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EVALUATION OF CORPORATE GOVERNANCE IN THE NIGERIAN BANKING INDUSTRY
ABSTRACT
Research into corporate governance in Nigerian Bank was born out of necessity to investigate the frequent collapse of some banks ever since the post-independence period. Bank failure is so disturbing because it sits at the center of the economy. Upon further enquiry, this study arrived at the conclusion that central to the causes of bank failure is the poor management in institutions. The first chapter succinctly discussed the issues of bank failure and faults, centralization of management, misreporting, insider abuses and fraud, violation and non-compliance of internal controls put in place, etc. Causes of bank failures is the locus stand of the discussion of corporate governance in chapter one. Several definition of corporate governance coming from different schools of thought was attempted, analyzed and common position identified. Summarily, corporate governance was defined as the way and manner corporate organizations are directed and controlled by the board for the interest of the stakeholders. Wealth distributions to the stakeholders which is one of the poignant issues corporate governance addressed was central to this study. Review of literature historically traced back bank distress in Nigeria from pre-independence to date. Reasons for the recorded failures were also identified. Aims, principles and provisions of corporate governance were discussed in chapter two. Legal perspective was given to the study by the highlighting on the provisions of OECD, Bank for international settlements, peterside’s Committee, Bankers Committee, King’s reports on corporate governance. The procedures adopted in data generations, data collection, measurement criteria, analysis and interpretations were highlighted in chapter three. The empirical approach adopted in the research gave the work a scientific outlook. Sufficient data generated were tabulated so as to aid analysis. Pictorial analytic tools –graphs were employed in analyzing the data.
In data analysis, a comparative study of the values given to various stakeholders of Banks was done so as to determine their fairness or otherwise. Before arriving at a result data of various companies under review as contained in Value added statement in the past five years were carefully spooled and analyzed. The analyzed data presented in graph simplified the analysis. Conclusively, the study criticized the returns given to shareholders of banks and recommended a comparative review.
TABLE OF CONTENTS
Title Page … … … … … … … … … i
Certification …… … … ii
Dedication … … … … … … … … … iii
Acknowledgement … … … … … … … … iv
Abstract … … … … … … … … … v
Table of Contents … … … … … … … … vi
List of Tables … … … … … … vii
List of Charts … … … … … … … viii
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study … … … … … … 1
1.2 Statement of Problem … … … … … … 4
1.3 Research Questions … … … … … 5
1.4 Objectives of the Study … … … … … 5
1.5 Significance of the Study … … … … … 6
1.6 Scope of the Study … … … … … … 6
1.7 Limitation of the Study … … … … … 7
1.8 Organization of the Study … … … … … 8
1.9 Definition of Terms … … … … … … 8
References … … … … … … … … 11
CHAPTER TWO: REVIEW 0F RELATED LITERATURE
Theoretical Review
2.1 An Overview of Corporate Governance … … … 12
2.2 Distress in Nigerian Banks … … … … … 21
2.2.1 History … … … … … … … … 21
2.2.2 Causes … … … … … … … … 24
2.2.3 Ownership … … … … … … … … 25
2.2.4 Misreporting … …. …. …. …. …. …. … 26
2.2.5 Insider Abuses … … … … … … … 28
2.2.6 Frauds … … … … … … … … 29
2.2.7 Regulations … … … … … … … 30
2.3 Weakness in Corporate Governance of Banks in Nigeria … 32
2.4 Principles of Corporate Governance … … … 33
Empirical Review
2.5 Issues in the Provision of Corporate Governance … 38
2.5.1 Board of Directors … … … … … … … 38
2.5.2 Internal and External Auditing … … … … … 54
2.5.3 Risk Management … … … … … … 58
2.5.4 Disclosure and Transparency … … … … 61
2.6 Shareholders and Corporate Governance … … 64
2.7 Regulations … … … … … … … 67
2.7 Challenges of Corporate Governance in Bank Post Consolidation 70
References … … … … … … … … 72
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Research Design … … … … … … … 76
3.2 Research Methodology … … … … … … 77
3.3 Research population and sample … …. … … 77
3.4 Sampling Technique … …. ….. ….. …. …. … 78
3.5 Methods of Data Collection … … … … … 79
3.6 Sources of Data … … … … … … … 80
3.7 Method of Data Collection and Interpretation … 81 References … … … … … … … 82
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Introduction … … … … … … … 84
4.2 Data Presentation … … … … … … 84
4.3 Data Analysis … … … … … … … 86
References … … … … … … … 99
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings … … … … … … 100
5.2 Conclusion … … … … … … … 102
5.3 Recommendations … … … … … … 103
Bibliography … … … … … … … 104
LIST OF TABLES
Table 1: Value Added Statement of Banks for 2005-2009
Table 2: Computation of Industrial Averages and Periodic Industrial Averages of Dividend values given to shareholders
Table 3: Presentation of total returns (dividend and retained wealth to Shareholders)
Table 4: Presentation of aggregate returns to shareholders.
