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EFFECTS OF OWNERSHIP STRUCTURE ON PERFORMANCE OF NIGERIAN BANKS, 2004 – 2014
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.
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.
- Statement of the Research Problem
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).
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.
As at 2005, there were 89 active banks whose overall performance led to the sagging of confidence in the industry. There was lingering distress in the industry as the supervisory structures were inadequate and there is official recklessness amongst the managers and directors of banks. The industry was notorious for unethical practices and all forms of abuses. After consolidations between 2004 and 2009, banks were still part of largely family-controlled business groups and were used as tools for maximizing family interests rather than the interests of all share holders. In other cases where private ownership concentration was not allowed, the banks were heavily interfered with, and controlled by the government, evidently without any ownership shares, (Williamson, 1970; Zahra, 1976; and Yeung, 2000).
Understandably, Nigeria is no exception in the crisis plaguing the banking sector given that banking industry has been struggling for survival since 80s and 90s and even after the recent consolidations, the banking distress seems not to be abetted. This is more evident with the recent introduction of the Treasury Single Account (TSA) where government made one-fell-swoop withdrawal of public sector deposits and stoppage of over the counter payments of foreign currencies into domiciliary accounts. The consequence of these actions to the banks and the economy are too numerous as the banks are caught in the web of downsizing their workforce and the economy wobbling in poor financial performance in which it is virtually impossible to pay workers salaries and pension benefits among others.
Arguments on the effects of ownership structure on the performance of banks globally have been a subject of intense theoretical and empirical discourse. Theoretical analyses that contain some of the existing knowledge on the performance of banks based on their ownership structure constitute subjects of serious scrutiny. Some lines of arguments which suggest that agency and stakeholders theories can be used to explain the impacts of ownership structure on the performance of banks were also reviewed. Love and Rachinsky (2006) posited that better governed banks may reduce the incidences and amount of related party transactions and other self-related practices.
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.
The Nigerian economy can arguably be said to still have banks with different ownership structures in varying degrees (foreign banks, indigenous banks, government/state banks and private banks). This calls to question the ownership structure/bank performance nexus as have been studied in different economic climes. Pointedly, this work is an inquisition on the degree to which ownership structure can either enhance or impede the performance of banks with Nigeria as a case study.
1.3 Objectives of the Study
The main objective of this enquiry is to evaluate the effects ownership structure has on the 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
Ho1: Board ownership and institutional ownership of Nigerian banks do not have positive and significant effect on their total assets.
Ho2: Board ownership and institutional ownership of Nigerian banks do not have positive and significant impact on their return on assets.
HO3: 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 significance to the following groups. There are:
- Central Bank of Nigeria (CBN)
The committee on Banking Supervision (2001) traced the history of financial distress in the Nigerian banking system back to the 1930s, when about 21 bank failures were recorded out of the 25 banks that were in existence, prior to the establishment of the Central Bank of Nigeria (CBN) in 1958. One of the reasons attributed to the failure was the absence of regulation.
Another financial crisis in Nigeria, which started in 1989 with the identification of seven distressed banks, worsened gradually until 1993 when it led to the collapse of the inter-bank market and spread to all segments of the financial system, was also blamed on the CBN for the absence of a comprehensive regulatory framework for distress management.
Again in 2009, 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 practice (Anumihe, 2012). Soludo (2004), stated that “while the state of Nigerian banking system can be adjudged satisfactory, the state of some of the banks were less cheering. A problem he traced to lack of vigilant oversight function among others.
As a consequence of the above factors, this study re-emphasized the importance of oversight function by the regulators.
- Board of Directors
Boards of banks are statutorily empowered to oversee the activities of banks. But where board relinquishes this important oversight functions on the management, the resultant effect is bank distress and failure.
For example, the boards of directors of banks were recently criticized for the decline in shareholders wealth. They were also said to have been in the spotlight for the fraud cases that have resulted in the failure of major corporations (Sanusi, 2010). The series of widely publicized cases of accounting improprieties recorded in the Nigerian banking industries in 2009 were related to lack of vigilant oversight functions by the boards, the boards relinquishing control to corporate managers who pursue their own self-interests and the board being remiss in its accountability to stakeholders (Uadiala, 2010). It is in the light of all these that the board of banks shall find this information of value in bench marking the performance of their banks against their peers.
- Shareholders
Share holders are statutorily the owners of a firm who expect a return on their investment. But where this much expected returns were not forth coming as a result of the activities of boards and managements that resulted in poor bank performance and its ultimate failure, the whole edifice will collapse, as the entire investments on the owners become eroded. Al- Faki, (2006), posited that to achieve the objective of the shareholders, the relationship between board and management should be characterized by transparency to shareholders and fairness to other stakeholders. It is to avoid this ugly consequence of bank failure that this study extensively covered three forms of ownership structure of banks with specific emphasis on performance.
- The Researchers:
The impact of ownership structure on bank performance has shown strong significance in the corporate world these days, given the rate at which banks and other multinational companies have closed doors and never to re-open them as a result of their actions and in-actions. These are organizations that were termed “world class” and assumed to act in line with acceptable ethical standards. It is in order to avoid the repeat of this ugly consequence that this study, chose to examine two ownership structures, board ownership and institutional ownership instead of one. The hypotheses were uniquely paired according to the independent variables of interest. Essentially, the pairing gave room for a comparative survey and reporting of the impact ownership structure has on the performance indicators of total assets, total deposits, and return on assets of Nigerian banks. This work will help researchers in their areas of interest to draw inference and therefore add to the body of knowledge.