IMPACT OF CORPORATE GOVERNANCE ON DEPOSIT MONEY BANKS FINANCIAL PERFORMANCE IN NIGERIA (A CASE STUDY OF ZENITH BANK)
IMPACT OF CORPORATE GOVERNANCE ON DEPOSIT MONEY BANKS FINANCIAL PERFORMANCE IN NIGERIA (A CASE STUDY OF ZENITH BANK)
ABSTRACT
The effect of corporate governance on the financial performance of Deposit Money Banks in Nigeria was the objective of this paper. Research design adopted was descriptive and involved. 8 Deposit Money Banks in Nigeria. Data was collected for a 5-year period, 2012-2016, from financial statements of Deposit Money Banks and annual reports from AMFI and CBK. The data was analyzed annually giving a total of 40 data points. Descriptive and regression analysis were used to analyze the data. From the findings board independence had the highest standard deviation meaning that it had the highest variability or high volatility (Risk) in the financial performance. The study found that firm size and liquidity affected ROA of Deposit Money Banks positively. However, board size, board independence, gender diversity and leverage had a negative effect on ROA. The variables had a significant effect on ROA. Firm size and leverage displayed a strong effect on ROA compared to the other variables that displayed a weak effect on ROA. The study concludes that board size, board independence, gender diversity, firm size, liquidity and leverage when combined have a strong effect on financial performance. The study recommends that Deposit Money Banksreduce board diversity, board size, board independence and leverage while at the same time increasing liquidity and assets in order to enhance the financial performance of the firms. A similar study in other sectors is recommended. Further research can be done on to determine such other variables that influence financial performance of Deposit Money Banks.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Corporate governance is the management of an entity in a way that ensures proprietors being stakeholders receive reasonable return on investment. It’s a procedure of an idealistic circle that connects the board and shareholders, administration, staff, client together with the community as a whole. Corporate governance is tied in with advancing transparency, corporate fairness, accountability (Glossary, 2013).
Okeahalam and Akinboade, (2003) laid out particular corporate governance benefits to incorporate upright good moral amongst firms’ workforce reliably entrusted to protect resource and all stakeholders’ entitlements. Corporate governance upgrade execution guarantees compatibility of corporate in making and keeping up trading environment which awaken entrepreneurs and managers to expand organizations practical resourcefulness, long haul productivity growth as well as return on investment (Love, 2011).
Governance in deposit taking Deposit Money Banksrely on mechanisms which guarantee equity investors that their funds will be utilized for the purposes intended. Such mechanisms of control are fundamental on the grounds that the goals of managers may differ from the goals of fund providers. For instance, managers of DTMFI may work to satisfying the mission of the firm yet they may likewise have inclinations for non-financial prizes or less work.
In the corporate governance literature, this issue is known as the agency problem. The manager, who does not own the resources of the firm is called an agent of the
provider of finance, who is the principal. The expenses related to the agency problem are called Agency costs. The key components of an effective governance system are proprietorship (counting institutional and administrative possession), board and board structure, CEO (manager) and director (board member) compensation, reviewing data and corporate control market (Tricker & Tricker, 2015).
MFBs sustainability will center within industry good governance structures. Corporate governance affects the operational risk and hence sustainability of Deposit Money Banks. Governance is about achieving Deposit Money Banks goals. Mwasi, (2011) assessed adoption of corporate governance practices by Nigerian MFIs. Study established that MFIs (both profit and non-profit) have large boards and that they did not experience any challenges in regard to adoption of CG practices; this is a good indication that MFIs in Nigeria are on track with regards to implementation of corporate governance practices. However, concern still remains on how these corporate governance practices have improved financial performance of Deposit Money Banks.
Agency theory contends that administrators won't move to support investor’s returns unless fitting administration frameworks are realized by organization to shield the investors' advantages (Jensen and Meckling, 1976). Stewardship hypothesis communicates that supervisors are great stewards of the organizations and work constantly to accomplish a lot of corporate advantage and returns to the investors. Pfeffer (1972) notes that Resource Dependency Theory (RDT) expresses that boards engage organizations to confine dependence or pick up resources. RDT has a viable point of convergence for discerning boards comprehensively in light of the fact that it highlights that outer executives overhaul the limit of organization to safeguard against the outside condition, diminish vulnerability, or co-pick assets that expands
organization ability to raise its status or funds and acknowledge increment (Kor & Misangyi, 2008).