Table 5: Presentation of Industrial and Periodic Industrial average values given to all the stakeholders
CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY
The increasing number of high profile corporate failures around the world has sparked off a lot of enquiry as to the reasons why well-established and respected companies failed. Corporate failure today is a global issue. On the international scence we saw the overlaps of large companies like Enron, Worldcom, Rank, Xerox, Rarmalat, Bank of Credit and Commerce International (BCCI) and large-scale crisis that rocked the Asian financial institutions. In Nigeria, corporate failure is very rampant in the financial services sector some years back and even at present. Cases of corporate debacle abound in the death of Abacus Merchant Bank Nigeria Limited, Royal Merchant Bank Limited, Rims Merchant Bank Limited, Financial Merchant Bank Nigeria Limited, Progress Bank Plc to mention but a few (Al-Faki;2006). Soludo: 2005 hinted that by 1998 a total of 26 banks have been liquidated and at the time of consolidation in 2005, eleven banks were already dead literally. Outside the banking institution, creative accounts of African petroleum where its concealed debts in excess of N20 billion, over valuation of shares of involving Bonkolans securities and others are signals of impending doom for these companies. What then is the cause of corporate failure in local and international, listed and unlisted, quoted and unquoted, public and private companies?
John Clutterback in Al-Faki (2006) highlighted that companies that failed shares some common characteristics and they are: –
Leadership of the company is vested in an individual who combines the office of chairman and chief executive with domineering tendency.
Persistent violation and non-compliance with internal control of the company by the chief executive.
Optimistic or even distorted rather than prudential financing reporting.
Irregular board meetings, often without adequate information given in advance.
Minimal disclosure in the accounts of the company.
It is the combination of these factors that undermine the ability of companies to withstand economic downturns turns leading to a collapse.
In the Nigerian Banking Industry, issues such as lack of probity, transparency, integrity and accountability, inflation of balance sheet with unearned income, weak capital base, unskilled and inefficient management also contributed to death of many banks. Uche, 2001 identified the reasons of early indigenous banks failures as mismanagement and accounting incompetence. These are the issues today’s legislation need to combat with since yester years’ provision seemed to be adequate.
What then is adequacy of bank legislation and controlling and regulating the banking practices in the industry? The question is pertinent, because in spite of the existing legislations, a number of failures and distresses have been recorded in the industry. In an attempt to design codes, that will be appropriate to quell these irregularities, a global phenomenon termed “Corporate Governance” came into existence. Today, it has become a contemporary issue, which has dominated the interest of all business, legal and government circles worldwide. In the Nigerian scene, the provisions in the code of Corporate Governance was designed to augment the provisions of Company and Allied Matters Act 1990 (CAMA), Bank and other Financial Institution Act (BOFID) 2004, Failed banks (Recovery of Debts) and financial malpractices in Bank Act 2004, Nigeria Deposit Insurance Corporation Act, 2006, Money Laundering (prohibition) Act 2004, Economic and Financial Crimes Commission (Establishment) Act 2004, Prudential Guidelines and other relevant banking codes and prudential guidelines for Deposit Money Banks in Nigeria.(2010)
1.2 STATEMENT OF THE PROBLEM
Banks in Nigeria over since the emergence of the early indigenous bank in 1927 have witnessed series of systemic distress and failures. The collapse is quite particular with indigenous owned banks while foreign banks established in the colonial days have all survived the turbulent of Nigerian economy. Examples of these banks of foreign origin are of Bank of British West Africa (BBWA) now First Bank of Nigeria Plc, Barclays Bank (Now Union Bank Plc) and British and French Bank of Commerce and Industry (Later become United bank for Africa), were established in 1894, 1925 and 1948 respectively (Uche: 2001a).
