOVOWN +
4
INSOWN
where:
PERF
it
= Performance of bank i at time t, which is measured as ratio of return on assets
and ratio of non-performing loans
BODOWN = Proportion of board ownership to total shareholding
FOROWN = Ratio of foreign ownership stake to total shareholding
GOVOWN = In banks were it exists, it was taken as a percentage of shareholding held by
the government or a related party to the entire shareholding of the company
INSOWN = This was taken as the ratio of shareholding held by institutions to the total
number of shares outstanding in the bank
3.11 DATA
The data used for this research primarily comprises of non-performing loan ratio to total
advances and return on assets. This was collected for six years from the banks individual
annual report obtained from their registrars and bank offices. A yearly bank report from
Agusto & Co was also used in the compilation of the data given their track record and
expertise in this field.
Also, the independent variables used comprise of ownership variables of corporate
governance. Under the ownership variable, the following areas were reviewed: board
ownership, institutional ownership, government ownership and foreign ownership. The
data used in deriving the above parameters were collected from the various companies
annual reports. The shareholding figures were analysed and the data extracted. The
ownership structure was calculated as a percentage of its value to the number of shares
outstanding. An example is the case of United Bank of Africa for its board ownership. It
was discovered that the board members total number of shareholding summed up to
1 131 627 863 units. This was then divided by the total number of shares outstanding on
the stock exchange giving rise to a value of 0.0524. The total number of shares
49
outstanding for all quoted companies is available on the website of the Nigeria Stock
Exchange.
In analysing the data, it was discovered that government participation in banks was
minimal with only three banks identified as institutions where the government had
presence. The banks are Wema Bank, Skye Bank and Finbank. The means of government
ownership in Finbank is direct, as the Rivers state government directly owns six per cent of
the bank. However, in the case of Wema Bank and Skye Bank, government vehicles are
used to own shares in these banks. While Ibile Holdings, which is an investment company
belonging to the Lagos State Government, owns 12.36 per cent of Skye Bank; Odua
Group, which is primarily owned by government from the Western part of Nigeria, has 9.76
per cent shareholding in Wema Bank.
In a past study, it was stated that the Nigerian banking industry does not have large
institutional shareholders. What this study did, was to group any institution or individual
under institutional ownership if it is regarded as other significant shareholders. These
institutions do have a large stake in the banks and this study reckons their activities to be
likened to that of institutional investors. However, in cases where these other significant
shareholders were clearly identified and it is beyond doubt that they cannot function as
institutional investors, they were excluded. A good example is that of Odua Groups
interest in Wema Bank, where it was addressed as other significant shareholders. Behind
Odua Group is the Western government, and hence our categorisation under government
ownership for this research.
Another key feature that stood out in the ownership structure of Nigerians banks is that the
ownership structure was skewed towards certain categories. Whilst Board ownership was
highly prevalent due to the fact that most of these institutions are closely held by a few
number of people, foreign ownership was practically non-existent. However, it was noticed
that Standard Chartered Bank had 100 per cent foreign ownership, while Citibank had
82.63 per cent foreign ownership and Platinum Habib Bank had 15.29 per cent foreign
ownership from Habib Bank Limited of Pakistan.
The dependent ratios where calculated on a bank by bank basis using their annual
financial reports. Return on assets (ROA) and the non performing loan (NPL) ratios were
obtained for the period under study. However, in compiling the above information, only
banks that were in existence for the entire study period were taken. This was done
because prior to the consolidation in 2005, Nigeria had a total of 89 banks, and post
50
consolidation, it came down to 25. Further consolidation also took place which brought the
total count of banks to 24. However, two banks were excluded from this research as a
result of their inability to make public their annual financial reports for the period under
study.
After the banking consolidation the banks capital base has experienced an astronomical
growth from a minimum amount of two billion naira to twenty five billion naira. The effect of
this was an increase in their working capital, hence their ability to create more risk assets,
which will subsequently lead to an increase in the banks performance. Given this, it is
important to watch out for this in the data analysis, as the probability of a jump in the
performance ratios exists from prior 2005 and post 2005.

