CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

It is widely accepted that ownership structure is an important element of firm performance. For this reason, researchers have studied the effect of ownership on performance for several decades, first in developed economies and more recently in emerging markets, and ownership structure is generally viewed as a major influence on a firm's health. Banks hold a central position in the economy of every country, in developed and developing economies alike, so their performance inevitably affects the wider economy. Restrictions on the banking sector are more common than in other industries, and these restrictions are motivated by several considerations, among them conflicts of interest, the concentration of economic power and the stability of the financial system. As a result, financial authorities commonly set a ceiling on the equity any single party may hold, or require regulatory approval once holdings pass certain levels. Where ownership is separated from control, problems of aligning incentives emerge, and few studies have examined ownership structure and corporate governance in Nigerian banks (Yahaya & Lawal, 2018).

A fit and proper test is also applied to the owners and managers of banks, taking account of their reputation and experience. Other prudential rules were designed to meet social or political objectives, such as policy-directed lending to agriculture or to small and medium-scale enterprises, although such rules tend to weaken competition. The regulation is justified by the opacity of banking and the strong incentives for market misconduct that this creates. When banking first developed in Nigeria, both bank owners and customers were mostly foreigners. This imbalance was largely responsible for the difficulty indigenous Nigerian businesses had in obtaining bank credit. To remedy it and to meet the financial needs of Nigerian-owned businesses, some indigenous banks began operating in the late 1920s. Because those banks were weak in capitalisation, ownership and management, and because no government agency regulated them at all, they could not survive the intense competition from the foreign banks. It is therefore unsurprising that by 1954 a total of 21 out of 25 indigenous banks had failed and gone into self-liquidation. Historical records confirm that no banking legislation existed in Nigeria until 1952, when the first Banking Ordinance set standards, required reserve funds, introduced bank examination and provided assistance to indigenous banks (Federal Research Division, Library of Congress, n.d.).

Afterwards, the Nigerian banking industry came to include banks with different ownership structures. These differed in composition (foreign banks, indigenous banks, government or state banks and private banks) and in spread (quoted banks and non-quoted banks). The ownership structure and composition of Nigerian banks have been contested, as both have changed continually. The introduction of free, unrestricted equity holdings, however, led to serious abuses in bank management by individuals, family members and governments.

Over time, Nigerian banks have been troubled by the character of their ownership. Government-owned banks suffered frequent changes of board members, usually tied to changes in federal and state governments. Appointments to those boards were made on political patronage and not on merit. Board members saw themselves as representatives of political parties, states or local governments and had little or no loyalty to the banks. Political and social considerations therefore pervaded decision-making. This encouraged indiscipline in such banks, since sanctions and postings became highly subjective. Privately owned banks, for their part, were afflicted by undue interference and pervasive influence from dominant shareholders, who were unable to recruit or keep competent management teams. It has also been argued that owner-managers appointed relatives or friends to key positions instead of professional managers, in order to extend their business empires. Even where regulators declined to approve such appointments, the persons concerned were sometimes kept in post in an acting capacity or under other titles such as Chief Operating Officer. Many privately owned banks were also marked by repeated shareholder disputes and boardroom quarrels.

To avert such problems and encourage a private-sector-led economy, the Central Bank of Nigeria (CBN) directed that the combined holdings of individuals and corporate bodies in banks should exceed those of governments. It also recognised and encouraged individuals who manage banks in which they also hold equity, on the view that they would have a compelling business interest in running them well. The code further directed that government direct and indirect holdings in any bank be limited to 10 per cent by the end of 2007, and that equity holdings above 10 per cent by any investor required prior CBN approval.

In Nigeria, until 1973, banks were classified in three groups by ownership: expatriate banks, indigenous banks and mixed banks. Expatriate or foreign banks were those wholly owned by foreign investors. Indigenous banks were wholly owned by Nigerian citizens or governments. Mixed banks were owned partly by foreign investors and partly by Nigerians. The first banks to operate in Nigeria were the expatriate banks. After the indigenisation decree of 1973, however, expatriate banks in their original form ceased to exist, because the decree stipulated that no company operating in Nigeria could be 100 per cent foreign-owned. In line with the decree, the Federal Government of Nigeria acquired some equity in the expatriate banks. Nigerian banks have since been either indigenously owned or of mixed ownership, with Nigerians holding at least 60 per cent. The federal government's equity acquisition in the largest foreign banks and the later 60 per cent indigenous-ownership requirement under the Nigerian Enterprises Promotion Decree are documented in the standard country histories (Federal Research Division, Library of Congress, n.d.).