1.1.1 Corporate Governance
Corporate governance alludes to creating a harmony between, individual, socioeconomic and common objectives while empowering the proficient resources utilization, responsibility, power utilization, and stewardship at the same time, adjusting the interests of people, companies, and society (OECD, 2015). It is the system of standards, approaches, methods, and obviously characterized obligations and accountabilities utilized by stakeholders in managing and directing an organization. Effective governance is fundamental for long haul corporate achievement (Noriza, 2010). Bebchuk, Cohen and Ferrell, (2004) recognized the fundamental normal for corporate governance as; board formation, size of the board, CEO duality.
Corporate governance which is effective advances enhanced wealth to shareholder and other corporate stakeholders wealth. Great corporate governance (GCG) practices are essential in pulling in investors; by safeguarding concerns of shareholders, reducing risk and enhancing proficiency of the organization. Subsequently, effective governance implies the slight appropriation by managers of organization funds, prompting improved assets usage and enhanced monetary and firm profitability (Igbal & Kakakhel, 2016). The board characteristics of a firm do affect its profitability. Corporate governance assumes an essential part for profitability. Firms profit improvement is essential for attainment of corporate goals (Gill & Mathur, 2011).
1.1.2 Financial Performance
Institutions effectiveness is measured by firm performance and its capacity to accomplish its objectives as far as profits and revenues are concerned (Ongore & Kusa, 2013). Financial performance is an indicator of organization productivity with regard to aggregate assets. Organizations must assess and screen their profitability levels intermittently in order to gauge their financial performance. The two most well- known measures of productivity are ROE and ROA. ROE measures accounting earnings for a period for every shilling of investors' value while ROA measures return of each shilling put into resources.
Ngatia, (2012) identified ROA, asset age, firm size, ROE, and return on sales as Deposit Money Banks performance measures. Wanjau, (2007) recognized four pointers to be specific; turnover or disbursement, portfolio quality, market share as Deposit Money Banks performance measures. As indicated by Richard, (2009), financial performance comprises of three particular territories of returns on assets, profits, and return on investment.
1.1.3 Corporate Governance and Financial Performance
The presence of a successful corporate governance framework, inside an individual organization and over an economy overall, gives a level of certainty that is essential for the best possible working market economy. Thus, capital cost is lower and organization is urged to utilize assets all the more productively, along these lines supporting development (OECD, 2004). Great corporate governance surmises reasonable economic development by promoting organizations performance and expanding external capital access. For developing business sector nations, great corporate governance reduces vulnerability to budgetary emergency, fortifies property rights, reduction in exchange expenses, cost of capital and capital market improvement (Das, 2010). Corporate governance system which is weak lessens shareholders certainty demoralizing external managers. Two reasons behind incredible corporate governance expand organization value. To begin with great governance builds shareholders trust. Shareholders see firms that are well governed as safe and utilize rate of return which is lower, which prompting a higher valuation of organization. Likewise, better- governed organization may have powerful activities, achieving a higher expected future returns that translates to firm performance.
1.2 Research Problem
There is increased debate whether corporate governance practices should be part of managing Deposit Money Banksin Nigeria. This is important because its main elements like board composition, board committees, frequency of holding meetings and resolutions discussed in the general meetings can influence the financial performance either directly or indirectly. Brown and Caylor, (2004) gave bits of insights to connections between great corporate governance and corporate performance.
Corporate governance tries to advance responsive and responsible firms, authentic organizations that are managed with probity, recognition, transparency, recognition and rights of stakeholders. A corporate governance framework which is working well causes an organization to draw in investment, raise funds and buttress the establishment of organization financial performance (Donaldson, 2003).
Deposit taking involves a misfortune relying upon how the deposits are utilized. This is an indication that reliable corporate governance is required to manage Deposit Money Banks institutions. Deposit Money Banks is a huge and developing industry that requires sound corporate governance management, regardless of having many studies on connection amongst corporate governance and performance of the organization; we have restricted studies that investigate the connection amongst governance and performance inside the setting of Deposit Taking and Micro Finance Institutions (Deposit Money Banks).
Sayilir and Coşkun (2012) discovered that Corporate Governance has no measurable critical relationship with ROE or ROA hence showing a contextual gap. Ochola, (2013) directed a study on how corporate governance practices affect Nigerian fund manager’s financial performance and established that corporate governance factors such as, CEO Chairman Duality, Insider Shareholding and Board Size positively related to ROA while Fund Managers having high number of internal directors compared to external directors was negative showing a conceptual gap.
