THE EFFECT OF CORPORATE GOVERNANCE MECHANISMS ON BANK FINANCIAL PERFORMANCE

ABSTRACT

This research work titled “The Corporate Governance Mechanisms and Bank  Financial Performance” The researcher examined the relationship between board structure and financial performance. Determined if effective corporate governance has positive effects on directors effectiveness. Ascertained the relationship between board effectiveness and financial performance of first bank plc Enugu. Data for the study was sourced from two main sources which include Primary and Secondary sources of data Collection. Primary data: questionnaires and oral interviews were used to collect information from the respondents. Secondary data: journals, and other relevant materials relating to the area of my investigation will be review. Extensive literature review was carried out on the direct literature and indirect literature on books, journals and past works. The research instrument used in this study includes oral interview and questionnaire. The questionnaire is structural as to contain both close and open ended question. Simple tables and percentages was used in treatment of data. Based on the analysis the researcher found out that there is a significant relationship between corporate governance and financial performance. Corporate governance has positive effect on financial performance of commercial banks in so many ways, based on the findings the researcher recommends that Supervisory and regulatory agencies should improve on supervision of organizations through improved use of their machinery and appropriate sanctions should be taken on erring board of any organization to serve as a deterrent on others.

CHAPTER ONE

1.0  INTRODUCTION

1.1  Background of the Study

The effect of corporate governance mechanisms is concerned with the intrinsic nature, purpose, integrity, and identity of the institution with a primary focus on the entity’s irrelevance, continuity and judiciary aspects. It means that the governance involves monitoring and overseeing strategic direction, socio economic and cultural context, externalities and constituencies of the institution.

Effect of corporate governance mechanisms also includes the relationship among the stakeholders involved in the goal for which the corporation is governed.         Bank financial performance on the other hand, is the presentation of the summarized result of operation of an organization, this summarized result has helped to know the improvement of many banks in Enugu metropolis and also helps in relation of the financial aspect of corporate existence in Enugu metropolis.

Sound corporate governance has becomes imperative for bank stability because it improve the performance of monetary polices in metropolis, especially in commercial banks of the metropolis which render retail-banking services and also provides current account that allow the use of cheques to the metropolis. Government in order to maintain macroeconomic stability, provide regulatory agencies that surprise and regulate some organization through the corporate affairs commission and other regulatory agencies like Central bank of Nigeria, securities and Exchange commission, Nigerian Deposit Insurance Commission, etc, but some of these regulatory agenesis have failed to carryout their responsibilities effectively.

There has been greater demand for transparency requiring more requiring more reliable and accountable financial reporting that would ensure adequate protection of corporate stakeholders. This because it was generally believed that the financial scandals in which people lost billions of dollars were caused by distortion in the corporate governance structure and financial performance of the affected organization operations leading to inefficient financial decision making. The fundamental concern of corporate governance mechanisms is to ensure the conditions whereby organizations directors act in the interest of there shareholders and to ensure that managers are held accountable to capital provides for use of assets. Therefore, it becomes a crucial element and necessary for the corporate governance system to function effectively (Wikipedia, free encydopedia 2006).

1.2 Statement of the Problems

Effect on corporate governance is crucial for stability of corporate organization and markets that make up the economy. Corporate governance mechanisms is sustained by full disclosures, check and balances. Full disclosure by organizations also builds and sustains confidence in investors, shareholders, customers and regulators. So where there are corrupt and self-interest directors, managers and international auditors, financial performance position of an organization at any given point in time.

Laxity of supervisor and regulatory agencies (CBN, SEC, NSE, NDIC, and CAC) on ensuring that corporate governance principles are adhered to in financial performance, also contribute to problems of poor financial performance and governance practice in organization. Many organization have corporate governance code and principle and sill fail to practice them. In some organizations, the overbearing attitude of organization CEO negatively affects organizations performance as they dictate what happens in the organization.

1.3 Objectives of the Study

The objective of this research will be to study the corporate Governance mechanisms on financial performance.

Other specific objectives will be to;

·        To study the relationship between board structure and financial performance.

·        Determine if effective corporate governance has positive effects on directors effectiveness.

·        To ascertain the relationship between board effectiveness and financial performance of first bank plc Enugu.

1.4 Research Questions

To carry out this study, the researcher raised following research questions

·        What is the relationship between board structure and financial performance in the bank?

·        Does effective corporate governance have positive effect on the directors effectiveness?

·        What is the relationship between directors effectiveness and financial performance in the first bank plc Enugu?

1.5  Research Hypothesis

Hypothesis is an intelligent guess about the solution to a problem whose validity is to be established. The researcher therefore formulated the following hypothesis for the study.

Hypothesis one

H0: There is no relationship between board structure and financial performance of the first bank.

H1: There is significant relationship between board structure and financial performance of the first bank.

Hypothesis two

H0: Effective corporate governance does not have positive effect on the director’s effectiveness.

H1: Effective corporate governance has positive effect on the director’s effectiveness.

Hypothesis three

H0: There is no significant relationship between director’s effectiveness and financial performance in the first bank plc.

H1: There is significant relationship between director’s effectiveness and financial performance in the first bank plc.

1.6      Significance of the Study

It is expected that the findings of this study will give an insight on the importance or otherwise on the effect of corporate governance mechanisms and financial performance. The finding of this study will benefit the following:

1.  It will be beneficial to banks and management as it will broaden their knowledge on the role of effective corporate governance mechanisms on bank financial performance and to help them in performing better in their bank.

2.  Government and policy makers will benefit from this research as it will enable them bridge the gap in formulating legislations and investors by ensuring that the effective corporate governance practices are to embrace and sustained.

3.  Regulatory bodies will benefit from this study as it will enable them to carry out their oversight functions more effectively and efficiently, if they adopt suggestions made by the researchers.

4.  Individual and institutional investors will also benefit from this research work as they will be better informed and enlightened on the expectations of the management and the board of director’s will know what to expect from the financial performance they receive on yearly basis.

5.  Finally, the research will serve as literature for further studies by individuals and gaps interest in the effective corporate governance mechanisms and financial performance issues.

1.7     Scope of the Study

A good research needs to be delimited to a manageable scope. Delimitation of research refers to the definition of the scope (extent or boundary) covered by the research.

Therefore, the scope of the study is the effect of corporate governance mechanisms on bank financial performance. The scope of the study is limited to first bank plc Enugu.

1.8     Limitations of the Study

The major factor of the limitations of study is time and scarcity of material on this topic. The researcher found it difficult to cope with time factor and financial aspect of it as there is little that has been written on this topic.

Nevertheless, the researcher was able to collect all basic necessary facts to ensure objectivity in the result of the project.