CORPORATE GOVERNANCE AND BANK FAILURE IN NIGERIA
This study examines corporate governance and bank failure in Nigeria. A longitudinal data for the periods 2006 to 2010 was collected. The descriptive statistics test showed that the variables are not normally distributed. The correlation matrix revealed that, the controlled variables are negatively correlated with bank failure. Form the ordinary least square (OLS) regression result, chief executive officer status had a significant negative impact on bank failure.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background to the Study
Statement of the Research Problem
Objectives of the Study
Scope of the Study
Significance of the Study
Limitations of the Study
CHAPTER TWO: LITERATURE REVIEW
Corporate Governance in Nigeria
Overview of the Nigerian Banking Sector
The Role of Chief Executive Officer
Corporate Governance and Bank Failure
CHAPTER THREE: RESEARCH METHODOLOGY
3.2 Research Design
3.3 Population and Sampling
3.4 Sources of Data
3.5 Model Specification
3.6 Data Analysis
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS OF RESULTS
4.2 Data Analysis and Interpretation
4.3 Discussion of Findings
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION
5.2 Summary of Findings
BACKGROUND TO THE STUDY
Sequel to so much distress in the banking sector, consolidation was made to enhanced services and deepening of financial intermediation on the part of the banks. On July 6th 2004, the Central Bank of Nigeria reformed the financial system by increasing the capital base of banks to N25billion. The reform led to a withdrawal of public sector funds amounting to N74 billion (Nworji, Adebayo and David, 2011). They added that, the reform also led to mergers and acquisitions, which reduced the number of banks in Nigeria from 89 to 25. The consolidation however, led to a review of the existing code for the Nigerian banks, which led to the development of the 2006, Code of Corporate Governance for Banks in Nigeria Post Consolidation. This was made to complement and enhance the effectiveness of other policies in the Nigerian Banking Sector (Nworji, Adebayo, and David, 2011).
The distress syndrome was first observed in 1989 when there was mass withdrawal of deposit by government agencies and other public sector institutions which revealed the financial weakness of certain banks like the
National Bank of Nigeria and the Commercial Trust Bank Limited which was bedeviled by boardroom crisis and insides abuse (Osuka, Bernado & Chris Mpamugoh, 2006).
The consistent bank failures and financial crisis during the last two decades have raised questions on the consistency of the Corporate Governance practices in the banking system.
Measures taken to regulate banks during this period include the establishment of the first Banking Ordinance of 1952 which proved inadequate to curtail bank failures; the establishment of the Central bank of Nigeria (CBN) in 1958 to serve as the regulatory body of banks and also, the establishment of the Structural Adjustment Programme in 1986 which led to the proliferation of more banks (Nworji, Adebayo, and David, 2011). However, the political instability between 1992 and 1993 put the entire financial system into a state of chaos as there were “RUNS” on the banks and this led to a prolonged crisis in the banking sector. The resultant effect of this crisis led to the introduction of the consolidation policy in 2004 by CBN to alleviate the effect of the crisis.
The most recent bank distress in the Nigerian economy can be traced to the global financial crisis which began in the United States of America and the United Kingdom when the global credit market came to a standstill in July 2007 (Avgouleas, 2008). The crisis, brewing for a while, really started to show its effects in the middle of 2008. Around the world, stock markets have fallen, large financial institutions had collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. This had significantly been related to Corporate Governance issues.
The turmoil in the Nigerian banking system has required the Government to set up some policies in form of corporate governance to stem the tide of bank failures and distress in Nigeria. Therefore the CBN in conjunction with other supervisory institutions have decided to place emphasis on the monitoring of credit risk and provide incentives on prudent management of banks to aid transparency in the banking system, so that the Nigerian economy can forge ahead (Ogunleye, 2002).
Corporate Governance in the banking system has assumed heightened importance and has become an issue of global concern because it is required to lead to enhanced services and deepening of financial intermediation on the part of the banks and enable proper management of the operations of banks. To ensure this, both the institutionalization and management have key roles to play to ensure the institutionalization of corporate governance.
Governance and performance should be mutually reinforcing in bringing about the best corporate governance.
Transparency and disclosure of information are key attributes of good corporate governance which banks must cultivate with new zeal so as to provide stakeholders with the necessary information to judge whether interest are being taken care of.