Gadi, (2015) analyzed corporate governance and Nigerian Deposit Money Banks bank's financial performance. Pearson correlation demonstrates critical relationship occurs amongst EPS and corporate governance. Regression analysis demonstrates that no huge relationship occurs amongst bank's financial performance and corporate governance hence showing a contextual gap.
Olick, (2015) directed a study on corporate governance practices effects on Nigerian Deposit Money Banks banks financial performance. Study findings showed that board size had huge positive effects on ROA whereas proportion of NEDs had positive unimportant impact on financial performance based on ROA measurement. The empirical results by Olick, 2015; Mutisya, 2016; Abdulazeez, Ndibe & Mercy, 2016; Mwesigwa, Nansiima, & Suubi, 2014 & Sayilir, Ö. & Coşkun (2012) shows inconsistency in research outcomes on corporate governance and financial performance. These are knowledge gaps which the study attempted to fill by establishing corporate governance effects on Nigeria’s Deposit Money Banks financial performance.
1.2 Research Objective
To determine the effect of corporate governance on the financial performance of Deposit Money Banks in Nigeria, A case study of Zenith Bank.
1.3 Value of the Study
Managers will benefit through understanding significance of corporate governance elements with a specific end goal to enhance their firm image translate into increase in
firm financial performance. The vast majority of the organizations engage at activities which are aimed at enhancing firm corporate image and the best person to champion these are firm directors and managers. It will likewise help corporate supervisors and policy makers in investigation of the issues of corporate governance within their organization with the aim of improving the organization therefore establishment of discipline in the administration of the Deposit Taking Deposit Money Banks organizations.
Scholars who might wish to embrace additional studies aimed at enhancing corporate governance structures in Nigeria. In this manner, a major obligation lies on the shoulders of academicians who are considered as scholarly people in conferring the components of corporate governance in the psyches of youthful experts particularly investigating different components of corporate governance on organization performance in other industry players. Researchers particularly academicians engaged to research on, MFI, investment, public finance, will find this study useful as one of the working documents.
IMPACT OF CORPORATE GOVERNANCE ON DEPOSIT MONEY BANKS FINANCIAL PERFORMANCE IN NIGERIA (A CASE STUDY OF ZENITH BANK)
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IMPACT OF CORPORATE GOVERNANCE ON DEPOSIT MONEY BANKS FINANCIAL PERFORMANCE IN NIGERIA (A CASE STUDY OF ZENITH BANK).docx
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IMPACT OF CORPORATE GOVERNANCE ON DEPOSIT MONEY BANKS FINANCIAL PERFORMANCE IN NIGERIA (A CASE STUDY OF ZENITH BANK)
IMPACT OF CORPORATE GOVERNANCE ON DEPOSIT MONEY BANKS FINANCIAL PERFORMANCE IN NIGERIA (A CASE STUDY OF ZENITH BANK)
ABSTRACT
The effect of corporate governance on the financial performance of Deposit Money Banks in Nigeria was the objective of this paper. Research design adopted was descriptive and involved. 8 Deposit Money Banks in Nigeria. Data was collected for a 5-year period, 2012-2016, from financial statements of Deposit Money Banks and annual reports from AMFI and CBK. The data was analyzed annually giving a total of 40 data points. Descriptive and regression analysis were used to analyze the data. From the findings board independence had the highest standard deviation meaning that it had the highest variability or high volatility (Risk) in the financial performance. The study found that firm size and liquidity affected ROA of Deposit Money Banks positively. However, board size, board independence, gender diversity and leverage had a negative effect on ROA. The variables had a significant effect on ROA. Firm size and leverage displayed a strong effect on ROA compared to the other variables that displayed a weak effect on ROA. The study concludes that board size, board independence, gender diversity, firm size, liquidity and leverage when combined have a strong effect on financial performance. The study recommends that Deposit Money Banksreduce board diversity, board size, board independence and leverage while at the same time increasing liquidity and assets in order to enhance the financial performance of the firms. A similar study in other sectors is recommended. Further research can be done on to determine such other variables that influence financial performance of Deposit Money Banks.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Corporate governance is the management of an entity in a way that ensures proprietors being stakeholders receive reasonable return on investment. It’s a procedure of an idealistic circle that connects the board and shareholders, administration, staff, client together with the community as a whole. Corporate governance is tied in with advancing transparency, corporate fairness, accountability (Glossary, 2013).