51
CHAPTER 4
RESULTS
4.1 INTRODUCTION
The data used for this research was pooled from recognised research firms and the banks
annual report which was obtained from the respective registrars. After compiling this data,
a descriptive analysis was carried out on the return on assets (ROA) and non performing
loans (NPL) ratios. This was to ensure that the mean, median and standard deviation of
this data was analysed as well as the impact of the ownership variables on the
performance ratios. The trend revealed from the descriptive analysis as well as the
regression model results ought to depict a general trend of the Nigerian banking industry.
Finally, from the regression model, it was determined if a relationship exists between
ownership and banks performance in Nigeria.
4.2 DEPENDENT VARIABLE (NON-PERFORMING LOANS AND RETURN ON
ASSETS PERFORMANCE INDICATORS)
These performance indicators have been chosen since they are the common tools for
assessing banks performances. Additional reasons why they were chosen is because of
their employment in similar past research reports. In Nigeria, non-performing loans in the
books of a bank is a critical factor as revealed in the recent financial crisis. The impact of
the recent global financial crisis affected 10 Nigerian banks as a result of the high degree
of non-performing loans on their books; which led to them being under receivership from
the Central Bank of Nigeria.
As a result of the above, the Central Bank requested full provision of non-performing loans
by the banks. The provision requirement ensured that the banks capital became
significantly impaired and in some cases completely eroded. Without the injection of
liquidity by the Nigerian Central Bank, those banks would have collapsed unveiling
significant losses for investors and depositors alike. Nevertheless, the impact of this has
been a freeze in credit from the banks, leading to excess liquidity and steep decline in
interest rates in the inter-bank market.
4.3 DESCRIPTIVE STATISTICS
Appendix 1 presents the summary of the two performance indicators, i.e. return on assets
(ROA) and non performing loans (NPL) in the regression model. The data shows that for
52
the period under review, the mean of return on assets was relatively stable with a value of
4.08 and 3.69 in 2003 and 2008 respectively. However, the slight drop in the mean can be
neglected and attributed to the possible increase of bad loans as a result of increased
lending. Also, analysing the maximum return on assets for each year showed a gradual
increase from 7.90 to 9.30 in 2003 and 2008 respectively. However, it is important to note
that the ROA went as high as 12.40 in 2007. The likely effect of this is the banking
consolidation of 2006. This led to an increase in the banks capital base hence increasing
their risk appetite which subsequently led to increased profitability.
The overall standard deviation for the return on assets gave a value of 2, that is from
recording a value of 2.09 in 2003 to 1.78 in 2008. The stability of this return on assets for
the period under review indicates that return on assets was relatively stable for this period.
However, a slight increase in ROA was noticed for the years included in the study.
The average non-performing loan ratio for the period under review was 12.05 against the
industry average of 5.6 per cent in 2008. The mean of NPL nearly halved from 15.81 per
cent in 2003 to 8.62 per cent in 2008. However, it is important to note that this is a huge
drop from the 2004 figure of 19 per cent. Also reviewing the yearly figures for the banks in
the population sample, the NPL was 23.84 per cent in 2008 from a 2003 figure of 43.70
per cent. This high distortion from industry average is as a result of the banks that were
included in the research report.
Also, the reduction in NPL ratio from 2003 2008 can be attributed to a couple of factors.
Amongst this is the increased risk management measures embraced by the banks due to
the expansion in their loan books after their 2006/2007 capitalisation. It should be noted
that bank capitalisation had been significantly enhanced by 2008 following the 2007
consolidation in the industry.
The standard deviation for NPL showed significant volatility within the period 20032008
with an overall figure of 10.57. The disparity in the NPL of the banks shows that an
industry standard for risk assets is lacking. This means that while risk management
improved and is considered adequate in some institutions, it is less so in other institutions.
It also means that certain banks are more exposed to loan defaults than others.
53
4.4 DEPENDENT VARIABLE: RETURN ON ASSETS
4.4.1 Institutional ownership
Institutional ownership was used to set up the null hypothesis that the banks institutional
ownership is positively associated with banks return on assets (ROA). However, from the
table ROA shows a weak positive association with institutional ownership with a correlation
coefficient of 0.008. This is consistent with hypothesis 1a and research done in the Kenyan
banking system, which posits that the presence of a banks institutional ownership is
positively associated with the banks profit based on its ROA.