Government participation in banking goes back to 1952, when two regional governments rescued three indigenous banks that were on the verge of closing. The Western Regional Government rescued Agbonmagbe Bank (now Wema Bank) and National Bank, while the Eastern Regional Government rescued African Continental Bank. This was the beginning of government participation in banking and of government ownership of banks in Nigeria. Federal government involvement began in 1974, when it acquired 40 per cent of the shares of the three big expatriate banks, namely United Bank for Africa, Barclays Bank of Nigeria and First Bank of Nigeria. Its shareholding in these banks was later raised to 60 per cent in 1976.

To meet the minimum paid-up capital deadline of N25 billion set for banks under the Banks and Other Financial Institutions Decree (BOFID) of 1991, many Nigerian banks became publicly quoted on the Nigerian Stock Exchange. Most governments have also given up all or part of their shares in banks. As a result, Nigerian banks can now be classified as quoted or non-quoted, according to whether they are listed on the Nigerian Stock Exchange. The CBN's current position is that foreign banks and investors may establish banking business in Nigeria provided that they meet the N25 billion capital requirement and the other regulatory conditions for a banking licence.

The CBN's rules also allow foreign individual or institutional investors to invest in existing Nigerian banks, provided that no single foreign investor acquires a larger share than any single Nigerian individual or institutional investor in the same bank. Foreign investors who wish to acquire or merge with a local bank are free to do so provided that their aggregate shareholding does not exceed 10 per cent of the bank's total capital. A foreign bank of this kind must also have operated in Nigeria for at least five years and have established branches in at least two-thirds of the states of Nigeria, excluding state capitals. The rules additionally require that the shareholding of such a bank or investor arising from a merger or acquisition should not exceed 40 per cent of the total capital of the resulting entity, although existing Nigerian banks with foreign interests above 10 per cent may continue with them, provided they do not exceed their current level.

An essential feature of a corporation is the separation of ownership from management. Shareholders, as owners, delegate decision-making rights to managers to act on their behalf, but this separation implies a loss of effective shareholder control over managerial decisions. Berle and Means argued that the separation of ownership from control in modern corporations reduces managers' incentive and appetite to maximise corporate profit. Their ideas were later developed into the theory of corporate ownership structure that guides ownership-performance studies, associated with Jensen and Meckling. The primary objective of corporate governance is therefore to align the incentives of managers with those of stakeholders. Ownership structure is an essential instrument for corporate performance because it aims to resolve the conflict of interest between shareholders and managers. It checks the tendency of senior managers in particular to act selfishly, and it ensures that delegated decision-making powers are not abused to the detriment of shareholders and other stakeholders. Agency theory, as reviewed for Nigerian banks, holds that managers create agency costs for the firm when they do not work to maximise shareholders' wealth (Asogwa, 2016).

Nigeria has not escaped corporate failures, which have affected both public and private corporations. The main reason for their failure was the non-observance of effective corporate governance mechanisms. This was linked to the privatisation of some Nigerian companies that were beset by corruption and mismanagement, such as African Petroleum Plc, Nigerian Security Printing and Minting Company (NSPMC), the Nigerian Telecommunications Company (NITEL), Capital Hotels Plc (Abuja Sheraton), Nicon Hilton Hotel and Nigerdock Nigeria Plc. Among private companies, corporate abuses led to the collapse of quoted companies such as Unilever, Savannah Bank, Benue Cement and Allied Bank, among others. Banks in Nigeria have moved from foreign ownership at their start in the 1920s to corporate ownership. This is consistent with developments in other financial systems in this millennium, where corporate ownership has become the norm.

Banks and other financial intermediaries have been at the centre of recent world financial crises. The deterioration of their asset portfolios, caused largely by distorted credit management, was at the root of the structural sources of those crises.

It has been observed that the agency problem dominates corporate governance research. The classic statement of the problem, from Adam Smith's Wealth of Nations, is that the directors of joint-stock companies manage other people's money rather than their own, so they cannot be expected to watch over it with the same anxious vigilance that partners in a private partnership apply to their own. Like the stewards of a rich man, they are inclined to treat attention to small matters as beneath their master's honour and readily excuse themselves from it. Negligence and extravagance, he concluded, must therefore always prevail to some degree in the management of such a company.

