Full Project - IMPACT OF CORPORATE SOCIAL RESPONSIBILITY AND GROWTH ON THE COMMERCIAL BANKS IN NIGERIA

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Full Project – IMPACT OF CORPORATE SOCIAL RESPONSIBILITY AND GROWTH ON THE COMMERCIAL BANKS IN NIGERIA

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CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

A firm’s principal goal is to maximize shareholder value by creating products and services that fulfill societal demands. Economic activities of businesses have attracted the attention of a variety of stakeholders, including workers, suppliers, unions, consumers, investors, creditors, regulators, and directors. These stakeholders are increasingly demanding more openness and responsibility from businesses, putting significant pressure on them to examine the broader social implications of their economic actions. Corporate Social Responsibility (CSR) is a term that refers to the voluntary integration of social and environmental problems into business decision-making and operations by corporate enterprises. However, CSR has come to mean that businesses incorporate social and environmental issues into their operations and interactions with stakeholders on a voluntary basis. However, others argue that CSR is only a reminder that profit maximization should be balanced against social and environmental concerns (Manuel & Lcia, 2007). Branco and Rodrigues (2008) argue that CSR should be seen as a means to an objective, rather than an end in itself.

In impact, the concept of CSR has evolved from being regarded as detrimental to a company‘s profitability and growth, to being considered as somehow benefiting the company as a whole, at least in the long run. Corporate managers have found a need that the environment in which they operate should be catered for because their intermediate and macro environments have a direct impact on the attainment of their corporate goals, objectives and mission statements. Therefore, the purpose of profit-making organizations is to maximize profit through optimal utilization of available resources. It is important to note that profitability and growth is an important factor to companies,

because it is one of the major purposes for which companies are established. In the emerging global economy, where the Internet, the news media and the information revolution shed light on business practices around the world, companies are now frequently assessed on the basis of their environmental stewardship in addition to their ability to make profit. Partners in business and consumers want to know what is inside a company. This transparency of business practices means that for banks in Nigeria, CSR is no longer a luxury but a necessity.

Mazurkiewicz (2004) recognizes that the concept of CSR has been developing since the early 1970s. Therefore, there is no single, commonly accepted definition of CSR. There are different perceptions of the concept among stakeholders. CSR in banking sector is aimed addressing the peculiarity of the socio-economic development challenges of the country (e.g. poverty alleviation, health care provision, infrastructure development, education, etc.) and would be informed by socio-cultural influences (e.g. communalism and charity). They might not necessarily reflect the popular western standard or expectations of CSR (e.g. consumer protection, fair practice, green marketing, climate change concerns, and social responsible investments).

Companies are assumed to be socially responsible because they anticipate a benefit from their actions. Examples of such benefits might include reputation enhancement, the ability to charge a premium price for its outputs, or the use of CSR to recruit and retain high quality workers. These benefits are presumed to offset the costs associated with CSR, since resources must be allocated to allow the firm to achieve CSR status, while a key indicator to determine the true worth and value of modern organizations is their ability to give back to the society part of their income through some mutually beneficial initiatives (Nkanbra & Okorite, 2007).

There is no doubt that CSR is becoming indispensable, though involuntary, in the contemporary business world as societal needs are making it imperative for the corporate organizations to be sensitive to happenings in their environment, which ensure more understanding and good relationship between the organization and the society they exist, since CSR contributes to the wellbeing of the citizenry (Obaloha, 2008). CSR is one of the most dynamic, complex and challenging areas that business leaders face (Gwynne, 2009). It is arguably one of the most critical issues in business-society relationship thus bringing public interest companies under pressure to take active role in making the society a better place to live in.