Okeahalam and Akinboade, (2003) laid out particular corporate governance benefits to incorporate upright good moral amongst firms’ workforce reliably entrusted to protect resource and all stakeholders’ entitlements. Corporate governance upgrade execution guarantees compatibility of corporate in making and keeping up trading environment which awaken entrepreneurs and managers to expand organizations practical resourcefulness, long haul productivity growth as well as return on investment (Love, 2011).
Governance in deposit taking Deposit Money Banksrely on mechanisms which guarantee equity investors that their funds will be utilized for the purposes intended. Such mechanisms of control are fundamental on the grounds that the goals of managers may differ from the goals of fund providers. For instance, managers of DTMFI may work to satisfying the mission of the firm yet they may likewise have inclinations for non-financial prizes or less work.
In the corporate governance literature, this issue is known as the agency problem. The manager, who does not own the resources of the firm is called an agent of the
provider of finance, who is the principal. The expenses related to the agency problem are called Agency costs. The key components of an effective governance system are proprietorship (counting institutional and administrative possession), board and board structure, CEO (manager) and director (board member) compensation, reviewing data and corporate control market (Tricker & Tricker, 2015).
MFBs sustainability will center within industry good governance structures. Corporate governance affects the operational risk and hence sustainability of Deposit Money Banks. Governance is about achieving Deposit Money Banks goals. Mwasi, (2011) assessed adoption of corporate governance practices by Nigerian MFIs. Study established that MFIs (both profit and non-profit) have large boards and that they did not experience any challenges in regard to adoption of CG practices; this is a good indication that MFIs in Nigeria are on track with regards to implementation of corporate governance practices. However, concern still remains on how these corporate governance practices have improved financial performance of Deposit Money Banks.
Agency theory contends that administrators won't move to support investor’s returns unless fitting administration frameworks are realized by organization to shield the investors' advantages (Jensen and Meckling, 1976). Stewardship hypothesis communicates that supervisors are great stewards of the organizations and work constantly to accomplish a lot of corporate advantage and returns to the investors. Pfeffer (1972) notes that Resource Dependency Theory (RDT) expresses that boards engage organizations to confine dependence or pick up resources. RDT has a viable point of convergence for discerning boards comprehensively in light of the fact that it highlights that outer executives overhaul the limit of organization to safeguard against the outside condition, diminish vulnerability, or co-pick assets that expands
organization ability to raise its status or funds and acknowledge increment (Kor & Misangyi, 2008).
1.1.1 Corporate Governance
Corporate governance alludes to creating a harmony between, individual, socioeconomic and common objectives while empowering the proficient resources utilization, responsibility, power utilization, and stewardship at the same time, adjusting the interests of people, companies, and society (OECD, 2015). It is the system of standards, approaches, methods, and obviously characterized obligations and accountabilities utilized by stakeholders in managing and directing an organization. Effective governance is fundamental for long haul corporate achievement (Noriza, 2010). Bebchuk, Cohen and Ferrell, (2004) recognized the fundamental normal for corporate governance as; board formation, size of the board, CEO duality.
Corporate governance which is effective advances enhanced wealth to shareholder and other corporate stakeholders wealth. Great corporate governance (GCG) practices are essential in pulling in investors; by safeguarding concerns of shareholders, reducing risk and enhancing proficiency of the organization. Subsequently, effective governance implies the slight appropriation by managers of organization funds, prompting improved assets usage and enhanced monetary and firm profitability (Igbal & Kakakhel, 2016). The board characteristics of a firm do affect its profitability. Corporate governance assumes an essential part for profitability. Firms profit improvement is essential for attainment of corporate goals (Gill & Mathur, 2011).
1.1.2 Financial Performance
Institutions effectiveness is measured by firm performance and its capacity to accomplish its objectives as far as profits and revenues are concerned (Ongore & Kusa, 2013). Financial performance is an indicator of organization productivity with regard to aggregate assets. Organizations must assess and screen their profitability levels intermittently in order to gauge their financial performance. The two most well- known measures of productivity are ROE and ROA. ROE measures accounting earnings for a period for every shilling of investors' value while ROA measures return of each shilling put into resources.
Ngatia, (2012) identified ROA, asset age, firm size, ROE, and return on sales as Deposit Money Banks performance measures. Wanjau, (2007) recognized four pointers to be specific; turnover or disbursement, portfolio quality, market share as Deposit Money Banks performance measures. As indicated by Richard, (2009), financial performance comprises of three particular territories of returns on assets, profits, and return on investment.