The result above can be associated with the fact that the presence of institutional
ownership is not a sole predictor of profitability, but rather the management acumen of the
bank is a more accurate predictor of the return on assets. Another reason might be the
past Central Bank governors stance against foreign ownership of Nigerian banks, where
the foreign ownership would have given raise to higher institutional ownership and hence
the capability of improving the banks performance. The hypothesis that the presence of
the banks institutional ownership is positively associated with the banks profitability in the
Nigerian banking sector, is accepted.
4.4.2 Foreign ownership
Under this dependent variable, the hypothesis drawn states that foreign ownership is
positively associated with return on assets in line with past studies. From the results, the
correlation coefficient gives a value of 0.032.The correlation coefficient of 0.03 suggests a
weak positive association between profitability based on return on assets and percentage
of foreign ownership. This is consistent with hypothesis 2a which states that the higher the
proportion of a firms foreign ownership, the higher the profit; based on the return of assets
ratio. Most foreign owned banks have declared profits in the period when the locally owned
counterparts were declaring losses on account of huge provisions compelled by the CBN.
This might be attributed to the lending behaviour of foreign owned banks with a focus on
wholesale banking and blue chip companies with low default rates. The foreign owned
banks have been known to operate lean structures with few branches and have shifted
their focus from retail banking, which is perceived to have a higher degree of risk, long pay
back periods as well as high default rate in loan repayments. All these would have further
aided foreign banks profitability in line with the set hypothesis. Hence, the hypothesis is
accepted that the higher the proportion of a firms foreign ownership, the higher the
54
profitability of the banks. However, it is important to state that the weak correlation might
be due to the few number of banks with foreign ownership in Nigeria.
4.4.3 Board ownership
Hypothesis 3a states that the higher the level of a firms board ownership, the lower the
profitability based on return on assets, that is the relationship is negatively related. The
results from the data analysis show a correlation coefficient of 0.015 between the board
ownership of Nigerian banks and their return on assets. The above figures depict a weak
positive correlation in the Nigerian banking sector.
A significant number of Nigerian banks have strong board ownership. Most local banks
were either family owned or registered as limited companies before subsequently
participating in public offers and hence getting listed on the Nigerian Stock Exchange.
However, majority share holding is still believed to lie in the hands of few individuals, even
after the public offers and listing. Also, these owners still affect how business is done in the
banks, hence having a negative influence in creating of risk assets. Bad risk assets also
have a negative effect on the banks profitability which is measured in this study using
return on assets ratio.
The weak positive correlation leads to the rejection of the null hypothesis. It is suggested
that the higher the percentage of board ownership, the more profitable the bank is using
the return on assets ratio. A likely explanation to this is the possible effect of the banks
managers, given that they also own the bank. Hence, the likelihood of ensuring their
business is profitable in all situations.
4.4.4 Government ownership
Hypothesis 4a states that there is a negative relationship between a firms government
ownership and a banks profitability based on return on assets. From the data, the
relationship gives a correlation coefficient of 0.15 in line with the hypothesis. From the
data table, it was noticed that government ownership in banks was limited to only three
banks, namely Wema Bank, Finbank and Skye Bank. Further buttressing the correlation
coefficient, two of these banks failed the recently conducted stress test conducted by the
Central Bank of Nigeria in 2009. However, the government ownership in Skye Bank is
indirect and being held by a third party (Ibile Holdings) for the government.
Hypothesis 4a is not rejected despite the fact the correlation coefficient of 0.15 is weak.
Other factors, such as those stated above, have aided in further confirming the
55
relationship. This relationship between government ownership and banks profitability
seemed to have been noticed by the CBN, hence the new law limiting government
ownership in Nigerian banks to 10 per cent stake after the consolidation.
4.5 DEPENDENT VARIABLE: NON-PERFORMING LOANS RATIO
4.5.1 Institutional ownership
Hypothesis 1b states that the presence of a banks institutional ownership is negatively
associated with its level of non-performing loans; that is, the higher the percentage of
institutional ownership, the lower the degree of non-performing loans and vice versa. The
study gives a correlation coefficient of 0.073 between the institutional ownership and non
performing loans ratio in the Nigerian banking context. In line with past studies, it is
expected that institutional ownership styles will enforce stricter risk management structures
to ensure that risk assets created are of acceptable standards and good quality hence
increasing the banks profitability. This is mainly done by reducing the amount of
provisioning the bank might witness as a result of good quality assets.