The concept of CSR is also regarded as having emerged from the environmental perspective which is about how to manage physical resources so that they are conserved for the future. Therefore, CSR is about the economic performance of the organization itself. CSR calls for economic growth that can relieve the great poverty of less developed countries, based on policies that sustain and expand the environmental resource base. Nigerian banks responded to CSR over the years when they recognized their obligations to the banks‘ stakeholders and to the society since CSR enhance their reputations. Elkington (2008) asserts that companies should not only focus on enhancing its value through maximizing profit and outcome but concentrate on CSR issues equally. In line with Elkington (2008) assertion, Nigerian banks have spent billions of naira as their contribution towards addressing the peculiarity the social economic development challenges of the society. The principal beneficiaries of banks‘ CSR policies are in the areas of healthcare, education, security, housing, agriculture, arts and tourism, sports, charity organizations, religion, social clubs, government agencies, youth development and public infrastructure development.

Profitability and growth is the final measure of economic success achieved by a firm in relation to the capital invested in it. This economic success is determined by the magnitude of the net profit (Pimentel, Braga & Casa Nova, 2015). To achieve an appropriate return over the amount of risk accepted by the shareholders, is the main objective of firms operating in capitalist economies. After all, profit is the propulsive element of any investments in different projects. The assessment of profitability and growth is usually done through the ROA (Return on Assets = Net Income/Total Assets) and ROE (Return on Equity = Net Income/Equity), which is the ultimate measure of economic success. Financial ratios are a class of financial metrics that are used to assess a business’s ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor’s ratio or the same ratio from a previous period is indicative that the company is doing well.

The profitability and growth of firms is of vital importance for investors, stakeholders and economy at large. For investors, the return on their investments is highly valuable and a well performing business can bring high and long-term returns for their investors. Furthermore, profitability and growth of a firm will boost the income of its employees, bring better quality products for its customers, and have better environment friendly production units. Also, more profits will mean more future investments, which will generate employment opportunities and enhance the income of people. Profitability and growth is the ability of a business to earn a profit. A profit is what is left of the revenue a business generates after it pays all expenses directly related to the generation of the revenue, such as producing a product, and other expenses related to the conduct of the business activities. Profitability and growth is the primary goal of all businesses. Without profitability and growth the business will not survive in the long run. So measuring current and past profitability and growth and projecting future profitability and growth is very important. Profitability and growth is measured with income and expenses. Income is money generated from the activities of the business. Expenses are the cost of resources used up or consumed by the activities of the business.

Whether you are recording profitability and growth for the past period or projecting profitability and growth for the coming period, measuring profitability and growth is the most important measure of the success of the business. A business that is not profitable cannot survive. Conversely, a business that is highly profitable has the ability to reward its owners with a large return on their investment. Increasing profitability and growth is one of the most important tasks of the business managers. Managers constantly look for ways to change the business to improve profitability and growth. A variety of profitability and growth ratios (decision tool) can be used to assess the financial health of a business. These ratios, created from the income statement, can be compared with industry benchmarks. Also, income statement trends (decision tool) can be tracked over a period of years to identify emerging problems.

Profitability and growth is seen as a measure of economic success achieved by a company in relation to the capital invested in it (Pimentel et al., 2005). To achieve an appropriate return over the amount of risk accepted by the shareholders, is the main objective of companies operating in capitalist economies. After all, profit is the propulsive element of any investments in different projects. The assessment of profitability and growth is usually done through the ROA (Return on Assets = Net Income / Total Assets) and ROE (Return on Equity = Net Income / Equity), which is the ultimate measure of economic success.

In order to measure the profitability and growth of a company, the most usual indicator is the return over equity (ROE), which is obtained by divided the net profit over the total shareholder‘s equity. However some of the companies in the studied sample had very small values for equity (sometimes even negative values), so in order to go around this problem the return over assets

(ROA) could be used as a measure of profitability and growth. This indicator is obtained by dividing the net profit of the period by the total assets of the company. Unlike the ROE the ROA is not a measure of firm‘s efficiency to generate profit from the invested capital, thus it cannot be used to compare the company‘s performance against other kinds of investments, such as bonds. Also ROA is not the best indicator in order to compare the performance of companies in different industries, since the scale factors and capital requirements may differ, however this ratio is good to compare the profitability and growth between companies inside the same sector.

