ABSTRACT
This research work set out to examine the
Corporate Governance frameworks on some selected Nigerian banks so as to draw
conclusions on whether this framework is of any significance in enabling banks
in Nigeria achieve its corporate objectives and meeting the expectations of
shareholders and stakeholders at large. 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 also enable
proper management of the operations of banks. Very recently, Oceanic
bank, Intercontinental bank, Afribank, Fin bank, Union bank, Bank PHB,
Equitorial Trust Bank and Spring bank lost their operating licence and were
either acquired or nationalised because of bad corporate governance practises.
Relevant data used for analysis in this
research work were collected from staff of two banks through the administration
of questionnaires to the sample population. Five Hypothesis were formulated and
these were tested using chi square statistical method.
The result of the finding revealed that
strong corporate governance framework can curtail institutional or bank failure
and that improper risk management, inexperience management and corruption of
bank official are the key issues why banks fail. In addition, corporate governance framework protects and
facilitates the exercise of shareholders’ rights and
encourages active co-operation between stakeholders in creating wealth. The study concluded that Corporate Governance
is necessary to the proper functioning of banks and that bank failures can only
be prevented if Corporate Governance frameworks are instituted and implemented.
Finally, the study recommends that
banks should encourage good and effective corporate governance that will ensure
consistent transparency and fraud minimization in the bank. The shareholders
have the responsibility to choose their directors, which will in turn choose
members of management that will run the affairs of the banks. They should put
in place good management that will protect their investment and increase the
profitability of the banks.
Effective corporate governance should be adhered to in ensuring better
stock performance, conservative credit
practices, transparency of information, and proper due diligence.
TABLE OF CONTENT
Pages
Title Page i
Certification ii
Dedication iii
Acknowledge iv
Abstract vi
Table of Content viii
CHAPTER ONE
1.0 Background of Study 1
1.1 Statement of Problem 3
1.2 Objective of Study 4
1.3 Research Question 5
1.4 Statement of Hypothesis 6
1.5 Significance of the Study 7
1.6 Scope and limitations of the Study 10
1.7 Organsiation of the Study 12
1.8 Definitions of Terms 12
References 14
CHAPTER TWO
2.1 Introduction 15
2.2 The conceptual Framework 17
2.3 The Nigerian Banking Industry 24
2.3.1 The central Bank of Nigeria 25
2.3.2 The Nigeria Deposit Insurance Corporation (NDIC) 27
2.3.3 The Securities and Exchange Commission (SEC) 28
2.3.4 Regulatory Requirements for Nigerian Banks 29
2.4 Developments in the Nigerian Banking Industry 30
2.4.1 Asset Management Corporation of Nigeria (AMCON) 31
2.4.2 Nationalisation of some Distressed Banks 32
2.4.3 Mergers & Acquisitions in the Banking Industry 33
2.4.3.1 Access Bank
& Intercontinental Bank 33
2.4.3.2 Eco-bank &
Oceanic Bank 33
2.4.3.3 First City Monument
Bank (FCMB) & Finbank Plc 34
2.4.4 Bank’s Rating 35
2.4.5 Nigeria Uniform Bank Account Number (NUBAN) 36
2.4.6 New
CBN cash Collection Policy 38
2.4.7 The New Retail; Cash Policy 39
2.4.8 Non-Interest Banking 39
2.4.9 Repeal of Universal Banking Model 40
2.5 Aims/Principles of Good corporate Governance 41
2.6 Issues in the Provision of corporate Governance 43
2.6.1 Board of Directors 43
2.6.2 Board Composition 44
2.6.3Equity Ownership 45
2.6.4 Appointment 46
2.6.5 Meetings 47
2.6.6 Appraisal 48
2.6.7 Review 48
2.6.8 Other suggestions by Kings II 53
2.7 Board Committees 53
2.7.1 Audit Committees 53
2.7.2 Remuneration Committee 58
2.8 Internal and external Auditing 59
2.9 Risk management 62
2.10 Disclosure and Transparency 64
2.11 Shareholders and Corporate Governance 67
2.12 Regulations 70
2.13 Challenges of corporate governance in banks post consolidation 72
2.14 Advantages and Benefits of Corporate Governance 78
2.15 Corporate Governance and banks Performance 80 References 83
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction 89
3.2 Research Design 89
3.3 Re-statement of Research Questions 89
3.4 Re-statement of Research Hypotheses 90
3.5 Source of Data 91
3.6 Population, sampling Technique, Sampling Procedure and Sample
size 92
3.7 Procedure of administrating questionnaire 93
3.8 Research instrument-Validity/Reliability of Instrument 93
