1.1 BACKGROUND OF THE STUDY
The Nigerian financial system is a complex network of the affiliated institutional arrangements, which has a common goal of mobilizing and channeling of funds for economic development. Umoh (1997) defines financial system as “the congeries of institutions and institutional arrangements created to facilitate lending and borrowing of funds in an economy. Also in the same vein, Akpan (2009) puts it that the financial system is a framework of institutions and institutional arrangements created to facilitate lending and borrowing of funds. Thus, the lender, the borrower, the instruments traded, the intermediary institution, the observed rules and regulations and the institutions that create them constitute the financial system.
Institutions in the financial system include the banks and the non-banking institutions but for the purpose of the study we are concerned with the banking institutions and commercial banks to be precise.
A bank is defined by Banks and Other Financial Institutions Act (BOFIA), 1991 (Section 61) as an institution licensed to carry on bank business, which the same section defines as: the business of receiving deposits on current accounts, savings account or other similar account, paying or collecting cheques drawn by or paid in by customers, provision of finance or such other business as the Governor may, by order published in the Gazette, designate as banking business. The same section went further to define a Commercial Bank to mean any bank in Nigeria whose business includes the acceptance of deposits withdraw able by cheques.
Thus a commercial bank is an institution which accepts deposits from the public and in turn advances loans by creating credit. According to Ekezie (2006), Commercial Banks are a nation’s most important financial institutions in the sense that, their performance of services are unique and are distinguished from other forms of financial institutions or intermediary. To confirm these, Akpan (2009) explains that banks are the most regulated financial institutions because of their role in the payment system through their unique characteristics of creation and destruction of money, also that they control a greater portion of institutionalized savings.
The following are unique characteristics of Commercial Banks stated by Ekezie (2006), Commercial Banks holds the nation’s money supply, they are the only financial intermediaries whose demand deposits circulate as money, there create money and also have power to destroy money. These is the reason why Commercial Banks must be well regulated and supervised to ensure a sound corporate governance in the banking sector, because a weak banking sector with poor corporate governance entails a weak and under developed economy.
The banking sector has passed through so many eras of reforms among which include, the free-banking era (1892-1952), the Structural Adjustment Programme of 1985, financial liberalization, financial consolidation and so on. All these reforms base their focus mainly on sound management system to ensure good corporate government. During the early days of banking in Nigeria, many banks were created and later within a short while a great number failed as a result of poor management, low capital base, high debt, etc (Ekezie, 2006).
Viewing the great role of banks in the economy, it is necessary to emphasize on good corporate governance in the banking sector which implies sound and efficient management to pilot the affairs of banking business because when the management is effective and working diligently, the banking sector will progress with less failure hence a booming economy with high level of employment.
The issue of corporate governance in the Nigerian banking sector is therefore not only crucial but also central to the entire economic process and national development and growth. Thus, a detailed research into the effect of corporate governance in Nigerian banking sector has become the increasing public apprehension about the improvement and sustainability of good corporate governance to ensure growth and development of the Nigerian economy.
1.2 STATEMENT OF THE PROBLEM
It is observed that prior to the introduction by the Central Bank of Nigeria (CBN) of the new code of corporate governance, there were in existence disparate codes of corporate governance regulating the activities of banks in Nigeria but, as admitted by the CBN these codes were manifestly ineffective and this is due mainly to the weak legal, regulatory and institutional framework of the banking sector (Wilson, 2006).
However, considering the number of years since the inception of banks in Nigeria, it would be expected that the banking sector performs above its present status having experienced series of failures and more reforms and laws made to boost corporate governance and guide management practice. Yet still, a closer look at recent happenings in the banking sector among which are failures and acquisition of some banks by government, shows that the sector has not been sufficiently active. This observed deficiency of the Nigerian banking sector in terms of corporate governance is due mainly to poor management and recklessness in granting of loans which result in a high rate of bad debts.
1.3 OBJECTIVES OF THE STUDY
This research was originally conducted to examine the effect of corporate governance on the Nigerian Banking Sector. Specifically, this research was conducted:
(i) To determine the effect of corporate governance on bank performance.
(ii) To ascertain the relationship between corporate governance, loans and bad debts on banks.
(iii) To make recommendations on how to boost corporate governance and reduce the rate of bad debts and insolvency in the Nigerian banking sector.
1.4 RESEARCH QUESTIONS
In this study, the following research questions were developed and applied:
(i) How does corporate governance affect bank performance?
(ii) How does corporate governance contribute or relates to loans and bad debts on banks?
(iii) What can be done and what recommendations could be made to improve and boost bank corporate governance?
1.5 RESEARCH HYPOTHESES
The following hypotheses were formulated in their null form to guide us in further investigation.
Ho: Corporate governance does not have a significant effect on bank performance in Nigeria.
H1: Corporate governance has significant effects on bank performance in Nigeria.
Ho: Corporate governance does not contribute or relate to loans and bad debts on banks.
H1: Poor corporate governance contributes to bad debt on banks.
1.6 SIGNIFICANCE OF THE STUDY
Corporate governance is one of the key issues in the Nigerian banking sector today. It is crucial for good bank performance as the effectiveness of bank management (corporate governance) determines the growth of the Nigerian banking sector and hence the Nigerian economy. As such its significance spread as follows:
(i) The study has the potential of informing and educating both bank experts and interested members of the public.
(ii) The study will be beneficial to persons who will love to refer to it for further research on the subject.
(iii) The paper will serve as a reference material to fellow students and will also educate students on the effect of corporate governance, possible causes and how to check and improve corporate governance.
(iv) It exposes the indispensable role of the Nigerian Commercial Banks in economic development.
(v) Being that not much has been written about bank corporate governance in Nigeria since the issue just started gaining much attention recently unlike before; this study contains additional information concerning bank corporate governance and recent principles for sound corporate governance.
(vi) It reinforces the efforts of regulatory authorities in their supervisory roles on banks. In other words, the findings and recommendations made form valuable information for the regulatory agencies in their policy formulation and decision making.
1.7 ORGANIZATION OF THE STUDY
The study was designed and presented in five chapters. Chapter one is the introductory chapter and covers background of the study, statement of the problem, objectives of the study, research question, research hypotheses, scope and limitations of the study and finally a brief definition of terms.
Chapter two, centres on the review of related literature. Chapter three describes the research design and methodology, while chapter four presents, analyzes and interpretation of data. In chapter five the work is summarized, concluded and recommendations given.
1.8 SCOPE OF THE STUDY
The focal point of this study was the Nigerian Banking Sector. The research was carried out to examine the effect of corporate governance on the Nigerian banking sector; where by the main concentration is on Commercial Banks.
1.9 LIMITATIONS OF THE STUDY
The issue of corporate governance in the Nigerian banking did not start today, it has been a great problem faced by Nigerian banks since inception, but has not been given much attention until lately due to the insolvency of many banks even with the laid down rules to follow. On this regard, there has been not much paper written concerning the subject, hence the limitation of resources and sufficient data to back up basic facts of its reality.
Apart from the limitation posed by insufficient data, the study which was suppose to be a mini project/research work faced funds and time limitation being conducted within a very short time in the format of a full complete project and not a mini project.
However, the study has against its limitations covered and addressed relevant areas of the subject as a complete project should, and so is authentic and reliable.