According Sanusi (2010), the huge surge in capital availability occurred during the time when corporate governance standards at banks were extremely weak. In fact, failure in corporate governance at banks were indeed one of the principal factor contributing to the financial crisis. Consolidation created bigger banks but failed to overcome the fundamental weaknesses in corporate governance in many of these banks. It was well known in the industry that since consolidation, some banks were engaging in unethical and potentially fraudulent business practices and the scope and depth of these activities were documented in recent CBN examinations. Governance malpractice within banks, unchecked at consolidation, became a way of life in large parts of the sector, enriching a few at the expense of many depositors and investors. Corporate governance in many banks failed because boards ignored these practices for reasons including being misled by executive management, participating themselves in obtaining un-secured loans at the expense of depositors and not having the qualifications to enforce good governance on bank management. In addition, the audit process at all banks appeared not to have taken fully into account the rapid deterioration of the economy and hence of the need for aggressive provisioning against risk assets.
Sanusi (2010) added that, as banks grew in size and complexity, bank boards often did not fulfill their function and were lulled into a sense of well-being by the apparent year-over-year growth in assets and profits. In hindsight, boards and executive management in some major banks were not equipped to run their institutions. The bank chairman/CEO often had an overbearing influence on the board, and some boards lacked independence; directors often failed to make meaningful contributions to safeguard the growth and development of the bank and had weak ethical standards; the board committees were also often ineffective or dormant.
Nigeria has witnessed a number of bank failures since independence in 1960. A spate of banking distresses experienced in the 1980s prompted the introduction of a regulatory framework for the Nigerian banking industry (Nnadi, 2006). In 1995, another bout of banking distresses occurred in the banking industry when 57 commercial and merchant banks went into distress in the first three months of that year. Their illiquidity was put at N47.9 billion ($383.2 million), constituting 24.6 per cent of the total deposits in the banking sub-sector at that time, and out of the reach of their depositors (Newswatch, 24 August 2009).
Due to various inadequacies, the liquidity problems often experienced by the banks in Nigeria led to the minimum capital base of banks being raised in 2004 to N25 billion ($167 million). The re-capitalization led to there being 25 banks in Nigeria in 2006, a considerable reduction from the 89 which existed in 2004. The number of banks was subsequently reduced to 24 as a result of the voluntary merger two of the banks (Haynes, 2010). The Central Bank of Nigeria (CBN) implemented an expansive financial strategy, the target of which was to bring Nigeria into the global ‘big league’ and to serve the needs of a growing economy with a view to Nigeria being one of the 20 biggest economies in the world by 2020 (Tell, 31 August 2009). The Nigerian banks witnessed explosive balance sheet growth in the wake of the consolidation which took place five years ago, and they went on massive capital-raising sprees which increased their capacity to lend to companies and to private persons. Risk-management, however, did not keep pace (Nigerian Tribune, 17 August 2009). Thus, the Governor of CBN, Sanusi Lamido Sanusi, attributed the crisis in the Nigerian banking sector, such as unethical and potentially fraudulent business practices, to weaknesses in the corporate governance of the banks:
‘Consolidation created bigger banks but failed to overcome the fundamental weaknesses in corporate governance in many of these banks. It was well known in the industry that since consolidation, some banks were engaging in unethical and potentially fraudulent business practices and the scope and depth of these activities were documented in recent CBN examinations’ (CBN, 2010).
In relation to the above failures in the Nigerian banking system, the CBN affirmed that the management of the failed banks had clearly acted in a manner ‘detrimental to the interests of their depositor and creditors’ (Tell, 31 August 2009; The Guardian, 30 August 2009). The five banks were said to be responsible for 39.9 per cent of the loans in the banking industry. As at May 2009, Oceanic Bank Plc had the highest nonperforming loan of N278.2 billion; Intercontinental Bank, N201.9 billion; Afribank, N141.9 billion; Union Bank, N73.6 billion; and FinBank, N42.4 billion (ThisDay, 27 August 2009; Newswatch, 24 August 2009; Haynes, 2010). The audit conducted in 2009 showed that the five banks had a total of loan portfolio of N2.8 trillion, with margin loans granted for investment in the capital market contributing N456.3 billion. Loan exposure to the oil and gas sector was N487 billion. Aggregate non-performing loans stood at N1.14 trillion, representing 40.81 per cent of the total loans (The News, 7 September 2009; Tell, 31 August 2009).
In the light of this, the researcher intends to investigate the relationship between corporate governance and bank failure in Nigeria.
STATEMENT OF THE RESEARCH PROBLEM
Corporate financial reporting is fundamental to all stakeholders - shareholders, management, government, creditors and society at large. It requires vital attention in practice considering the effect on institutional failures and abuse of power. The dynamic business environment, therefore, calls for improved recognition, measurement and transparent disclosure on firm's operation.
The rate of business failure is sporadic as evidenced by Enron, Worldcom, Sunbeam, Cadbury Nigeria Plc and other high-profile scandals. The causes of such failure, according to Krehmeyer (2006), are excessive short-term strategies which undermine market credibility and discourage long term value creation and investment.