3.9 Statistical Tools/Analytical Procedure 93
3.10 Limitations of the research methodology 95
References 96
CHAPTER FOUR
PRESENTATION AND ANALYSIS OF DATA
4.1 Introduction 97
4.2 Respondents Demographic Data 97
4.3 Presentation of Descriptive Statistics 99
4.3.1 Corporate governance framework in ensuring strategies guidance and board’s accountability 100
4.3.2 Corporate governance framework and the exercise of shareholders
rights 101
4.3.3 Corporate governance framework and the equitable treatment of all shareholders, including minority and
foreign shareholders 102
4.3.4 Corporate governance framework and the rights of stakeholders established by law 103
4.3.5 Corporate governance framework, due process
and due diligence on all material matters
regarding the company 104
4.4 Test of Hypothesis 105
4.5 Summary of Findings 113
Reference 115
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Introduction 117
5.2 Summary 117
5.3 Conclusion 118
5.4 Recommendation 119
5.5 Suggestion for Further Study 120
Bibliography 121
CHAPTER ONE
INTRODUCTION
1.0. BACKGROUND OF
STUDY
The increasing number of
high profile corporate failures around the world has sparked off a lot enquiry
as to the reasons why well-established and respected companies failed.
Corporate failure today is a global issue. On the international scene, we saw the
collapse of large companies like Enron, WorldCom, Rank Xerox, Parmalat, 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 Ltd, 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, 11 banks were already “dead” literally.
Also recently, Oceanic bank, Intercontinental bank, Afribank, Fin bank, Union
bank, Bank PHB, Equitorial Trust Bank and Spring bank were considered as weak
banks because of bad corporate governance.
What then is the cause of
corporate failure in local and international, listed and unlisted, quoted and
unquoted, public and private companies?
Al-Faki (2006) highlighted
that companies that failed shared 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 financial reporting; irregular board meetings, often
without adequate information given in advance; minimal disclosure in the
accounts of the company.”(p3).
It
is the combination of these factors that undermine the ability of companies to
withstand economic downturns thus leading to a collapse.
In
the Nigerian banking scenario, issues such as lack of probity, transparency,
integrity and accountability, inflation of balance sheet with unearned income,
weak capital base, unskilled and inefficient management, weak internal
controls, sit-tight directors and passive shareholders, technical incompetence,
poor leadership and administrative ability also contributed to collapse of many
banks (CBN, 2006). Uche (2001b) also identified the reasons of early indigenous
bank failures as mismanagement, and accounting incompetence. These are the
issues which today’s legislation needs to combat with since the yester years’
provision seemed not to be adequate.
What then is the adequacy
of bank legislations in 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 concept termed Corporate Governance came into
being and 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 Companies and Allied Matters Act, 1990
(CAMA), Bank and Other Financial Institution Act (BOFIA) 2004, Failed Banks and
Financial Malpractices in Banks Act 1994, Nigeria Deposit Insurance Corporation
Act 1990, Money Laundering Prohibition Act 2003, Prudential Guidelines and
other relevant banking codes.
Corporate governance is only part of the larger economic
context in which firms operate that includes, for example, macroeconomic
policies and the degree of competition in product and factor markets. The corporate
governance framework also depends on the legal, regulatory, and institutional
environment. In addition, factors such as business ethics and corporate
awareness of the environmental and societal interests of the communities in
which a company operates can also have an impact on its reputation and its
long-term success.
While a multiplicity of factors affect the governance and decision-making
processes of firms, and are important to their long-term success, the
principles of corporate governance focus on governance problems that result
from the separation of ownership and control. However, this is not simply an
issue of the relationship between shareholders and management, although that is
indeed the central element. In some jurisdictions, governance issues also arise
from the power of certain controlling shareholders over minority shareholders.
