THE IMPACT OF MICROFINANCE BANK CREDIT TO THE SMALL AND MEDIUM SCASLE ENTERPRISES ON THE ECONOMIC GROWTH IN NIGERIA (1992-2016)

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CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

According to the Central Bank of Nigeria (CBN) code of corporate governance for banks and other financial institutions in Nigeria, corporate governance is the process by which the business activities of an institution are directed and managed. Adeusi and Adebisi (2013), explained that corporate governance is a set of rules and incentives through which the management of an organization is being directed and controlled.

It has become a worldwide dictum that the quality of corporate governance makes an important difference to the soundness and unsoundness of banks. Broadly speaking, corporate governance refers to the extent to which companies are run in an open and honest manner (Sanusi, 2003). Thus, effective corporate governance practice incorporates transparency, openness, accurate reporting and compliance with statutory regulations among others. Historically, antecedents indicate that financial crisis is a direct consequence of lack of good corporate governance in banks; invariably one of the sources of instability in the banking sector is lack or inadequate practice of corporate governance.

Corporate governance has in recent time’s assumed heightened importance requiring that boards and management of companies’ exhibit greater transparency and accountability in their business conduct. The just concluded consolidation of the Nigeria banking industry makes the institution of corporate governance a sine qua non in the industry. With twenty- five, now twenty- four as at today banks that emerged from the ashes of the erstwhile eighty- nine banks being publicly quoted, corporate governance should in fact take the centre stage in the management of these banks. Hence, effective corporate governance requires a clear understanding of the respective role of the board and of senior management and their relationships with others in the corporate structure.

The relationships of the board of management with stockholder should be characterized by candour; their relationships with employees should be characterized by fairness; their relationships with the communities in which they operate should be characterized by good citizenship, and their relationships with government should be characterized by commitment to compliance and good corporate citizenship (Anya, 2003).

In view of the later, performance could be seen in terms of the absolute profits, rate of return, earnings per share, the quality of asset portfolio, level of liquidity and net contribution to the economic development of the nation. Performance however is not determined by inputs alone but is also dependent on the environment within which the bank operates. This environment is known as œPESTLM comprising of Political, Economic, Social Cultural, Technology, Legal and Marketing. The level of bank’s performance is determined also on how the institution can positively influence these environmental factors and effective survive in a driven competitive environment. In the last two decades, developments in Nigeria financial sector have reinforced the need for greater concern for corporate governance in financial institutions in the country (Okeke, 2003).

1.2       Statement of Problem

There is no gainsaying that the present economy deserves a sound, stable and better banking performance following the causative factors, such as unethical and unprofessional practices, poor management quality among others which contributed to low level of bank performance and sometimes lead to failure of bank. The bitter experiences of Asian financial crisis of the 1990s underscore the importance of effective corporate governance procedures to the survival of the macro economy. This crisis demonstrated in no unmistakable terms that œeven strong economies, lacking transparent control, responsible corporate boards and shareholder right can collapse quite quickly as investor’s confidence collapse (Sullivan, 2000).

Odozi (2007) expound this posting that, œEthics, like, corporate governance, transparency and accountability, etc, is a cliché that has been abused and misused. The failure of banks in Nigeria, as elsewhere, has been largely due, not merely to inadequate corporate governance or leadership, but to a failure of professional ethics as manifested in numerous instances of creative accounting practices, professionals insensitive internal control and risk management position being seriously compromised or even colluding with fraudster.

The few studies on bank corporate governance normally focused on a single aspect of governance, such as the role of directors or that of shareholders while omitting other factors and interactions that may be important within the governance framework. Feasible among these few studies is the one by Adams and Mehran (2000) for a sample of US companies, where they examined the effects of board size and composition on value. Another weakness is that such research is often limited to the largest, actively traded organizations, many of which show little variation in their ownership, management and board structure and also measure performance as market value.