From the standpoint of the banking industry, the importance of a vibrant, transparent and healthy banking system cannot be overlooked. The banking sector plays a major intermediation role in the economy by mobilising savings from surplus units and channelling them to deficit units, particularly private enterprises that want to expand their productive capacity (Abubakar et al., 2025). It has been argued that better-governed banks operate more efficiently and with less streamlined waste, reduce related-party transactions and other self-dealing, and may enjoy a lower cost of capital, and so perform better. The level at which the financial sector functions also depends on how citizens perceive it and how far they patronise it. In Nigeria, the banking environment has been struggling for breath and survival since the 1980s and 1990s, and even in this new millennium the spectre of financial distress still hangs over the financial services sector.

Banks also play important roles in international financial and foreign exchange markets, and they promote the monetary and financial stability of the economy as a whole. No national economy can succeed without banks that are under control. Good and effective management of banks in Nigeria is therefore very important for the business of banks and for their customers. Poor banking practice, by contrast, can cause markets to lose confidence in a bank's ability to manage its assets and liabilities, including deposits, and can trigger a bank run or a liquidity crisis. Public confidence matters in every business but is more pronounced in banking; confidence and sound practice are the pillars on which banking rests. If the public loses trust in financial institutions, the consequences for the economy can be severe, since bank equities alone make up over 60 per cent of the Nigerian capital market. Government therefore cannot allow banking institutions to falter. If depositors and the public lose confidence in a bank's ability to meet its obligations for any reason, that bank is heading for ruin, and the result is bank distress and, eventually, failure, with all its negative effects. For this reason, besides the laws governing business activity generally, such as the Companies and Allied Matters Act of 1999 as amended, which also applies to banks, all aspects of banking operations are highly regulated and closely monitored under various laws and guidelines. Banking institutions also deserve separate attention for several other reasons:

First, banks are very vulnerable to shocks because of their highly leveraged balance sheets and, more recently, financial deregulation and liberalisation. Risk management and internal control are therefore more important in banking than in many other sectors.

Second, governments usually provide safety nets to banks and regulate them heavily because of their importance and the externalities associated with bank failure. This practice reduces the incentive for creditors to monitor banks. It is also questionable whether banks should pursue only the interests of shareholders, since taxpayers, governments, the banking community and other stakeholders have a large stake in banks.

Third, information asymmetry is much more pronounced and serious in banking than in non-financial industries, largely because typical financial contracts involve a promise to pay in future and financial products are increasingly complex. This calls for higher standards of governance, including disclosure and transparency.

Finally, banks can play an important monitoring role over their corporate clients, protecting their credit against corporate financial distress or bankruptcy. This role cannot be properly performed without sound governance of banks that ensures managers control risks and pursue profit. Good corporate practice is therefore essential to achieving and maintaining public trust and confidence in the banking system. The banking industry is also special in terms of regulation, because experience shows that failure in this industry has external consequences.

The nature of banking business also aggravates the agency problem, because the stakeholders in banking are very diverse and their interests conflict. Depositors are concerned with the safety of their deposits, while shareholders are interested in high-risk investment exposures that can maximise their expected returns. Managers' chief interests lie in their compensation packages and in concentrating power. Agency theory and stakeholder theory therefore guide this study, because they are relevant to the conflict between management and owners and to the interests of every stakeholder in a corporation (Asogwa, 2016).

Concern to safeguard the viability of the deposit-taking industry also arises because financial failure has significant external effects that reach beyond the depositors and stakeholders of the failed firm. Deposit-taking institutions are the main conduit for both the payment process and the savings-investment process. A strong corporate standard is particularly important for banks because most of the funds banks use belong to their creditors and depositors. The failure of a bank affects not only its shareholders but also other banks, through systemic effects. Banks also tend to have little equity relative to other firms, since they typically obtain about 90 per cent or more of their funding from debt. Bank liabilities are largely deposits that are available on demand to their creditors, while their assets often take the form of loans with longer maturities, although increasingly refined secondary markets have to some extent eased the mismatch between the terms of bank assets and liabilities. By holding illiquid assets and issuing liquid liabilities, banks create liquidity for the economy. This liquidity creation can cause a collective-action problem among depositors, because banks keep only a fraction of deposits in reserve and so cannot repay all depositors at once. The mismatch becomes a problem in the unusual event of a bank run. If, for any reason, large and unexpected withdrawals begin at a bank, individual depositors may rationally conclude that they must withdraw too, to avoid being left with nothing.