The consequences of institutional failure on economic growth and sustainable development are unbearable to a developing country like Nigeria. This affect the level of confidence the public has in various corporate establishments (such as the banking sector). The consequences of ineffective corporate governance will not only affect the shareholders but also, the employees, suppliers, consumers and the nation as a whole. Thus, a governance system that will promote ethical value, professionalism and sound management practice is desirable.
The banking institution occupies vital position in the stability of the nation's economy. It plays essential roles on fund mobilization, credit allocation, payment and settlement system as well as monetary policy implementation. Management is expected to exhibit good governance practices to ensure achievement of it objectives and avoid the consequences of failure resulting from weak governance practices. In this regard, Oluyemi (2005) considers corporate governance to be of special importance in ensuring stability in the economy and successful achievement of banks' strategy.
Against this backdrop, the following research questions were raised:
Is there relationship between board Size and bank failure?
Is there relationship between board composition and bank failure?
Is there relationship between Chief Executive Offer and bank failure?
OBJECTIVES OF THE STUDY
The broad objective of this study is to empirically investigate corporate governance and bank failure in Nigeria.
The specific objectives of this study are:
To ascertain the relationship between board size and bank failure.
To investigate the relationship between board composition and bank failure.
To examine the relationship between Chief Executive Officer and bank failure.
The following hypotheses have been formulated to serve as a base for this research;
Ho: There is no significant relationship between board size and bank failure.
Ho: There is no significant relationship between board composition and bank failure.
Ho: There is no significant relationship between Chief Executive Officer and bank failure.
SCOPE OF THE STUDY
The research study focuses on corporate governance and bank failure in Nigeria. The sample size will be restricted to some selected banks quoted in the Nigeria Stock Exchange for the periods 2006 to 2010. They are selected in order to get the effect of corporate governance and bank failure.
SIGNIFICANCE OF THE STUDY
This research work on its conclusion, together with whatever solution or findings that may arise, will prove useful to some particular group of persons or otherwise for various reasons in accordance with their varying needs.
Management of Bank: This study will be important and beneficial to management of banks. This will enable them know that the management staff have important roles to play in ensuring that there exists a sound internal control system in their banks and that laid down procedures are reviewed regularly.
The Regulatory Authority: It will acquaint the regulatory authority (CBN and NDIC) of the importance of corporate governance and how it should be managed. It also will assist (CBN and NDIC) in enforcing the need for all banks to have approved policies in all their operation areas and strong inspection division to enforce these policies.
The public: This study will help to restore the lost confidence of the public as regard corporate governance and bank failure.
Academic/future researcher: Both academic and other future researchers in this similar subject matter will find it a useful source of learning and research.
LIMITATIONS OF THE STUDY
In the course of conducting this research work, the researcher encountered some constraints. These constraints are:
Inadequate Study Materials: Research materials were of limited supply due to the practicality of the study. Where they were available; the cost involved in sourcing for them was very expensive.
Lack of Access to Current Data: Most managements and staff of the establishment would not want to disclose important or relevant information about their organizations on this subject matter, except were such is permitted by law to be disclosed.
Finance Cost: The cost involved in sourcing for the available materials and other necessary information was very high within the reach of the student researcher.
Avgouleas, E. (2008) ‘Financial Regulation, Behavior Finance, and the Financial Credit Crisis in Search of a New Regulatory Model’, Journal of Finance, 52:737-83.
Krehmeye, S. (2006). Governance in Banks and Financial Institutions. An inaugural address delivered at the Administrative Staff College of India, Hyderabad. 1 - 19.
Nworji, I. D., Adebayo, O. and David, A. O., (2011), Corporate Governance and Bank Failure in Nigeria: Issues, Challenges and Opportunities, Research Journal of Finance and Accounting, 2(2):35-60.
Ogunleye G. A. (2002), “The causes of Bank Failure and Persistent Distress in the Banking Industry”. NDIC Quarterly, 2(2):19-38.
Oluyemi, S. A (2005). Banking Sector Reforms and the Imperatives of Good Corporate Governance in the Nigerian Banking System. www.ndic-ng.com/pdf/cgovbk. 1 - 33.
Osuka, Bernado and Chris Mpamugoh (2006), “Restructuring Distressed Financial systems” (The Nigerian Banker).
Nnadi, K. U. (2006) ‘An Economic Geneolaogy of Financial Sector Restructuring in Nigeria, The Social Sciences’, 1(4):308-312
The News newspaper – Several editions.
Haynes, S. (2010) ‘Fighting Fraud in Nigeria – What Progress has been Made’, in KPMG Forensic Fighting Fraud, 29:16-17.
Tell Magazines – Several editions
Central Bank of Nigeria (2010) ‘The Nigerian Banking Industry: What Went Wrong and the Way Forward’, Being Convocation Lecture, Bayero University Kano.
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