The ROA can be used on my research because all the companies of the sample operate in the same industry. Thus by analyzing the different ROA of the firms I will be able to verify if the profitability and growth is in some way related to the liquidity levels. The ROE would not provide a good comparison because the small and the negative equity levels of some companies would generate distorted indicators of profitability and growth. The ROA is calculated by dividing the net income of each period over the total assets of the companies. Since both numbers could be easily found on the financial statements on the annual reports it was hard to make a table with this ratio.

Commercial banks (DMBs) are resident depository firms which have liabilities in the form of deposits payable on demand, transferable by cheque or otherwise usable for making payments (OECD, 2015). DMBs are financial intermediaries, providing funds for deficit sectors and collecting funds from surplus sectors. A key function of DMBs is to mobilize savings for investment. The importance of DMBs in influencing economic growth is widely acknowledged. Blum, Federmair, Fink and Haiss (2002) identify the role of DMBs in facilitating technological innovation through their intermediary roles. DMBs also ensure efficient allocation of savings through identification and funding of entrepreneurs with the best chances of successfully implementing innovative products and services.

Commercial banks in Nigeria have evolved over the years. Commencing in 1892, the pioneer banking company in Nigeria namely the Africa Banking Corporation was absorbed by the British Bank of West Africa (BBWA) in 1894 enjoyed virtual monopoly of banking business. This period up to 1952 was characterized by the absence of banking legislation in Nigeria and also said that anybody could set up a banking company provided he/she is registered under the companies‘ ordinance. The dominant banking institutions were foreign commercial banks operating mainly to serve the trade financing requirement of their country‘s industrial sector. Being foreign based, it was believed that indigenes were discriminated against in respect of banking credit facilities. The belief, coupled with ―free-for-all‖ operation environment and ease with which bank were incorporated-―cases of easy come– easy go‖ was experienced in Nigerian Banking Sector. In this era banks failed in social responsibility. This problem faced led to the agreement between government officials and representative of banks that there was need for legislations and establishment of control measures for banking operation. The period 1958-1969 witness an era of banking regulations consolidation. It gave birth to the establishment of and commencement of the Central Bank of Nigeria. Today the Nigerian Banking Industry is made up of twenty four commercial banks with First Bank of Nigeria Plc recognized by the CBN as one of the leading banks in the country.

1.2 Statement of the Research Problem

In Nigeria, commercial banks are at the heart of several socially responsible activities, such as donations to tertiary institutions, health institutions, promoting friendly and clean environment and developing human capital. Whether these activities contribute to bank profitability and growth, there are limited interests by scholars and policy makers to examine this question. There is also additional demand on the part of society for commercial banks to continue to do more in the areas of social causes.

It is desirable to state that the nexus between corporate social responsibility (CSR) and profitability and growth has come a long way (Dodd, 1932; Jarrell & Peltzman, 1985; Hoffer et al., 1988; Preston & O‘Bannon, 1997; Waddock & Graves, 1997; Griffin & Mahon, 1997; McWilliams & Siegel, 2000 and Simpson & Kohers, 2002). The empirical studies on CSR and profitability and growth link have never been in agreement, as some studies find negative correlation, some find positive correlation, while others find no correlation at all.

The viewpoint for negative correlation between CSR and profitability and growth suggests that the fulfillment of CSR will bring competitive disadvantages to the bank (Aupperle et al., 2005) methods or need to bear other costs. When carrying out CSR activities, increased costs will result in little gain if measured in economic interests. When neglecting some stakeholders, such as employees or the environment, result in a lower CSR for the enterprise, the profitability and growth may be improved in the short run. Hence, Waddock and Graves (2007) indicate that this theory was based on the assumption of negative correlation between CSR and profitability and growth. Some other studies suggest that CSR is not related to profitability and growth at all. Ullmann (2015) points out that there is no reason to anticipate the existence of any relationship between CSR and profitability and growth, as there are many variables in between the two. On the other hand, the issue of CSR measurement may also cover the link between CSR and profitability and growth (Waddock & Graves, 2007). McWilliams and Siegel (2000) also suggest that the relationship between CSR and profitability and growth would disappear with introduction of more accurate variables, such as the research and development strength, into the economic models.