However, the analysis has shown a positive correlation between institutional ownership
and non performing loans in banks. A likely explanation of this is that the institutional
shareholders of these banks are represented by individuals not skilled in the act of
banking, hence their inability to contribute positively to the quality of risk assets being
created.
4.5.2 Foreign ownership
Under the foreign ownership variable, Hypothesis 2b states that the higher proportion of
this ownership, the lower the level of non-performing loans hence depicting a negative
relationship. The correlation coefficient from the data gives a figure of 0.02 showing a
weak negative correlation. This indicates that foreign ownership leads to a reduction in
non-performing loans in the Nigerian banking context, hence Hypothesis 2b is not rejected.
It is believed that foreign owned banks have the necessary risk management expertise to
ensure that the percentage of non-performing loans is reduced as much as possible. The
analysis has gone further to prove this correct, despite the fact that the correlation is weak.
This weak correlation might be as a result of the few foreign banks operating in the
industry and present in the data.
56
4.5.3 Board ownership
Hypothesis 3b in this study theorises that the higher the level of a firms board ownership,
the higher the level of non-performing loans, hence suggesting a positive relationship. In
line with this, this study reveals a weak positive association with a figure of 0.089 between
both variables. The correlation coefficient signifies a weak correlation which is consistent
to the hypothesis being postulated hence Hypothesis 3b is not rejected.
Several Nigerian banks have significant board ownership just as several of the banks have
huge non-performing loans portfolios, as revealed by a recent CBN enquiry into the books
of the banks. However, it is important to state that this was only recently made known to
the public in 2009. Nevertheless, the data has further shown that an increase in board
ownership leads to an increase in non-performing loans of the banks. In addition, factors
such as risk management and poor lending practices would have accounted for the level
of non-performing loans in Nigerian banks.
4.5.4 Government ownership
Hypothesis 4b states that there is positive relationship between a firms government
ownership and bank performance measured as non-performing loans. Data from this
study revealed a correlation coefficient of 1.53 signifying a positive relationship between a
bank with government ownership and the level of its non-performing loans. Hence,
Hypothesis 4b is not rejected.
The above relationship shows that as government ownership in a bank increases, so also
its level of non-performing loans which negatively affects its profitability. This hypothesis is
in line with what was done in past research and also applies to the Nigerian banking
environment. To further buttress this point, the recent bank crisis in Nigeria showed that
banks with government ownership, such as Finbank and Wema Bank, were faulted for a
high level of non-performing loans after the CBN carried out its audit test. This shows that
this hypothesis also applies in the Nigerian banking sector as it does in other countries.

57
CHAPTER 5
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 INTRODUCTION
Corporate governance will continue to have relevance to firms, as it constitutes the
balance of power with which the organisation is directed (Yakasai, 2001: 249). Corporate
governance not only places the organisation in an acceptable light with the public, but also
affects other core areas of business such as profitability. Whilst company profitability is
key, also important is how a company is viewed by the public, which ultimately affects the
patronage it attracts from the public - its bottom line. This chapter reviews the results of the
previous chapter and suggest areas of further research in this field and the likely positive
effects on the performance of the firm.
5.2 CONCLUSION
The essence of this study is to determine the effect of corporate governance using
ownership structure on a banks profitability. Four ownership styles were used, namely
institutional ownership, foreign ownership, board ownership and government ownership.
Under each ownership, two hypotheses were set up against return on assets and non
performing loans.
This gives rise to a total number of eight hypotheses that were set up. From these eight
hypotheses, two were rejected in line with past research, while the other six were not
rejected. However, it is important to state that the correlations were weak as a result of
limitations in the amount of data available.
The institutional ownership showed a weak positive correlation with return on assets in line
with previous studies. This is likely as a result of the fact that most shareholders with huge
numbers of units take interest in the profitability of the banks. However, the data was
conflicting as it also showed that institutional shareholders also lead to an increase in the
banks non-performing loans.