So why did more indigenous banks fail in spite of the recipes of G. Paton in 1958, SAP induced bank deregulation, BOFIA of 2004 and other related regulated policies. Uche: 2001b summarily insinuated that incidence of fraud and unethical practices were behind the debacle of these banks. Persistent fraud and unethical issues are then the indices of weak corporate governance.
Weak corporate governance has been a hydra-headed problem to the industry ever since the emergence of indigenous bank. Many recipes have also failed to strengthen the integrity and enthrone ethical practices. More still, poor banking cultures, lax ethnical practices, centralized ownership (though practically addressed by consolidation), and incompetence in management culminate into weak corporate governance. Weak corporate governance is the most disturbing issues in the banking industry today. Due to N25billion recapitalization exercises by central bank of Nigeria, new mega banks have emerged thereby more challenges are posed to corporate governance because failure of a large bank could cause systemic problems.
The tension is high because failure of the industry is tantamount to the collapse of the entire economy. This is so because banking industry is the driver of the economy. Failures of the industry could mar the perception of the banking by public and international investors.
1.3 OBJECTIVES OF THE STUDY
The objectives of this study include:
To determine the fairness of returns given to shareholders of Nigerian banks.
To perform a comparative study of how value added is distributed to the various stakeholders.
To compare returns given to banks shareholders and share holders of other industries so as to establish fairness.
RESEARCH QUESTIONS
The research question for this study is a simple one that addressed the poignant issues in the wealth distributions to the various stakeholders with particular emphasis on the shareholders.
How equitable is the returns given to shareholders of Nigerian banks over the years?
How equitable is the value added distributed to various stakeholders?
How equitable are the returns given to banks shareholders and shareholders of other industries?
RESEARCH HYPOTHESES
The hypotheses of this study are as follows:
(i) H0: Profit earned by the commercial bank is not related to the amount of dividend paid to shareholders
(ii) H0: Value added by the commercial bank is not related to the amount distributed to various stakeholders.
(iii) H0: Returns given to shareholders in commercial banks are not same with shareholders in other industries.
SIGNIFICANCE OF THE STUDY
Corporate Governance in Nigerian Banks is a pertinent issue especially in the post-consolidation period where mega banks have emerged and strict compliance to the code is mandatory to shield against persistent systematic distress. Sound corporate governance is not an end in itself but a means. It is not about strict policing of the managers who are the company agents; the bottom line is about superior corporate performance based on a reasonable cost. This study celebrates the spirit of corporate governance instead of the letter of corporate governance.
When managers and board members understand the relevance of their positions towards the promotion of corporate governance, the enforcement of the code becomes easier.
A study such as this will go a long way appraising and consolidating the revised code of corporate governance for banks in the post consolidation period.
This study will positively change the banking attitude of Nigerians and improve the international perception of Nigerian banks.
The whole width and depth of corporate governance will be x-rayed in this study.
1.7 SCOPE OF THE STUDY
This study will research and analyze into colonial and post-colonial periods and the present time to ascertain the challenges and practices of corporate governance in Nigerian Banks.
The study will draw its conclusion based on five (5) years comparative analysis of sample drawn from Nigerian banks. The criteria for the selection will be discussed in chapter three of this study.
In answering research questions, this study will not employ judgmental approach instead it will adopt a more pragmatic approach of financial and situational analysis.
1.8 LIMITATION OF THE STUDY
Corporate governance in the Nigerian is a contemporary issue in the industry and as such, not much has been written about the topic in the Nigerian perspective sourcing of relevant literature was an onerous job.
More thorough analysis of the subject matter will require the availability of undiluted financial and non-financial details about the industry. In the Nigerian case, banks are known for misrepresenting facts and figures so as to conceal abuses and unprofessional practices inherent in some banks. Therefore, total reliance of the published facts may limit the chances of optimism result in the research.
Time constraints and financial bottleneck were important limiting factors to this research.
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