It is therefore important to ensure that banks operate properly. A critical point is that failures can occur even in solvent banks. Good bank management practices could therefore reduce these damaging consequences. It is generally believed that good and efficient corporate practice improves a firm's performance. Research on ownership and its influence on firms in developing countries remains scarce, and few studies have covered ownership structure and corporate governance in Nigeria (Yahaya & Lawal, 2018).

1.2 Statement of the Research Problem

Banks and other financial intermediaries have been at the centre of the world's recent financial crises. The deterioration of their asset portfolios, largely because of poor credit management, is one of the structural or fundamental causes of those crises. To a large extent, this problem is arguably linked to poor and inconsistent regulatory policy on bank ownership. Weak corporate governance and the erosion of confidence in banks are largely blamed on the lack of clarity in the definition of ownership. Not long ago, news broke of the removal of the top management of Skye Bank Nigeria Plc. The development sent shock waves through the banking sector, and anxieties have grown since then despite repeated assurances from the CBN that the bank and the banking sector in general are healthy. There was also an incident in 2009 when the CBN had to rescue eight Nigerian banks through liquidity injection to restore confidence in the banking system, a problem it traced to extreme weakness in corporate governance practices among banks. Poor corporate governance has been identified as the principal factor behind past failures in the Nigerian banking system (Asogwa, 2016).

No economic system can survive without a healthy and vibrant banking system. Regulatory authorities, mindful of this, regulate proactively on matters that could affect the integrity of banks. In Nigeria, bank equities alone make up about 60 per cent of the shares traded in the capital market, so if banks were to become distressed, an economy already in recession could hardly recover.

As at 2005, there were 89 active banks, and their overall performance had eroded confidence in the industry. Distress lingered because supervisory structures were inadequate and managers and directors of banks acted with official recklessness. The industry was notorious for unethical practices and all forms of abuse. Even after the consolidation exercise between 2004 and 2009, banks were still part of largely family-controlled business groups and were used as tools for maximising family interests instead of the interests of all shareholders. In other cases where private ownership concentration was not allowed, banks were heavily interfered with and controlled by government, even though government held no ownership shares.

Nigeria is no exception to the crisis affecting the banking sector, given that the industry has struggled for survival since the 1980s and 1990s, and that even after the recent consolidations banking distress does not seem to have abated. This became more evident with the recent introduction of the Treasury Single Account (TSA), under which government withdrew public sector deposits from banks in one stroke and stopped over-the-counter payments of foreign currency into domiciliary accounts. The consequences for banks and for the economy have been numerous: banks have been caught in the web of downsizing their workforces, and the economy has been faltering in poor financial performance in which it is virtually impossible to pay workers' salaries and pension benefits, among other obligations.

The effects of ownership structure on bank performance have been the subject of intense theoretical and empirical debate worldwide. The theoretical analyses that contain much of the existing knowledge on bank performance by ownership structure have been subjected to serious scrutiny. Arguments that suggest agency theory and stakeholder theory can be used to explain how ownership structure affects bank performance were also reviewed. It has been argued that better-governed banks may reduce the incidence and amount of related-party transactions and other self-serving practices.

There are therefore clear gaps in the literature, in terms of both methodology and geography. One gap is that the ownership structures studied were mostly those of firms in general, not banks. Another is that the few studies that did examine banks looked at only one form of ownership structure, using one or two performance indicators. In addition, those studies were carried out in foreign, developed countries and not in developing ones. Multiple regression methods were also what previous studies employed. Recent Nigerian evidence suggests that the findings remain unsettled: for example, Yahaya and Lawal (2018), studying 15 listed banks for 2008 to 2016, found that only institutional ownership had a positive and significant effect on financial performance, while the other ownership variables had insignificant effects, and a study of Turkish banks found that ownership structure influences financial performance (Kevser & Elitaş, 2019).

The Nigerian economy can still be said to have banks with different ownership structures to varying degrees (foreign banks, indigenous banks, government or state banks and private banks). This calls into question the ownership structure and bank performance relationship as studied in other economic settings. This work is therefore an inquiry into the degree to which ownership structure can enhance or impede the performance of banks, with Nigeria as the case study.

