ABSTRACT
This study examined the effects of ownership structure on performance of Nigerian banks. The research population comprised banks operating in Nigeria between 2004, to 2014. Panel dataset obtained from the published accounts of the banks under study were used for the research. Total deposit, total assets and return on assets were used as dependent variables and the independent variables include board ownership, institutional ownership as well as government ownership. Three hypotheses were formulated and tested using Panel Least Squares (PLS). The results show that board ownership performed better than institutional ownership with emphasis on total assets and institutional ownership performed better than board ownership with emphasis on return on assets. It was also found that institutionally owned banks performed better than board owned banks with emphasis on total deposits. Based on the above findings, it is recommended that adequate policies be put in place in the area of ownership of banks in Nigeria which would not only make banks survive the harsh economic environments currently plaguing the banking sector but also enhance their returns and improve their performance.
TABLE OF CONTENTS
Title Page . . . . . . . . . . . i
Declaration. . . . . . . . . . . ii
Approval Page. . . . . . . . . . iii
Dedication . . . . . . . . . . . iv
Acknowledgments . . . . . . . . . v
Abstract . . . . . . . . . . v
Table of Contents. . . . . . . . . vi
List of Tables . . . . . . . xii
List of Figures . . . . . . . . . . xiii
List of Equations xiii
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study. . . . . . 1
1.2 Statement of the Problem. . . . . . . 11
1.3 Objectives of the Study. . . . . . 13
1.4 Research Questions. . . . . . . . 14
1.5 Research Hypotheses. . . . . . . 14
1.6 Scope of the Study. . . . . . . . 14
1.7 Significance of the Study. . . . . . 15
References. . . . . . . . 18
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Conceptual Framework. . . . . . 26
2.1.1 An Overview of Ownership Structure . . . 26
2.1.2 Firm Performance . . . . . . . . 27
2.1.3 Variables of Ownership Structure …. . . . 27
2.1.4 Performance Indicators . . . . . . . 28
2.2 Theoretical Review . .. . . . . 29
2.2.1 The Theory of Ownership Structure . . . . . 28
2.2.2 Agency Theory . . . . . . 30
2.2.3 Stakeholder Theory. . . . . . . 31
2.3 Theories of Ownership Structure . . . . 32
2.3.1 Institutional Ownership . . . . .. . 32
2.3.2 Foreign Ownership . . . . . . . 34
2.3.3 Government Ownership . . . . . . 35
2.3.4 Board Ownership . . . . . . . 36
2.4 Minority Shareholder Rights . . . . . 37
2.5 Empirical Review . . . . . . 38
2.6 Ownership Structure and Performance . . . 41
27. Ownership Concentration . . . . . . 42
2.8 Ownership Concentration and Performance . . . 43
2.9 Managerial Ownership and Performance . . . 44
2.10 Relationship between Ownership and Monitoring by Shareholders 44
2.11 Conflict of Interest Between Corporate and Outside Investors . 48
2.12 The Perspective of Financial Reforms in Nigeria . . 50
2.13 The Need for Financial Sector Regulation . . . . 52
2.14 Transparency and Disclosure Requirements . . . 52
2.15 Why Banks Make Profit . . . . . . 54
2.16 Risk Management in Banking . . . . . . 57
2.17 Peculiarity of the Banking Business in Nigeria . . 59
2.18 Rationale for Banking System Reforms in Nigeria . . . . 59
2.19 Role of Board of Directors . . . . . . . 61
2.20 Role of Accounting Standards . . . . . . 63
2.21 Roles of Auditors . . . . . . . 66
2.22 Bank Performance Measurement (Profitability) . . . 67
2.23 Relationships between Ownership and Performance . . 69
2.24 Firm Performance Measurement . . . . . 70
References . . . . . . . 83
CHAPTER THREE: METHODOLOGY
3.1 Research Design. . . . . . . 95
3.2 Nature and Sources of Data. . . . . . 96
3.3 Model Specification. . . . . . . . 97
3.4 Techniques of Analysis. . . . . . . 99
3.5 Description of Model Variable . . . . 100
References. . . . . . . . 103
CHAPTER FOUR: DATA PRESENTATION AND ANALYSES
4.1 Data Presentation . . . . . . . 104
4.2 Descriptive Statistics and Test for Normality . . 109
4.3 Tests for Stationary . . . . . 110
4.4 Test for Linear Association . . . . . 110
4.5 Test of Hypotheses . . . . . . . . 112
4.5.1 Test of Hypotheses One . . . . 114
4.5.2 Test of Hypotheses Two . . . . . 113
4.5.3 Test of Hypothesis Three . . . . . . 116
4.6 Implication of Results . . . . . 118