In other countries, employees have important legal rights irrespective of their
ownership rights. The principles of corporate governance therefore have to be complementary
to a broader approach to the operation of checks and balances. Some of the
other issues relevant to a company’s decision-making processes, such as
environmental, anti-corruption or ethical concerns should also be taken into
account in enacting key principles for corporate governance.
1.1 STATEMENT OF
PROBLEM
The failure of big
multinationals has taught the corporate world that no company [or bank] can be
too big [financially or otherwise] to fail. A common thread that ran through
these monumental corporate failures was their poor corporate governance
culture, to wit, poor management, fraud and insider abuse by management and
board members, poor asset and liability management, poor regulation and
supervision.
The collapse of well known
multinationals underscores the essence of making corporate governance a global
issue. It should be emphasised that the failure of corporate governance is by
no means a peculiarly Nigerian phenomenon. The failure of Northern Rock, HBOS,
Freddie Mac, Fanny Mae, Lehman Brothers, Bears Stearns, AIG Investment Bank,
Washington Mutual and Wachovia and the Central Bank of Iceland confirms that
the need for effective corporate governance is worldwide. That some of the
biggest corporate entities - General
Motors, Chrysler and Ford–also recently manifested symptoms of poor corporate
governance, warranting infusion of humungous funds from the US treasury and
loss of managerial autonomy of their boards is an important teaching moment for
all those who had believed that bad corporate governance was a Third World
disease (Akin Oyebode, 2009). As a result, governance of corporations has
become a matter of great concern worldwide and bodies like the Organisation for
Economic Co-operation and Development (OECD) and the Bank for International
Settlements (BIS) have developed core principles of corporate governance which
are viewed as representing the moral consensus of the international community.
Generally banks (including Nigerian banks) occupy a sensitive position in the
economic equation of any country such that its [good or bad] performance
invariably affects the economy of the country. Poor corporate governance may
contribute to bank failures, which can pose significant public costs and
consequences due to their potential impact on any applicable deposit insurance
systems and the possibility of broader macroeconomic implications, such as
contagion risk and impact on payment systems. In addition, poor corporate
governance can lead markets to lose confidence in the ability of a bank to properly
manage its assets and liabilities, including deposits, which could in turn
trigger a bank run or liquidity crisis.
1.2 OBJECTIVES OF
STUDY
The aim of this study is
to critically examine the issues, challenges and principles associated with
corporate governance in the Nigerian banking industry.
The specific objectives are:
1.
To undertake an in-depth analysis of some of the theoretical
issues of corporate governance as it relates to the banking industry in
Nigeria.
2.
To examine how corporate governance framework can promote
transparent and efficient markets that is consistent with the rule of law in
Nigeria.
3.
To critically examine how corporate governance
framework could protect and facilitate the exercise of shareholders’ rights.
4.
To identify how corporate governance framework could ensure
the equitable treatment of all shareholders, including minority and foreign
shareholders.
5.
To identify the various factors
that hinders the effective adoption and implementation of governance principles
among Nigeria banks.
1.3 RESEARCH
QUESTIONS
For the purpose of this
study, the following research questions should facilitate the carrying out an
in-depth analysis of testing and validating the hypotheses that will arise from
the questions below:
1.
Does corporate governance framework ensure the strategic guidance of
the company and the board’s accountability to the company and the shareholders?
2.
Does corporate governance framework protect and facilitate the exercise
of shareholders’ rights?
3.
Does corporate governance framework ensure the equitable treatment of
all shareholders, including minority and foreign shareholders?
4.
Does corporate governance framework recognise the rights of
stakeholders established by law or through mutual agreements and encourage
active co-operation between corporations and stakeholders in creating wealth?
5.
Does corporate governance framework ensure due process and due
diligence on all material matters regarding the company?
1.4 STATEMENT OF HYPOTHESES
For the purpose of this
study, the following hypotheses are formulated to provide answers to the stated
research questions:
Hypothesis 1:
HO:
Corporate governance framework does not ensure
the strategic guidance of the company and the board’s accountability to the
company and the shareholders.
