CHAPTER ONE
INTRODUCTION
1.1 Background
of the Study
The concept of corporate governance has attracted
a good deal of public interest in recent years, because of its apparent
importance on the economic health of corporations and society in general
basically, corporate governance in banking sector requires judicious and
prudent management of resources and the preservation of resources (assets) of
the corporate firm, ensuring ethical and professional standards and the pursuit
of corporate objectives; it seeks to ensure customer satisfaction, high
employee moral and the maintenance of market discipline, which strengthens and
stabilizes the bank? Recently, the banking industry in Nigeria has been
encountering serious reforms over the past years arising from the Central Bank
of Nigeria’s requirement for banks to increase their capital base (share to a
minimum level of twenty five billion naira (N25
billion), (Ogeechee 2014). This triggered off several mergers and acquisition
that have reduced the number of banks from eighty nine (89) to twenty five (26)
banks as at the beginning of 2014 (Kama, 2015) it is imperative to note that at
the end of the consultation exercise, the total capitalization (the value of all
equities of the banks came to N9970
billion compact to the figure of N572
billion before the commencement of the programme. (CBN annual report 2014)
However, the successful banks accounted for about 93.5% and 87% of the
total deposit liabilities and assets of the banking system respectively. (CBN
annual report 2014). Before the consultation exercise, the banking industry had
82 active banks whose overall performance led to sagging of customer’s
confidence, as there was immerging distress in the industry. The supervisory
structures were inadequate as there were cases of official recklessness amongst
managers, and the industry was notorious for financial abuses. However CBN
blacklisted six (6) officers of banks, including a chairman and a non executive
director for unethical practices and professional misconduct.
Corporate governance is designed to promote a diversified strong and
reliable banking sector which bill ensure the safety of depositors money and
also to explore the relationship between internal corporate governance
structures and the performance of money deposit banks in Nigeria. Corporate governance
involves monitoring and overseeing strategic direction, social-economic and externalities
and constituencies of the institution.
In view of the above background this study investigates corporate
governance in money deposit bank.
1.2
Statement of Problem
Money deposit banks and other financial intermediaries are at the heart
of world recent financial crisis. The deterioration of their asset portfolios
largely due to distorted credit management was one of the main structural sources
of the crisis (Sanusi, 2010,Fries, Neven and Sea Bright, 2014 Kashif 2015). To
a large extent, this problem was the result of poor corporate governance in
countries including Nigeria.
Schjoedt (2014) observed that this poor corporate governance, in turn
was very much attributable to the relationships among the government, banks and
big business as well as the organizational structure of business; this weak
corporate governance is also seen manifesting in form of weak internal control
measures, absence of or non adherence to units of authority, insider abuses and
fraudulent practices remain a worrisome feature of the banking system.
Poor corporate governance is also seen manifesting inform of un ethical
or non conformity to the code of conduct
which hinder the corporate bodies, authorities and other shareholder to
aid information and right of the institution
In Nigeria, among the few empirically feasible studies on corporate
governance are the study by Sanda et al (2014) and Ogbechie (2015) that the
studied the corporate governance mechanisms and firm’s 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 central
bank of Nigeria code of corporate governance.
Finally, while other studies on corporate governance neglected the
operating performance variable as proxies for performance, this study employed
the accounting operating performance variable to investigate the existence if
any relationship between corporate governance and performance of banks in
Nigeria
1.3
Objectives of the Study
The major objective of the study is the effect of corporate governance
codes on the performance of money deposit banks in Nigeria. The specific
objectives are to determine:
1. The
need for corporate codes for money banks
2. The
benefit of corporate codes in Ecobank Plc
3. The obstacles
to adherence to corporate codes in Ecobank plc
4. The
strategies for effective adherence to corporate codes in Ecobank plc
1.4 Research Questions
To proffer useful answers to the research questions and realize the
study objectives, the following questions are stated.
1. What
are the needs for corporate codes for money deposit banks?
2. What are the benefits of corporate
codes in Ecobank Plc?
3. What are
the obstacles to adherence to corporate codes in Ecobank plc?
4. What are
the strategies for effective adherence to corporate codes in Ecobank plc?