References . . . . . . . 123
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings . . . . . . 124
5.2 Conclusion . . . . . . . 124
5.3 Recommendations . . . . . . 125
5.3.1 Contributions to Knowledge . . . . . . 125
5.4 Recommendation for Further studies . . . 126
Reference . . . . . . . . 128
Bibliography . . . . . . . . . . . 129
Appendages . . . . . . . . . . 148
LIST OF TABLES
Table 2.1: Summary of Some Other Previous Studies on Corporate Performance 68
Table 4.1: Yearly Observations for Banks Performance Index 2004-2014 104
Table 4.2: Basic Descriptive Statistics of the Level Series Data – 109
Table 4.3: Correlation Matrices of the Variables – – – 110
Table 4.4 : Panel Least Square Result for Hypothesis One – 113
Table 4.5: Panel Least Square Result for Hypothesis Two 115
Table 4.6: Panel Least Square Result for Hypothesis three 117
LIST OF FIQURES
Fig. 1 Bar Graph of Ownership Structure and Return on Assets of Nigerian Banks 110
Fig. 2 Line Graph of Ownership Structure and Total Assets of Nigerian Banks 110
Fig. 3 Bar Plot of Total Deposits and Ownership Structure of Nigerian Banks 111
LIST OF EQUATIONS
Equation Titles Pages
Multiple Regression Analysis Model Equation 100
Econometric Model Equation 100
Simple Definitional Model Equation 100
CHAPTER ONE
INTRODUCTION
- Background to the Study
It is generally accepted that ownership structure is an important component of firm performance (Shleifer and Vishny, 1986). Hence, for decades, researchers have been investigating the effect and value of ownership on firm performance in developed and recently in emerging markets (Srivastava, 2011). According to Zeitun and Tian, (2007), ownership structure is undoubtedly a major factor that affects a firm’s health. Banks in developed and developing countries occupy an important position in the economic equation of any country such that its performance invariably affects the economy of the country (Lawal 2009). Nam and Lum (2006) posits that restrictions in the banking sector are prevalent when compared with other industries and this might have been motivated by many considerations, including the conflicts of interest, concentration of economic power and stability of the financial sector. As a consequence, financial authorities placed an ownership ceiling for a single equity or a requirement for approval of the financial authorities when the shares exceed certain levels (Nam and Lum 2006).
Also considered is a fit and proper test for the ownership or management of banks putting into consideration their reputation and experience. There were other prudential regulations that were geared to address social or political concerns but which weaken competition, such as policy lending to agriculture or small and medium-scale enterprises. This practice is justified, given the opaqueness of banking and the consequent high incentives for market misconduct (Nam and Lum, 2006). At the time banking business fully commenced in Nigeria, bank ownership and customers were largely foreigners. That lopsidedness was mainly responsible for the inability of indigenous Nigerian enterprises to have access to bank credit. To correct this anomaly and meet the financial requirements of businesses owned by Nigerians, some indigenous banks commenced operations in the late 1920s. In view of the weakness of those indigenous banks in such areas as capitalization ownership and management, and given the total absence of regulation by any government agency, the indigenous banks could not survive the hostile and strong competition posed by the foreign banks. It was therefore not surprised that, by 1954, according to Uche (2000), a total of 21 out of 25 indigenous banks had failed and went into self liquidation.
Thereafter, the Nigerian banking industry had banks with different ownership structures which included banks having different compositions of ownership (foreign banks, indigenous banks, government/state banks and private banks) and banks having different spreads of ownership (quoted banks and non-quoted banks) ( Uche, 2000). Thereafter, there have been conflicts over ownership structure of the Nigerian banking institutions as there have been continuous changes both in the ownership and structure. However, the introduction of the free, non-restrictive equity holdings led to serious abuses by individuals and family members as well as government in the management of banks.