HA:
Corporate governance framework ensures the
strategic guidance of the company and the board’s accountability to the company
and the shareholders.
Hypothesis 2:
HO:
Corporate governance framework does not protect
and facilitate the exercise of shareholders’ rights.
HA:
Corporate governance framework protects and
facilitates the exercise of shareholders’ rights.
Hypothesis 3:
HO:
Corporate governance framework does not ensure
the equitable treatment of all shareholders, including minority and foreign
shareholders.
HA:
Corporate governance framework ensures the
equitable treatment of all shareholders, including minority and foreign
shareholders.
Hypothesis 4:
HO:
Corporate governance framework does not
recognise the rights of stakeholders established by law and encourage active
co-operation between stakeholders in creating wealth.
HA:
Corporate governance framework recognizes the
rights of stakeholders established by law and encourage active co-operation
between stakeholders in creating wealth.
Hypothesis 5:
HO:
Corporate governance framework does not ensure
due process and due diligence on all material matters regarding the company.
HA:
Corporate governance framework ensures due
process and due diligence on all material matters regarding the company.
1.5 SIGNIFICANCE
OF THE STUDY
This research work is
intended to critically examine the issues, challenges and principles associated
with corporate governance in the Nigerian banking industry. Corporate
Governance in Nigerian banks is a relevant issue especially in the post
consolidation period where mega banks have emerged and strict compliance to the
code is mandatory to shield against persistent systemic 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 understand the relevance of their
position towards the promotion of corporate governance, the enforcement of the
code becomes easier. The importance of imbibing a robust corporate governance
structure in the general operations of corporations and the effects of its
absence has attracted comments from popular and well respected personalities in
the financial circle in the international community. In the words of Arthur
Levitt, Former Chairman, US Security and Exchange Commission (SEC) in an
article published by the Nigerian Economic Submit Group:
“If
a country does not have a reputation for strong corporate governance practices,
capital will flow elsewhere”. (p2).
In a related statement from
the same article above, James Wolfehnson, a one-time president of the World
Bank says that:
“In the future, the governance of
corporations is going to become as critical as the government of nations”. (p2).
Increasingly, governments
in the bid to ensure that businesses comply with the global best practices in
this era of increase transparency and compliance with the rule of law, have
recognized that corporate governance is one key element in improving economic
efficiency and growth as well as enhancing investor confidence. Thus, corporate
governance involves a set of relationships between a company’s management, its
board, its shareholders and other stakeholders such that if properly balanced
will lead to the overall growth of the organisation.
Corporate governance also
provides the structure through which the objectives of the company are set, and
the means of attaining those objectives and monitoring performance are
determined. Good corporate governance should provide proper incentives for the board
and management to pursue objectives that are in the interests of the company
and its shareholders and should facilitate effective monitoring. The presence
of an effective corporate governance system, within an individual company and
across an economy as a whole, helps to provide a degree of confidence that is
necessary for the proper functioning of a market economy. As a result, the cost
of capital is lower and firms are encouraged to use resources more efficiently,
thereby underpinning growth.
In addition, the degree to which corporations observe basic principles of
good corporate governance is an increasingly important factor for investment
decisions. This is very important given the relationship between corporate
governance practices and the increasing international character of investment.
International flows of capital enable companies to access financing from a much
larger pool of investors. If countries are to reap the full benefits of the
global capital market, and if they are to attract long-term “patient” capital,
corporate governance arrangements must be credible, well understood across
borders and adhere to internationally accepted principles. Even if corporations
do not rely primarily on foreign sources of capital, adherence to good corporate
governance practices will help improve the confidence of domestic investors,
reduce the cost of capital, underpin the good functioning of financial markets,
and ultimately induce more stable sources of financing.
Furthermore, corporate
governance is of special concern in the banking and financial sector for a lot
of ethical and financial security reasons. Banks are a vital component of our
economies. They provide financing for commercial enterprises, basic financial
services to a wide cross-section of the general populace and facilitate the
payment systems. In addition, some licensees are expected to make credit and
liquidity available in difficult market conditions. The importance of banks to
national economies is underscored by the fact that banking is virtually
universally a regulated industry and that banks have access to government
safety nets. It is therefore of utmost importance that these institutions are
subject to strong corporate governance principles.