1.1.3 Corporate Governance and Financial Performance
The presence of a successful corporate governance framework, inside an individual organization and over an economy overall, gives a level of certainty that is essential for the best possible working market economy. Thus, capital cost is lower and organization is urged to utilize assets all the more productively, along these lines supporting development (OECD, 2004). Great corporate governance surmises reasonable economic development by promoting organizations performance and expanding external capital access. For developing business sector nations, great corporate governance reduces vulnerability to budgetary emergency, fortifies property rights, reduction in exchange expenses, cost of capital and capital market improvement (Das, 2010). Corporate governance system which is weak lessens shareholders certainty demoralizing external managers. Two reasons behind incredible corporate governance expand organization value. To begin with great governance builds shareholders trust. Shareholders see firms that are well governed as safe and utilize rate of return which is lower, which prompting a higher valuation of organization. Likewise, better- governed organization may have powerful activities, achieving a higher expected future returns that translates to firm performance.
1.2 Research Problem
There is increased debate whether corporate governance practices should be part of managing Deposit Money Banksin Nigeria. This is important because its main elements like board composition, board committees, frequency of holding meetings and resolutions discussed in the general meetings can influence the financial performance either directly or indirectly. Brown and Caylor, (2004) gave bits of insights to connections between great corporate governance and corporate performance.
Corporate governance tries to advance responsive and responsible firms, authentic organizations that are managed with probity, recognition, transparency, recognition and rights of stakeholders. A corporate governance framework which is working well causes an organization to draw in investment, raise funds and buttress the establishment of organization financial performance (Donaldson, 2003).
Deposit taking involves a misfortune relying upon how the deposits are utilized. This is an indication that reliable corporate governance is required to manage Deposit Money Banks institutions. Deposit Money Banks is a huge and developing industry that requires sound corporate governance management, regardless of having many studies on connection amongst corporate governance and performance of the organization; we have restricted studies that investigate the connection amongst governance and performance inside the setting of Deposit Taking and Micro Finance Institutions (Deposit Money Banks).
Sayilir and Coşkun (2012) discovered that Corporate Governance has no measurable critical relationship with ROE or ROA hence showing a contextual gap. Ochola, (2013) directed a study on how corporate governance practices affect Nigerian fund manager’s financial performance and established that corporate governance factors such as, CEO Chairman Duality, Insider Shareholding and Board Size positively related to ROA while Fund Managers having high number of internal directors compared to external directors was negative showing a conceptual gap.
Gadi, (2015) analyzed corporate governance and Nigerian Deposit Money Banks bank's financial performance. Pearson correlation demonstrates critical relationship occurs amongst EPS and corporate governance. Regression analysis demonstrates that no huge relationship occurs amongst bank's financial performance and corporate governance hence showing a contextual gap.
Olick, (2015) directed a study on corporate governance practices effects on Nigerian Deposit Money Banks banks financial performance. Study findings showed that board size had huge positive effects on ROA whereas proportion of NEDs had positive unimportant impact on financial performance based on ROA measurement. The empirical results by Olick, 2015; Mutisya, 2016; Abdulazeez, Ndibe & Mercy, 2016; Mwesigwa, Nansiima, & Suubi, 2014 & Sayilir, Ö. & Coşkun (2012) shows inconsistency in research outcomes on corporate governance and financial performance. These are knowledge gaps which the study attempted to fill by establishing corporate governance effects on Nigeria’s Deposit Money Banks financial performance.
1.2 Research Objective
To determine the effect of corporate governance on the financial performance of Deposit Money Banks in Nigeria, A case study of Zenith Bank.
1.3 Value of the Study
Managers will benefit through understanding significance of corporate governance elements with a specific end goal to enhance their firm image translate into increase in
firm financial performance. The vast majority of the organizations engage at activities which are aimed at enhancing firm corporate image and the best person to champion these are firm directors and managers. It will likewise help corporate supervisors and policy makers in investigation of the issues of corporate governance within their organization with the aim of improving the organization therefore establishment of discipline in the administration of the Deposit Taking Deposit Money Banks organizations.
Scholars who might wish to embrace additional studies aimed at enhancing corporate governance structures in Nigeria. In this manner, a major obligation lies on the shoulders of academicians who are considered as scholarly people in conferring the components of corporate governance in the psyches of youthful experts particularly investigating different components of corporate governance on organization performance in other industry players. Researchers particularly academicians engaged to research on, MFI, investment, public finance, will find this study useful as one of the working documents.
IMPACT OF CORPORATE GOVERNANCE ON DEPOSIT MONEY BANKS FINANCIAL PERFORMANCE IN NIGERIA (A CASE STUDY OF ZENITH BANK)
Attached Files