Full Project – EFFECT OF OWNERSHIP STRUCTURE ON FINANCIAL PERFORMANCE OF NIGERIAN BANKS (Secondary Data)

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CHAPTER ONE

INTRODUCTION

1.1 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.

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).

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). 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).

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.

1.2 Statement of the Research Problem

Undoubtedly, no economic system can survive without a healthy and vibrant banking system. The regulatory authorities in being mindful of this point pro-actively regulate on matters that could impinge on the integrity of banks. Added to this is the fact that in Nigeria, equities of banks alone constitute about 60 percent of the stock that is traded in the capital market and should they be bank distress, the economy which now is in recession can hardly recover.

Banks and other financial intermediaries are at the heart of the world’s recent financial crises. The deterioration of their asset portfolios, largely due to poor credit management, represents one of the structural or fundamental causes of the crises, (Sanusi, 2010). To a large extent, this problem is arguably not unconnected to poor and inconsistent regulatory policy on ownership of banks. Weak corporate governance and erosion of confidence and sanity in banks are largely blamed on lack of clarity on ownership definition. Only recently, the news of the sack of the top management of skye bank Nigeria plc broke out (Sun 2016). This development sent shock waves throughout the banking sector and since then, anxieties have mounted, despite repeated assurances by the CBN that the bank and the nation’s banking sector in general are healthy. There was also another incidence in 2009 when CBN had to rescue eight Nigerian banks through liquidity injection in order to restore confidence and sanity in the banking system. A problem it traced to extreme weakness in corporate practices among banks (Anumihe, 2012).

There are therefore obvious gaps existing in literature in terms of methodology and geography. One of such gaps is that ownership structures studied were almost on firms’ performance rather than banks (Shleifer and Vishny 1997). Another gap was that the few that attempted it rather studied one form of ownership structure, using one or two performance indicators (Enobakhare 2010). Again those studies were carried out in foreign, developed countries rather than in the developing countries (Stein 2002). Also Multiple Regression Methods of analysis were employed in previous studies.

1.3 Objectives of the Study

The main objective of this enquiry is to evaluate the effects ownership structure has on the financial performance of Nigerian banks. Specifically, the above general objective is broken down as follows:

To investigate the effects of board ownership and institutional ownership on total assets of Nigerian banks.
To evaluate the impact of board ownership and institutional ownership on return on assets of Nigerian banks.
To ascertain the effects of board ownership and institutional ownership on total deposits of Nigerian banks.

1.4 Research Questions

As a consequence of the objectives highlighted above, this study will attempt to provide answers to the followings:

To what extent do board ownership and institutional ownership affect total assets of Nigerian banks?
To what extent do board ownership and institutional ownership impact on return on assets of Nigerian banks?
To what extent do board ownership and institutional ownership affect total deposits of Nigerian banks?

1.5 Research Hypotheses

H_o1: Board ownership and institutional ownership of Nigerian banks do not have positive and significant effect on their total assets.

H_o2: Board ownership and institutional ownership of Nigerian banks do not have positive and significant impact on their return on assets.

H_O3: Board ownership and institutional ownership of Nigerian banks do not have positive and significant effect on their total deposits.

1.6 Scope of the Study

This study investigated the effects of ownership structure on the performance of Nigerian banks. The specific period considered is between 2004, when Central Bank of Nigeria (CBN) unveiled new banking guideline designed to consolidate and restructure the banking industry through mergers and acquisitions, to 2014. This period was chosen because the consolidation policy brought some measure of sanity into the industry and marked a new beginning in the annals of the banking system in Nigeria. The policy also made Nigerian banks to be more competitive and be able to play in the global market, (Soludo 2004). It not only downsized the number of banks from 89 to 24, and further, to 21, but also compelled banks to increase their capital base and imbibe other good corporate practices.

1.7 Significance of the Study

This study is of help to the government of Nigeria and policy makers as they seeks to create a conducive environment and design policies to strengthen and build confidence across all categories of investors to build an economy that is inclusive. One of the key drivers of growth in a developing economy like Nigeria is inclusion of both large and small scale investors in mobilizing the scarce resources. Through the findings of the study, the government of Nigeria is able to appreciate mobilization of resources across the divide by all categories of investors in support of economic development to achieve the vision 2020 either by reducing information asymmetry or increasing investors’ awareness campaign through trainings workshop and seminars.