Arising from the lack of consensus on the findings of the previous empirical studies on the impact of CSR on the profitability and growth of corporate enterprises and the fact that none of these studies comprehensively modeled all the listed commercial banks in Nigeria; there is a gap in the academic literature that needed to be filled. It is within this context that this study examines the impact of CSR on the profitability and growth of listed commercial banks in Nigeria. Consistent with literature, this study expects that in the long run CSR will have positive impact on the profitability and growth of the firm.

1.3 Statement of Research Questions

In the light of the foregoing, the research questions of this study are articulated as follows:

What impact does corporate social responsibility has on the net profit margin of listed commercial banks in Nigeria?
How does corporate social responsibility affects the return on assets of listed commercial banks in Nigeria?
Does corporate social responsibility affects the return on equity of listed commercial banks in Nigeria?

1.4 Objective of the Study

The main objective of the study is to examine the impact of corporate social responsibility and growth on the commercial banks in Nigeria. The specific objectives of the study are to:

Examine the impact of corporate social responsibility on the net profit margin of listed commercial banks in Nigeria.
Examine the impact of corporate social responsibility on the return on total assets of listed commercial banks in Nigeria.
Assess the impact of corporate social responsibility on the return on equity of listed commercial banks in Nigeria.

1.5 Research Hypotheses

In order to achieve the specific objectives of this research, the following research hypotheses have been formulated to be tested in the study:

H₁: Corporate social responsibility has no significant impact on the net profit margin of listed commercial banks in Nigeria.

H₂: Corporate social responsibility has no significant impact on the return on total assets of listed commercial banks in Nigeria.

H₃: Corporate social responsibility has no significant impact on the return on equity of listed commercial banks in Nigeria.

1.6 Scope of the Study

The study focuses on the impact of corporate social responsibility and growth on the commercial banks in Nigeria. It covers a period of ten years (2006-2015) for the 15 listed commercial banks in Nigeria. The period of investigation is significant in many respects: first, the period witnesses the global financial crisis of 2007/2008 and therefore it will be interesting to investigate whether the crisis affected corporate social responsibility activities of listed commercial banks in Nigeria; second, since the 2015 financial data of the banks are published, 2006-2015 represent the most recent data in respect of the financial performance of listed commercial banks in Nigeria.

1.7 Significance of the Study

The study is expected to make contributions to knowledge in a number of ways. The outcome of this research will provide information about CSR in relation to corporate institutions especially the listed commercial banks in Nigeria. It is also expected that the results of this study would produce relevant material for scholarly discourse in management science relating to corporate social responsibility and profitability and growth. Another benefit is that in a truly global economy, commercial banks in Nigeria would be more responsible and become citizens. Banks would more easily and willingly respond to the social needs of the societies where they operate.

The findings generated in this study are useful in testing the existing theories under extreme conditions not present in developed economies where most of the prior studies were carried out. Current and potential investors are supplied with information to help them make good investment decisions. The findings and conclusion may enable the regulators to know the nature of demand placed on commercial banks in Nigeria and ways banks have responded to them.

The work is important to the government, host communities and non-governmental organizations involved in development programmes. This study fills literature gap by investigating the impacts of CSR on profitability and growth of commercial banks. The results provide useful evidence to other emerging sectors such as insurance, which is closely related to deposit money banking sector.

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Full Project – IMPACT OF CORPORATE SOCIAL RESPONSIBILITY AND GROWTH ON THE COMMERCIAL BANKS IN NIGERIA

Click here to Get The Complete Research Project Chapter 1-5

Full Project – IMPACT OF CORPORATE SOCIAL RESPONSIBILITY AND GROWTH ON THE COMMERCIAL BANKS IN NIGERIA

Full Project – IMPACT OF CORPORATE SOCIAL RESPONSIBILITY AND GROWTH ON THE COMMERCIAL BANKS IN NIGERIA

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