Banks in Nigeria have at various times been plagued by the nature of their ownership with government – owned banks suffering frequent changes in board membership which is usually associated with changes in the federal and state governments. Added to this problem is the fact that appointments in those banks were based on political patronage rather than merits. Again, board members saw themselves as representatives of political parties, the states or local governments and had little or no loyalty to the banks (Ogunleye, 2003). As a result, political and social considerations pervaded the decision making process. This situation promoted indiscipline in such banks as sanctions or deployment became very subjective. Ogunleye (2003) also argued that on the other hand, the privately – owned banks were afflicted by undue interference and pervasive influence of the dominant shareholder(s), that were unable to recruit or retain competent management teams. On the other hand, Olufon (1992) opined that the owner-managers appoint their relatives or friends to key positions instead of professional managers so as to extend their business empires. This is even when regulatory authorities declined approval of such appointments, the persons so appointed were sometimes made to remain in the positions either in acting capacity or under different names such as Chief Operating Officer. Again, many of the privately owned banks were characterized by series of shareholders quarrels and boardroom squabbles.
However, to avert such problems and encourage a private-sector-led economy, Central Bank of Nigeria, (CBN) directed that individuals and corporate bodies in banks to be more than that of governments. It also recognizes and encourages individuals who form part of management of banks in which they also have equity ownership to have a compelling business interest to run them well (CBN, 2006). The code equally directed that government direct and indirect holding in any bank shall be limited to 10% by end of 2007, as equity holding above 10% by any investor is subject to CBN prior approval.
In Nigeria, until 1973, banks were categorized into three, according to their ownership. These categories included: the expatriate banks, the indigenous banks and the mixed banks. While expatriate or foreign banks are those wholly owned by foreign investors, the indigenous banks are wholly owned by Nigerian citizens and/or governments. The mixed banks are those owned partly by foreign investors and partly by Nigerians (Anyanwaokoro 1996). The first group of banks to operate in Nigeria according to Anyanwaokoro (1996), was the expatriate banks. However, following the indigenization decree of 1973, Nigerian expatriate banks ceased to exist as the decree stipulated that no company operating in Nigeria shall be 100 percent owned by foreigners. In line with this, the Federal Government of Nigeria acquired some percentage ownership in the expatriate banks. As such, Nigerian banks are either indigenously owned or have a mixed ownership with Nigerians having not less than 60% of the ownership (Anyanwaokoro, 1996).
State government participation in banking business dates back to1952 when two regional governments rescued the then three indigenous banks that were in the verge of closing shops : Agbonmagbe bank, now, Wema bank and National bank were rescued by the then Western Regional Government while the then Eastern Regional Government rescued African Continental bank. This was the genesis of government participation in banking business and indeed ownership of banks in Nigeria. Federal government involvement commenced in 1974 when it acquired 40% shares in the “Big Three Expatriate Banks”- the then United bank for Africa, Barclays bank of Nigeria and First bank of Nigeria. The Federal government shareholding in these banks later extended to 60 per cent in 1976 (Uche 2000).
In a bid to meet up with the deadline for the minimum paid up capital of N25 billion stipulated for banks under the Banks and Other Financial Institutions Decree (BOFID)1991, many Nigerian banks are now publicly quoted in the Nigerian Stock Exchange. Moreover, most governments have relinquished whole or part of their shares in banks. With this new development, Nigerian banks can now be classified as quoted or listed banks and non-quoted according to whether they are quoted or not in the Nigerian Stock Exchange (Anyanwaokoro, 1996). As at now, the position of CBN is that foreign banks and/or investors are allowed to establish banking business in Nigeria provided they meet the current N25 billion and other applicable regulatory requirements for banking license as prescribed by the CBN (CBN, 2008).