The study findings can help organisations’ management and shareholders in evaluating the importance of contribution by different categories of investors on their financial performance in terms of reducing agency costs and bolstering the relationship between the principals and the agents. Further firm management will benefit from the study as they will acquire information that directly relates to their decision-making paradigm and be able to carry out their day-to-day operations.

Other companies in developing countries will learn from this Nigerian study and understand the diversity in ownership structure that they can replicate in their companies in order to improve their financial performance. The study findings inform them on which ownership structure have better link to financial performance and hence save on the costs of conducting cost benefit research in their companies.

To the scholars, the study is value-added to the existing body of knowledge as it recommends ways for improvement of financial performance by having inclusive investors who reduce agency costs and fosters empowering structures to all stakeholders in participating in decision making and stewardship of the companies’ resources in enhancing financial performance. Nevertheless, this study serves as a stepping stone for newer research on ownership structures and financial performance of listed firms

Model Specification

The study employed a multiple regression analysis model of Kahan (2001) equation:

Y_it = a + b₁X_1it + b₂X_2it + e_it Eq (1)

b₁and b₂ are the coefficients to the variables X_1it and X_2it respectively.

Lastly, e_it is the error term.

In line with the analysis above, this study adopted the modified version of the econometric model of Miyajima et al, (2003) as adopted by Coleman and Nicholas-Biekpe (2006) in the determination of the relationship between ownership and performance of banks in Nigeria and to test the hypotheses. The econometric model of Miyajima et al (2003) is therefore seen below in a modified form as:

Y_it = b_o + b₁G_it +b₂INS_it +b₃BO_it + S_t Eq. (2)

Where:

Y_it Represents firm performance variable which are: return on capital employed, earning per share; return on assets; and return on equity for banking firms at time, t.

Git is a vector of corporate governance variables which include Board Size (BDS), Board Composition (BDC), which is defined as the ratio of outside directors to total number of directors, a dummy variable (CEO) to capture if the board chairman is the same as the CEO or otherwise, CEO’s tenure of office (CET).

SZEt is the size of the firm.

BDTt is the debt structure of the firm.

St is the error term which accounts for other possible factors that could influence Yit that are not captured in the model.

The models for testing the hypotheses respectively are specified as follows:

For hypothesis 1: which states that board ownership and institutional ownership of Nigerian banks do not have positive and significant effect on their total assets, the relevant model was represented as:

TA_it = b_o +b₁BO_it + b₂IO_it+ B₃GO_it+ St_it Eq.3

Where:

BO_it = Board ownership structure of the Nigerian banks.

TA_it = Total Assets of the banks under study

IO_it = Institutional Ownership structure.

GO_it = Government Ownership structure.

Hypothesis 11 which states that board ownership and institutional ownership of Nigerian banks do not have positive and significant impact on their return on assets, the relevant model was represented as:

ROA_it = b_o +b₁BO_it + b₂IO_it+ B₃GO_it+ St_it

Where:

BO_it = Board ownership structure of Nigerian banks.

IO_it = Institutional Ownership structures.

GO_it = Government Ownership structure.

ROA _it = Return on Assets of the various banks

Hypothesis III. Which states that board ownership and institutional ownership of Nigerian banks do not have positive and significant effect on their total deposits, the relevant model was represented as:

TD_it = b_o +b₁BO_it + b₂IO_it+ B₃GO_it+ St_it

Where:

BO_it = Board ownership structure of Nigerian banks.

IO_it = Institutional Ownership structures.

GO_it = Government Ownership structure.

TD _it = Total deposits of various banks held by board members.

Operational Definition of Terms

Ownership Structure: An ownership structure concerns the internal organization of a business entity and the rights and duties of the individual holding the equitable or legal interest in that business. For instance, a shareholder who is also the owner of a corporation has certain rights.

Board Ownership: Board members are encouraged to own company shares on a long-term basis and most of them have substantial holdings, indicating a close alignment of directors’ interests with those of shareholders.

Total assets : Total assets refers to the sum of the book values of all assets owned by an individual, company, or organization. It is a parameter that is often used in net worth debt covenants. The value of a company’s total assets is obtained after accounting for depreciation.

Return on assets: The return on assets shows the percentage of how profitable a company’s assets are in generating revenue

Institutional ownership: Institutional ownership is the amount of a company’s available stock owned by mutual or pension funds, insurance companies, investment firms, private foundations, endowments or other large entities that manage funds on behalf of others.

Financial Performance : Financial performance is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues.

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