On foreign ownership, the hypothesis against return on assets and non performing loans
was not rejected. While this research will agree with the results from the hypothesis that
foreign ownership does impact a banks profitability positively, the Nigeria banking system
is also in line with other research where foreign ownership reduces the percentage of non-
58
performing loans. This might not be unconnected to the fact that foreign owned banks
have more robust risk management units.
Board ownerships are the most prevalent in the Nigerian banking system. Data results
showed a weak positive correlation with return on assets. Hence, it was rejected while the
hypothesis on non-performing loans was not rejected. A possible explanation of this is
that since majority shares are owned by single entities or individuals; their risk asset
creation decisions are normally influenced by this group to suit their needs, hence the
negative impact on banks risk assets.
The negative impact of board ownership on non-performing loans proved to be true as a
result of findings from the recent bank crisis. The recent stress test conducted by the
Central Bank of Nigeria (2009) revealed that most banks with a high percentage of board
ownership also had high levels of non-performing loans. However, the annual financial
statement has been altered, showing lesser values of non-performing loans against what
is truly obtained.
Government ownership was found to be negatively associated with returns on assets and
positively associated with non performing loans, hence not rejecting Hypothesis 4a and 4b.
This was found to be in line with past studies done. However, the impact of government
ownership on banks seemed to have been already discovered in the Nigerian banking
system, as the CBN recently made public that government stakes in any Nigerian bank
should be limited to a 10 per cent holding. An additional reason for this is to reduce
mismanagement of banks by government officials.
In conclusion, the study has been able to show that the Nigerian banking sector is affected
by the level of corporate governance culture being embraced. The corporate governance
variable was ownership styles and proved to have an impact on a banks profitability. It has
also been proved in the Nigerian context that the ownership style of the banks is bound to
have an effect on the banks profitability. Also, a fall out of this research is that it further re-
emphasises that the past bank crisis in Nigeria must have been fuelled by ignoring
corporate governance measures in the day to day running of the banks.
5.3 RECCOMENDATIONS
The Nigerian banking industry has been characterised by the bank crisis, as stated earlier
in this study. In 2008, while the global economy was in recession, the then governor of
CBN stated that the Nigerian economy was insulated from this recession as a result of non
59
exposure or ties to the global economy. However, this statement proved to be wrong, as
the year 2009 brought the realities of how connected the Nigerian economy was with the
global economy.
This effect became apparent on assumption of the new CBN governor, Sanusi Lamido
Sanusi, in 2009. On assumption of office, he pledged that he will ensure banks fully
disclosed the contents of their loan books. To ensure this was done, he embarked on a
stress test which saw 10 banks affected. Amongst the banks affected were Intercontinental
Bank and Oceanic Bank, which were amongst the big four banks. It is important to note
that these banks had a higher percentage of board ownership due to the original
ownership during incorporation.
These banks had high levels of non-performing loans and in some instances had their
entire capital wiped out by unhealthy lending practices. This further reinforces the results
on the effect of board ownership on a banks profitability. However, the new CBN governor
discovered that these banks had poor corporate governance measures, which were further
buttressed by the falsification of their past financial statements.
The above led the CBN reforms on the banking industry. Amongst these reforms was the
reduction of the banks CEOs tenure to a period of 10 years. This is to ensure that CEOs
do not become too strong and adversely affect the decision making process of the banks
lending practises. Hence, board ownership seems to be amongst the top corporate
governance factors affecting Nigerian banks.
5.4 FOR FUTURE RESEARCH
Corporate governance culture has been neglected for a long time in the Nigerian corporate
environment. However, a recent trend has revealed that for corporate success and
economic growth it can no longer be neglected. To further explore the relationship
between corporate governance and a banks profitability, CEO tenure can also be tried.
Analysing the impact of a CEOs tenure on the banks profitability will help to determine if
the CBNs recent stance on the banks chief executive was necessary and if it will have a
positive effect on return on assets.
Also, since the most prevalent form of ownership is board ownership, it will be important to
confirm if board size has any correlation on profitability of banks in Nigeria. Finally,
anaylsing the impact of board activity, intensity on the banks profitability will also be
helpful in the Nigerian banking sector.
60
The banking sector is of great importance to every economy due to its function of
intermediation. However, other sectors of the economy are equally important, as they also
contribute to the countrys economic growth. Hence, it is also suggested that the variables
used in this research, as well as those suggested, can also be tried on other sectors to
evaluate their impact on the firms profitability in the Nigerian context. This will further
throw more light on corporate governance culture in the Nigerian corporate world.