CBN (2008) stated that such foreign individuals or institutional investors could also invest in existing Nigerian banks provided that no single foreign individual or institutional investors should acquire more than the share of a single Nigerian individual or institutional investor in any bank. The Act also stated that foreign investors that want to acquire or merge with a local bank is free provided the aggregate share holding of the foreign investors do not exceed 10% of the total capital of the bank. Again that such foreign bank must have operated in Nigeria for at least five years and established branches in at least 2/3 of states of Nigeria excluding the state capital. Also CBN, (2008) Act, makes it mandatory that such bank or investor’s shareholding, arising from the merger/acquisition should not exceed 40% of the total capital of the resultant entity, though existing share holding structure of Nigeria banks in which there are foreign interests in excess of 10% are allowed to exists but not exceed the current level the act stated.
An essential feature of a corporation is the separation of ownership from management. To this end, the shareholders (owners) delegate decision making rights to managers to act on their behalf. However, this separation of ownership from control implies a loss of effective control by shareholders over managerial decisions. Berle and Means (1932) argues that such separation of ownership from control of modern corporations unarguably reduces management incentives and appetite to maximize corporate profitability. Their theories were later converted into what is now known as a theory of corporate ownership structure which guides the ownership- performance studies by Jensen and Mechling (1976). Thus, the primary objective of firm governance is an alignment of the managerial incentives with those of stakeholders. Ownership structure is an essential instrument for corporate performance as its objective is to resolve the conflict of interest between shareholders and managers. This is to check the tendency of selfishness by managerial employees especially at the top management level and to ensure that delegated decision making powers are not abused to the detriment of shareholders and other stakeholders Hu and Izumida (2008).
Nigeria is not absolved from corporate failures, which cuts across both public and private corporations. The major reasons for their failure were non observance of effective corporate governance mechanisms. This attributed to the privatizing of some of the Nigerian companies that were beset with corruption and mismanagement. Such companies included African Petroleum Plc, Nigerian Securities, Printing and Mining Corporations (NSPMC), the Nigerian Telecommunication Company (NITEL), Capital Hotels Plc (Abuja Sharaton), Nicon Hilton Hotel, and Nigerdock Nigeria Plc. In the case of private companies, corporate abuses led to the collapse of such quoted companies like Unilever, Savannah Bank, Benue Cement, Allied Bank to mention but a few (Asada 2006). Banks in Nigeria have metamorphosed from foreign ownership on inception in 1920s to corporate ownership. This is consistent with happenings in other financial systems in this millennium where corporate ownership has become the order of the day.
Banks and other financial intermediaries are at the heart of the world’s recent financial crises. The deterioration of their assets portfolios due largely to the distorted credit management was at the heart of the structural sources of the crises (Fries, Neven and Seabright, 2002; Kashif, 2008 and Sanusi, 2010).
Jensen and Meckling (1976) wrote that agency problem dominates corporate governance research and quoting from Adam Smith’s (1776:36)
The directors of such (Joint-stock) companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail more or less, in the management of the affairs of such a company.
From the banking industry perspective, the importance of a vibrant, transparent and healthy banking system can never be over looked. This is because the banking sector plays a major intermediation role in an economy by mobilizing savings from the surplus units and channeling those funds to the deficit units particularly the private enterprises for the purpose of expanding their production capacities. Love and Rachinsky (2006) opined that better governed banks translate into more efficient and streamlined operation and reduces the incidence of related-parties transactions and other self-dealings and may lower cost of capital- therefore improved performance. Al-Faki (2006) noted that the level of functioning of the financial sector depend on the perception and patronage of the citizens. In the case of Nigeria, the banking terrain has been groping, and grasping for breath and survival since the 80s and 90s. Even in this new millennium, the ghost of financial distress can still be seen hovering, haunting the financial service sector.