1.5 Significance of the Study
The beneficiary of corporate governance codes on the performance of
money banks and how they benefit
Government:
Government
will also benefit from the finding of the study with the knowledge of the
positive effect of corporate governance in the economy, government will be able
to make decision and policies which are favorable to bank and the economic as a
whole.
Shareholders: Shareholders play a key role in the provision of
corporate governance. Small or diffuse shareholders exert corporate governance
by directly voting on critical issues, such as mergers, liquidation, and
fundamental changes in business strategy and indirectly by electing the boards
of directors to represent their interest and oversees the myraid of managerial
decisions to be taken by the management of the organizations, may negotiate
managerial compensation with a view to achieving particular results.
Debt Holders Debt purchasers provide finance in return for a promised stream of
payments and a variety of other covenants relating to corporate behavior such
as the value and risk of corporate assets. If the corporation violates these
covenants or default on the payments, debt holders are to effectively exert
corporate governance as envisaged. Small debt holders may be unable to monitor
complex organization and could face the free-niter incentives, as small equity
holders. Also, the efficient exertion of corporate control with diffuse debts
depends largely on the efficiency of
the legal and bankruptcy systems.
1.6 Scope of the Study
Considering the year 2016 as the year of formation of post
consolidation governance codes for the Nigeria banking sector, this study
investigates relationship between corporate governance code and financial
performance of money deposit banks in Nigeria.
The choice of this sector in based on the fact that the banking sectors
stability has a large positive externality system and banks are the key
institutions maintaining the payment system
of an economy that is essential
for the financial sector. As to these the scope of the study is based on
the needs for corporate codes for money
deposit banks, the benefits of corporate codes in Ecobank Plc, the obstacles to
adherence to corporate codes in Ecobank plc, the strategies for effective
adherence to corporate codes in Ecobank plc.
The work is restricted to the case study, Ecobank Plc, Ungwa Sanusi
Branch, Kaduna, which will lasted for the period of four years (2016 -2019)
Further more; the project focused on money deposit bank because
corporate governance problems and transparency issues are more important in the
banking sector due to crucial role in providing loans to non financial firms,
in transmitting the effects of money to any pulley and in providing stability
to the economy as a whole.
1.7
Historical Background of the Study
Ecobank Transnational Incorporated (ETI), a public limited liability
company, was established as a bank holding company in 1985 under a private
sector initiative spear head by the Federation of West African Chambers of
Commerce and Industry with the support of ECOWAS. The dual objectives of ETi
are to build a world class Pan African bank and to contribute to the economic
and financial integration and development of African continent.
Ecobank Nigeria was incorporated on 7 October, 1986 as a public limited
liability company and commenced business on 24 April, 1989. The bank was listed
on the Nigeria stock exchange by introduction between 24 April 2006 and
remained listed until 31 December 2011. On 30 December 2011, by a Federal High
Court sanction of a scheme of arrangement, Ecobank Transnational incorporated
(ETI), Lome, incorporated in the Republic of Togo which prior to that date held
85.1% equity shares in the bank, became beneficial owner of 100% shareholding
in the bank. The bank is now fully owned subsidiary of ETi and has been
re-registered as a private limited liability company at the corporate affairs
commissions, Abuja. The principal
activity of the bank is commercial banking which includes domestic and
corporate banking services. The bank operates under a commercial banking
license with national banking status in line with the Central Bank of Nigeria
present banking model.
1.8
Definition of Terms
Agency theory: Agency theory is directed at the ubiquitous agency relationship in
which one party (the principal) delegates work to another (the agent), who
performs the work.
Board composition:- this is defined as the proportion of presentation
of non executive directors on the board.
Board size:- this is defined as the number of directors both executive and non
executive directors on the board of the bank.
Corporate governance:- the method by which suppliers of finance control
managers in order to ensure that their capital cannot be expropriated and that
they earn a return on their investment.
Financial performance:- This is a measure of how well a firm can use
assets from its primary mode of business and generate revenues. This term is
also used as a general measure of a firms overall financial health over a given
period of time
OECD: - The Organization for Economic Corporation and Development
Shareholders:- Shareholders are people who have bought shares in a limited liability
company. They own a part of the company
in exact proportion of the shares they own.
CBN:- Central Bank of Nigeria
ETi:- Ecobank Transnational incorporated