CBN CODE OF CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE OF LISTED BANKS IN NIGERIA
CHAPTER ONE
GENERAL INTRODUCTION
1.1 Background to the Study
Banking system is the backbone of the financial institution through which funds and other financial resources are mobilized. Banks in performing their pivotal roles in the economy, facilitate financial settlement through the payment system, influence money markets rates and provide means for international payments. The efficiency and success of this financial intermediation is predicated on a sound financial system. The banking system in any economy plays the important role of promoting economic growth and development through the process of financial intermediation. It may be argued that the existence and evolution of financial institutions and market constitute an important element in the process of economic growth.
The banking system, in promoting economic growth , plays the role of improving efficiency of resource mobilization by pooling individual savings, increasing the proposition of societal resources devoted to interest yielding assets and Long-term investment which in turn facilitates economic growth and provides a more efficient allocation of savings into investment than the individual savers can accomplish on their own. Other banking functions are reducing the risk faced by firms in their production process by providing liquidity and capital enabling investors to improve their portfolio diversification by providing insurance and project monitoring and provide a veritable platform for an effective monitory policy implementation thereby enhancing the effective management of the economy.
Moreover, corporate governance has received much attention due to Adelphia, Enron, Worldcom and other high profile scandals, serving as the impetus to such recent U.S regulations as the Sarbnes-Oxley Act of 2002, considered to be most sweeping corporate governance regulations in the past 70 years (Byrnes, Dwyer, Henry and Thornton 2003). If better corporate governance is related to better bank performance, better- governed bank should perform better than worse-governed banks.
The importance of banks to national economics is underscored by the fact that banking is virtually universally a regulated industry and that banks have access to government safety nets. For this reasons financial institutions in many industrial and emerging markets have witnessed intense and accelerated consolidation (Amel, Barnes, Panetta and Salleo 2002).
Despite all the essence of most banking sector consolidation is for the banks to embrace globalization, improve healthy competition, take advantage of economics of scale, adopt advanced technologies, raise efficiency, improve profitability and enhance the mobilization of resources for up-lifting the economic status of citizenry (Rhoades 2000). The distress syndrome was first observed in 1989 when there was mass withdrawal of deposit by government agencies and non compliance with CBN regulation public sector institutions with revealed the financial weakness of certain banks like the National Bank of Nigeria and Commercial Trust Bank limited which was bedeviled by board room cries and insight abuse (Osuaka, Bernado and Chris Mpamugoh)
1.2 Statement of the Research Problem
Corporate governance is considered as part and parcel of an organization and as such, it is pertinent to consider all that is necessary condition that will not warrant its breach. Past studies such as Nyong (1953), CBN/NDIC (1995) Ebhodaghe (1995) and Adam (2003) note that the banking problems emanate from gross under-capitalization relative to the level of operation, high level of classified loans and advances illiquidity reflected on the ability to meet customers cash withdrawals, lower earnings resulting from huge operational losses, weak management as reflected by poor credit quality, inadequate internal controls, high rate of frauds and forgeries and labour turnover to mention but a few. This also coincide with the study conducted in the Nigeria banking sector by usaid (2003) that the banking system problems emanated from weak corporate governance, widespread outsiders lending, dependence on the government for business, high level of non-performing loans and systemic under provisioning.
In view of the above, this study is aimed at assessing the impact of compliance with CBN code of corporate governance on financial performance of banks, the problem is that despite all these measures being taken by SEC, CBN, CAC and other regulatory agencies, to ensure those entrusted with the custody of funds, no significant impact was made. A survey by the Securities and Exchange Commission (SEC) reported in a publication in April 2003 showed that corporate governance was at rudimentary stage, as only about 40% of companies including banks have recognized code of corporate governance in place. During pre-corporate governance exercise conducted by CBN’s examiners it was discovered that five of the banks had accumulated margin loans of N500 billion, among other loans, that had gone bad and eroded their shareholders’ funds. The primary factors responsible for the current are laxity of control by the regulatory authorities, corruptions, inactive boards and greed on the part of the executives. The regulatory functions of the CBN to say the least have been non-existent, which may be due to dearth of qualified personnel experienced in the act of bank supervision and examination. Alternatively, the bank supervisors would have been compromised to issue clean of bill exports for banks over these years. The inability of the board of directors to effectively supervise top management of these banks has contributed more to this ugly situation. Most members of the board of these banks were composed of surrogates of the chief executives and at times chairmen. It is either they were unilaterally nominated by the managing director or the chairman who holds controlling interest in the bank as the suppliers of capital. To this end, board members have no financial contributions to the bank as their names were supplied to CBN in order to comply with statutory requirements.
The turmoil in the Nigerian system has required the government to set of some policies in form of compliance with corporate governance to stem the tide of bank failures and distress in Nigeria. Therefore, the CBN in conjunction with other supervisory institutions has decide to place emphasis on the monitoring of credit risk and provide incentives on prudent management of banks to aid transparency in the banking system so that the Nigerian economy can forge ahead.
Basically, that could be a reason why the government felt that new code of corporate governance should be specifically introduce for banks as such there is need to know clearly whether banks do comply with the new code of corporate governance if they do comply, what effect does their (compliance) have on the financial performance of Nigerian banks? Furthermore, several studies being conducted on similar problems by various researchers, Adenekinji and Ayorinde (2001) Sand, Mika’ila and Garba (2005), Kojola (2008) all assessed corporate governance and firms performance, while Yahaya and Ibrahim (2007) focus on the quality of financial reporting. In addition Muhammad (2012) studies corporate governance and performance of Nigerian Banking Industry, finally Aliyu (2011) carried out similar studies but on assessment. Moreover, the genesis of modern corporate governance dated back to 1992 with the publication of the Cadbury report as cited by Millichamp and Tallor (2008), there had been no significant study found have been conducted on the impact of compliance with CBN code of corporate governance on financial performance of banks in Nigeria thus, resulting in putting on the researcher to help address this issue with a view of breaching the knowledge gap, also to check the pre-corporate governance period and financial performance of bank
1.3 Objectives of the Study
The aim of this study is to assess the impact of CBN code of corporate governance 2006 on the financial performance of Nigerian banks, other specific objectives are to:
Evaluate the level of compliance with the CBN code of corporate governance by banks in Nigeria.
Determine whether there is a significant relationship between compliance and financial performance of banks.
Assess the impact of compliance with the code of corporate governance on the financial performance of banks in Nigeria.