Banks also play important roles in the international financial and foreign exchange markets. They also promote monetary and financial stability of the economy as a whole. Undoubtedly they is no economy of any country that can succeed without the control of banks. Thus, good and effective management of banks in Nigeria are very important for the business of the banks and their customers. Alternatively, poor banking practice can lead markets to lose confidence in the ability of a bank to properly manage its assets and liabilities including deposits, which invariably could in turn trigger a bank run or liquidity crisis (Uche 2000). According to Anyanwaokoro (2008), public confidence is very important in any business but it is more pronounced in banking. Confidence and sanity are the major pillars on which the banking business revolves. The situation where the public losses trust and confidence in the financial institutions can result in consequential economic woes as equities of banking sector alone constitute over 60 percent of the Nigerian capital market (Sun 2016). Therefore government cannot allow banking institutions to falter. If by any imagination, depositors and the general public should for any reason, lose confidence in the ability of a bank to discharge its obligation, such bank will be heading for its doom. In fact such a scenario leads to bank distress and subsequently bank failure with its negative consequences. As a result, apart from the laws that guide business activities such as the Companies and Allied Matters Act of 1999 (CAMA) as amended which also applies to banks, all aspects of banking operations are highly regulated and closely monitored by various laws and guidelines. Nam (2006), argues that banking institutions deserve separate attention for several other reasons which included that
Banks are very vulnerable to shocks due to their highly leveraged balance sheet structure and, more recently, financial deregulation and liberalization. This means that risk management and other internal control are more important in the banking sector than several other sectors.
Second, governments usually provide safety nets to banks and heavily regulate them in consideration of the importance of banks and the externality associated with banking failure. This practice by the governments reduces incentives for creditors to monitor banks. Also, whether banks should single-mindedly pursue the interests of shareholders is questionable, as taxpayers, governments, banking communities and other stakeholders also have a large stake in banks.
Third, information asymmetry is much more pronounced and serious in banking than in non-financial industries due largely to the inter-temporal nature (involving a promise to pay in future) of typical financial contracts and the increasing complexity of financial products. This calls for higher standards of governance including disclosure and transparency.
Finally, banks can play an important monitoring role for their corporate clients to safeguard their credit against corporate financial distress or bankruptcies. This role cannot be properly played without sound governance of banks, ensuring that bank managers control risks and pursue profits. Good corporate practice is therefore essential to achieving and maintaining public trust and confidence in the banking system. Uche (2000) further asserts that “the banking industry is special in terms of regulation as experience has shown that failure (Bankruptcy) in this industry has external consequences.
In their view, Okafor and Wilson (2010) opine that the nature of banking business further exacerbates the agency problem in banking because of multiple conflicts of interests among the very diverse key stakeholders. They further opine that, while depositors are interested in the safety of their deposits, the shareholders are interested in the high risk investment exposures capable of maximizing the expected return on their investments. Management’s chief interest, on the other hand, is in their compensation packages and power concentration. The agency theory and stakeholder theory therefore, guide this study due to its relevance in addressing the conflict between management and owners and also ability of every stakeholder’s interest in a corporation.
The concern to safeguard the viability of the depositary industry also arose from the fact that financial failure had significant external effects that reached beyond the depositors and stakeholders of the financial firm. The depositary institutions play important roles as the chief conduit in both the payment process and the savings – investment process. As Carse (2002) puts it, “a strong corporate standard is particularly important for banks. This is because most funds that banks use for their businesses belong to their creditors and depositors. The failure of a bank will affect not only its shareholders, but have a systemic effect on other banks. Carse (2002) also asserts that banks tend to have little equity relative to other firms as they typically receive about 90 percent or more of their funding from debt. Bank liabilities are also largely in the form of deposits which are available to their creditors/depositors on demand, while their assets often take the form of loans that have longer maturities (although increasingly refined secondary markets have mitigated to some extent the mismatch in the terms structure of banks assets and liabilities). Thus, by holding illiquid assets and issuing liquid liabilities banks create liquidity for the economy, he concluded. This liquidity production may cause a collection action problem among depositors as banks keep only a fraction of deposits on reserve. Depositors can not obtain repayment of these deposits simultaneously because the banks will not have sufficient funds on hand to satisfy all depositors at once. This mismatch between deposits and liabilities becomes a problem in the unusual situation of a bank run. If, for any reason, large, unanticipated withdrawals do begin at a bank, depositors, as individual may rationally conclude that they must do the same to avoid being left with nothing.
It is therefore important to ensure that banks are operating properly. Critical to this analysis is the fact that failures can occur even in solvent banks. Hence, good bank management practices could mitigate these ugly consequences. It is a general belief that good and efficient corporate practice enhances a firm’s performance. Yammeesri (2003), asserts that research on ownership and its influence on firm in developing countries are scarce.