61
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64
APPENDIX 1:
PERFORMANCE DESCRIPTIVE STATISTICS: RETURN ON ASSETS AND
NON-PERFORMING LOAN RATIO

Maximum Minimum Mean Std. Dev.
Panel A
Overall RoA 12.40 0.30 3.70 2.00
By Year
2003 7.90 0.40 4.08 2.09
2004 6.90 0.80 3.53 1.80
2005 9.80 1.10 3.53 2.00
2006
2007 12.40 1.50 3.70 2.41
2008 9.30 0.30 3.69 1.78
By ownership
Board 7.90 0.30 3.41 1.55
Foreign 12.40 1.40 4.95 2.70
Institutional 7.90 0.30 3.22 1.54
Government 6.20 1.20 3.16 1.48
Panel B
Overall NPL ratio 46.60 0.30 12.05 10.57
By Year
2003 43.70 - 15.81 11.77
2004 31.00 - 11.58 9.65
2005 43.70 0.30 13.67 12.18
2006
2007 46.60 1.20 10.14 10.64
2008 23.84 1.01 8.62 8.03
By ownership
Board 46.60 1.00 12.55 10.88
Foreign 24.10 0.30 9.66 7.59
Institutional 46.60 1.00 13.32 11.72
Government 46.60 3.20 14.70 12.38
Performance descriptive statistics: Return on Assets and Non-Performing Loan Ratio

65
APPENDIX 2:
BANKS RETURN ON ASSETS RATIO


2004 2005 2006 2007 2008
ROA ROA ROA ROA ROA Avg. ROA
Access 4.7 3.3 1.4 2.80 4.16 3.27
AFRIBANK 0.9 1.1 1.1 2.90 4.40 2.08
Bank PHB 5.4 2.2 2.80 3.30 3.43
CITIBANK 5.4 4.7 5.5 7.70 5.60 5.78
DIAMOND 0.4 3.1 3.2 2.70 2.59 2.40
Ecobank 2.7 1.4 3.2 3.50 3.40 2.84
ETB 7.9 5.2 5.2 6.00 6.00 6.06
FCMB 1.7 6.1 2.6 3.40 3.96 3.55
Fidelity Bank 1.29 2.00 1.34 3.10 3.10 2.17
Firstbank 3.8 0.8 3.8 2.90 2.77 2.81
Firstinland 1.29 2.13 2.6 2.70 0.30 1.80
GTB 4.9 3.9 3.6 3.00 3.79 3.84
IBTC 7.3 3.9 9.8 4.00 4.70 5.94
INTERCONT 4.8 6.9 4.4 3.90 3.28 4.66
Oceanic 6.2 5.3 3.8 2.70 2.75 4.15
Sterling 1.39 1.23 1.32 2.80 2.60 1.87
Stanchart 5.1 1.4 4.2 12.40 9.30 6.48
UBA 2.1 3.6 2.3 1.50 3.59 2.62
UBN 3.1 2.4 2.9 2.60 3.28 2.86
WEMA 4.3 2.7 1.2 1.80 1.80 2.36
ZENITH 4.1 2.4 3.1 2.50 2.91 3.00
66
APPENDIX 3:
NON-PERFORMING LOAN RATIO


2004 2005 2006 2007 2008
NPL NPL NPL NPL NPL Avg. NPL
Access 10.9 7.1 9.8 8.80 2.16 7.75
AFRIBANK 25.9 31 31.9 15.50 12.10 23.28
Bank PHB 9.6 9.6 8.7 6.10 2.10 7.22
CITIBANK 17.3 17.1 23.1 5.50 19.30 16.46
DIAMOND 10.2 7.1 5.7 6.60 4.27 6.77
Ecobank 24.1 15 15.9 3.10 9.30 13.48
ETB 16.7 24.7 20.9 18.80 18.80 19.98
FCMB 25 8.5 7.8 3.20 2.74 9.45
Fidelity 2.11 2.34 14.49 8.10 8.10 7.03
FirstBank 35.4 26.6 23.5 2.90 1.01 17.88
Finbank 8.2 7.23 23.34 46.60 23.40 21.75
GTB 2.8 2.8 2 1.90 1.20 2.14
IBTC 3.1 1.4 2.9 14.20 12.20 6.76
INTERCONT 19.9 6.2 6 4.70 3.50 8.06
Oceanic 9.1 6.1 5.3 3.20 3.20 5.38
STERLING 43.7 34.2 43.7 23.60 8.90 30.82
Stanchart 0 0 0.3 1.20 1.10 0.52