In Nigeria, among the few empirically feasible studies on corporate governance are the studies by Sanda et al (2005) and Ogbechie (2006) that studied the corporate governance mechanisms and firms’ performance. In order to address these deficiencies, this study is not restricted to the framework of the organization for Economic Co-operation and Development principle, which is based primarily on shareholder sovereignty. It analyzed the level of compliance of code of corporate governance in Nigerian banks with the Central Bank of Nigeria code of corporate governance.

1.3       Objectives of the Study

This study has as its main objective, the evaluation of the impact of corporate governance on performance of Nigerian banks. The specific objectives are:

1. To examine the impact of corporate governance measured by Board size on bank performance in Nigeria.
2. To find out if corporate governance measured by board composition (BC) has significant impact on bank performance (BP).

iii.       To examine the impact of corporate governance measured by gender composition (GC) of the Board on bank Performance.

1.4       Research Questions

The following research questions was buttressed for the study

1. To what extent does corporate governance measured by board size have impact on bank performance in Nigeria?
2. To what extent does corporate governance measured by board composition (BC) have significant impact on bank performance (BP)?

iii.       How does corporate governance measured by gender composition (GC) of the board have significant impact on bank performance?

1.5       Research Hypotheses

This study tested the following hypotheses:

Hypothesis One

H₀:      Corporate governance as measured by board size has no significant impact on bank performance in Nigeria.

H₁:      Corporate governance as measured by board size has significant impact on bank performance in Nigeria.

Hypothesis Two

H₀:      Corporate governance as measured by board composition (BC) has no significant impact on bank performance (BP).

H₁:   Corporate governance as measured by board composition (BC) has significant impact on bank performance (BP).

Hypothesis Three

H₀: Corporate governance as measured by gender composition (GC) of the board has no significant impact on bank performance.

H₁: Corporate governance as measured by gender composition (GC) of the board has significant impact on bank Performance.

1.6       Significance of the Study

The study will be beneficial to the students, financial institutions, non-financial institutions, private sectors, stakeholders in financial system, scholars and researchers by providing with insight on corporate governance in the Nigerian banking industry.

The study provides a picture of where banks stand in relation to the codes and principles on corporate governance introduced by the Central Bank of Nigeria. It will further provides an insight into understanding the degree to which the banks that are reporting on corporate governance have been compliant with different section of the codes of the best practice and where they are experiencing difficulties.

Financial institutions, non-financial institutions, private sectors, stakeholders in financial system and as well as other corporate titans will find this study as an invaluable asset which spelt out ways of improving an organization’s financial performance via corporate governance.

The study is significant in that it will help depositors of funds in financial institutions to fully understand the mechanism of corporate governance and the provisions of the law as it relates to the banking industry. It also provides a platform for the regulatory authorities to appreciate the impact of their activities on the banking industry, and underscores areas for improvement.

The findings of this study will be of immense benefit not only to the Nigerian banking industry and its related institutions, but also to those interested in understanding the inter-relationship between the actions of the regulators on one hand and the banking institutions on the other as well as providing a platform for promoting an efficient and effective banking practice.

The research study will also be beneficial to future researchers and undergraduate and postgraduate students wishing to carry out similar study in their future research undertakings.

1.7       Scope of the Study

The research work examines the impact of corporate governance on performance of Nigerian banks. The scope of the research is limited to some selected Banks in Lagos-Island, Nigeria. The research is confined to selected financial institutions in Nigeria i.e First Bank of Nigeria Plc, Union Bank of Nigeria Plc and United Bank for Africa Plc and Zenith Bank Plc.

1.8       Definition of Terms

Government Policy: A government policy statement is a declaration of a government’s political activities, plans and intentions relating to a concrete cause or, at the assumption of office, an entire legislative session.

Corporate Governance: This is the system of rules, practices and processes by which a company is directed and controlled.

Return on Equity: The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested.

Profitability:  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.

Bank: A bank is a financial institution that accepts deposits from the public and creates credit.

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