For banks and trust
companies, corporate governance relates to the manner in which the business
affairs of each individual organization are directed and managed by its board
of directors and senior management, and for branches of foreign banks by the
senior management of the parent foreign bank. For all of these organizations,
it also includes the effective management of compliance with applicable laws,
regulations and guidelines. Unlike other companies, these organizations are
generally highly leveraged and most of the resources used by them to conduct
their businesses belong to others, in particular to their depositors and other
clients. Also unlike other companies, the operations of individual financial institutions
can have systemic impact on the financial system as a whole. Consequently, the
expectations of the Central Bank of Nigeria (CBN) for the quality and
effectiveness of the corporate governance of all of its licensees are high,
since high quality corporate governance in individual organizations promotes
the general stability and successful functioning of the overall financial
system.
Good corporate governance
therefore benefits everybody including creditors/depositors, other client, the
banks and the supervisors. Put bluntly, the presence of appropriate levels of
accountability and checks and balances within licensees makes the work of the
supervisors lighter. Sound corporate governance contributes to a working
collaborative relationship between bank management and bank supervisors.
This study will go a long
way to appraise and consolidate the revised code of corporate governance for banks
in the post consolidation period and will positively change the banking
attitude of Nigerians and improve the international perception of Nigerians
banks.
For students and
researcher, this study will serve as a stepping stone in their research.
1.6 SCOPE AND
LIMITATIONS OF THE STUDY
SCOPE
The scope of this study is
to critically examine some of the issues, challenges and principles associated
with corporate governance in the Nigerian banking industry. In this study, it
is assumed that the significance of corporate governance is one key element
fundamental in improving economic efficiency and growth as well as enhancing
investor confidence.
This study will only
examine the impact of some of the issues, key principles and challenges of
corporate governance in the Nigerian banking industry. However,
due to time and budgetary constraints this research will only cover two banks–First Bank Plc. (an old
generation bank) and Zenith Bank Plc
(a new generation bank). The First Bank
especially been selected for special consideration as a result of its perceived
uncompromising and dogged adherence to the rule of corporate governance and
Zenith Bank for its status as an outstanding new generation bank. The rationale
for the choice is that it offer an ample opportunity for a comparative analysis
to see if there are any significant or material differences exist in the
perception of the different level of management staff on the issues,
challenges, principles and prospect associated with corporate governance in the
Nigerian banking industry
LIMITATIONS
One of the
major limitations of this study is that it will focus attention only on fundamental
issues, principles and challenges of corporate governance in the Nigerian banking
industry. Minimal
attention and efforts were concentrated on such pertinent issues as balancing
relationship between shareholders and external stakeholders in the corporate
setting and such issues as the interrelationship between corporate governance
and customer relations management (CRM).
Another major limitation
of this study is that it focused attention on only the banking industry. The study would probably have been
more revealing if it has focused on other sub-sectors of the Finance sector of
the Nigerian economy such as Insurance Companies, Building Societies and
Mortgage Banks, discount houses, non-bank financial institutions, pension fund
custodians, pension fund administrators and other banks that constitute vital
sector in the Nigerian economy where corporate governance has crucial roles to
play and which will benefit immensely from its successful implementation, but
such studies will be way above the available resources at the disposal of this
researcher.
A further constrain has to
do with the prevalent poor level of awareness in the country which in the first
instance tends to make people suspicious of questionnaire administration which
could in turn elicits poor response rate from prospective respondents while
some may not even know what is expected of them despite the reassurance to
safeguard their confidentiality and their constant re-education on issues
relating to academic research issues.
1.7 ORGANISATION
OF THE STUDY.
This
research work is divided into five chapters. Chapter one contains the
introduction which provides the basic background to the study on the divergent
theoretical and conceptual framework, challenges, principles and prospect
associated with corporate governance in the Nigerian banking industry. Chapter
three will simply outline the research methodology used while Chapter 4 presents the data to be
examined, reviews the current national and global state and the driving factors
that had increasingly predisposes banks towards adopting corporate governance.
Finally, Chapter 5
presents the summary, research findings, recommendations and conclusion of
study.
Login To Comment