UBA 8.5 3.9 3.5 4.20 3.58 4.74
UBN 23.4 23.3 18.2 14.80 23.84 20.71
WEMA 14.6 17 28.8 23.00 23.00 21.28
Non Performing Loan Ratio
67
APPENDIX 4:
OWNERSHIP VARIABLES


Board ownership Foreign Ownership Institutional Ownership Government Ownership
1 Access 18.3 0 16 0
2 Afribank 0.7 0 27.75 0
3 Bank PHB 34.6 15.29 0 0
4 Citibank 2.64 82.63 0 0
5 Diamond 15.7 0 24.08 0
6 Ecobank 0.48 0 71.3 0
7 ETB 26.08 0 64.28 0
8 FCMB 5.13 0 35.09 0
9 Fidelity 7.36 0 0 0
11 Firstbank 4.66 0 5.6 0
10 Finbank 16.16 0 6 6
12 GT Bank 7.14 0 10.91 0
13 IBTC 0 0 0 0
14 Intercontinental 26.67 0 0 0
15 Oceanic 6.08 0 41.84 0
16 Sterling 22.53 0 23.9 0
18 Stanchart 0 100 0 0
20 UBA 0.05 0 0 0
21 Union 0.93 0 0 0
23 Wema 0.29 0 9.76 9.76
24 Zenith 8 0 26.26 0
Ownership Variables
68
APPENDIX 5:
SUMMARY OUTPUT: RETURN ON ASSETS

SUMMARY OUTPUT
Regression Statistics
Multiple R 0.68363
R Square 0.46735
Adjusted R Square 0.334188
Standard Error 1.154187
Observations 21
ANOVA
df SS MS F Significance F
Regression 4 18.70138 4.675345 3.509629 0.030704
Residual 16 21.31437 1.332148
Total 20 40.01575
Coefficients Standard Error t Stat P-value Lower 95%Upper 95%Lower 95.0% Upper 95.0%
Intercept 3.119793 0.477211 6.537551 6.84E-06 2.10815 4.131436 2.10815 4.131436
Board ownership 0.014539 0.025167 0.577685 0.571518 -0.03881 0.06789 -0.03881 0.06789
Foreign Ownership 0.032215 0.010139 3.177367 0.005849 0.010722 0.053709 0.010722 0.053709
Institutional Ownership 0.008083 0.012865 0.628257 0.538701 -0.01919 0.035356 -0.01919 0.035356
Government Ownership -0.14968 0.10887 -1.37481 0.18814 -0.38047 0.081119 -0.38047 0.081119
Return on Assets
69
APPENDIX 6:
SUMMARY OUTPUT: NON PERFORMING LOANS

SUMMARY OUTPUT
Regression Statistics
Multiple R 0.471773
R Square 0.22257
Adjusted R Square 0.028212
Standard Error 8.517738
Observations 21
ANOVA
df SS MS F Significance F
Regression 4 332.3324 83.0831 1.145155 0.371043
Residual 16 1160.83 72.55186
Total 20 1493.162
Coefficients Standard Error t Stat P-value Lower 95%Upper 95%Lower 95.0% Upper 95.0%
Intercept 9.170779 3.521752 2.604039 0.019183 1.704999 16.63656 1.704999 16.63656
Board ownership 0.089083 0.185728 0.479641 0.637973 -0.30464 0.482808 -0.30464 0.482808
Foreign Ownership -0.01955 0.074824 -0.26131 0.797188 -0.17817 0.139067 -0.17817 0.139067
Institutional Ownership 0.072782 0.094944 0.766574 0.454497 -0.12849 0.274054 -0.12849 0.274054
Government Ownership 1.532243 0.803447 1.907086 0.074627 -0.17099 3.235475 -0.17099 3.235475
Non performing loans