1.3 Objectives of the Study

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

1. to investigate the effects of board ownership and institutional ownership on the total assets of Nigerian banks;
2. to evaluate the impact of board ownership and institutional ownership on the return on assets of Nigerian banks; and
3. to ascertain the effects of board ownership and institutional ownership on the total deposits of Nigerian banks.

1.4 Research Questions

In line with the objectives above, this study attempts to answer the following questions:

1. To what extent do board ownership and institutional ownership affect the total assets of Nigerian banks?
2. To what extent do board ownership and institutional ownership affect the return on assets of Nigerian banks?
3. To what extent do board ownership and institutional ownership affect the total deposits of Nigerian banks?

1.5 Research Hypotheses

1. H01: Board ownership and institutional ownership of Nigerian banks do not have a positive and significant effect on their total assets.
2. H02: Board ownership and institutional ownership of Nigerian banks do not have a positive and significant effect on their return on assets.
3. H03: Board ownership and institutional ownership of Nigerian banks do not have a 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 period considered runs from 2004, when the Central Bank of Nigeria (CBN) announced new banking guidelines intended to consolidate and restructure the banking industry through mergers and acquisitions, to 2014. This period was chosen because the consolidation policy brought a measure of order to the industry and marked a new beginning in the history of the Nigerian banking system. The policy also made Nigerian banks more competitive and better able to compete in the global market. It not only reduced the number of banks from 89 to 24, and later to 21, but also compelled banks to raise their capital base and adopt other good corporate practices.

1.7 Significance of the Study

This study is significant to the following groups.

1. Central Bank of Nigeria (CBN). The Committee on Banking Supervision (2001) traced the history of financial distress in the Nigerian banking system to the 1930s, when about 21 bank failures were recorded out of the 25 banks then in existence, before the CBN was established in 1958. One of the reasons given for the failures was the absence of regulation.

Another financial crisis in Nigeria began in 1989 with the identification of seven distressed banks. It worsened gradually until 1993, when it led to the collapse of the inter-bank market and spread to all segments of the financial system. It was also blamed on the CBN for the lack of a comprehensive regulatory framework for distress management.

In 2009 the CBN again had to rescue eight Nigerian banks through liquidity injection to restore confidence in the banking system, a problem it traced to extreme weakness in corporate practice. It has also been stated that while the state of the Nigerian banking system could be judged satisfactory, the condition of some of the banks was less encouraging, a problem attributed to, among other things, a lack of vigilant oversight. In view of these factors, the study re-emphasises the importance of the oversight function of regulators.

2. Board of Directors. The boards of banks are statutorily empowered to oversee bank activities, but where a board hands this important oversight function over to management, the result is bank distress and failure. For example, the boards of directors of banks were recently criticised for the decline in shareholders' wealth. They were also said to have been in the spotlight for fraud cases that led to the failure of major corporations. The widely publicised cases of accounting impropriety recorded in the Nigerian banking industry in 2009 were linked to a lack of vigilant oversight by boards, to boards surrendering control to corporate managers who pursued their own self-interest, and to boards failing in their accountability to stakeholders. In light of all this, bank boards will find this information useful for benchmarking the performance of their banks against their peers.

3. Shareholders. Shareholders are, by law, the owners of a firm and expect a return on their investment. Where the expected returns are not forthcoming because the activities of boards and managements result in poor performance and, ultimately, failure, the whole edifice collapses, because the owners' entire investment is eroded. It has been argued that, in order to achieve the shareholders' objective, the relationship between the board and management should be characterised by transparency to shareholders and fairness to other stakeholders. To avoid the unfortunate consequence of bank failure, this study examines in depth three forms of bank ownership structure, with specific emphasis on performance.

4. Researchers. The impact of ownership structure on bank performance has become highly significant in the corporate world today, given the rate at which banks and other multinational companies have closed down, never to reopen, as a result of their actions and inactions. These were organisations described as "world class" and assumed to act in line with acceptable ethical standards. To avoid a repeat of this unfortunate outcome, the study chose to examine two ownership structures, board ownership and institutional ownership, instead of one. The hypotheses were paired according to the independent variables of interest. This pairing allowed a comparative survey and report of the impact of ownership structure on the performance indicators of total assets, total deposits and return on assets of Nigerian banks. The work will help researchers in their areas of interest to draw inferences and so add to the body of knowledge.

REFERENCES

Abubakar, N., Hamza, H. D., & Ibrahim, U. Y. (2025). Effect of credit risk management on financial performance of listed deposit money banks in Nigeria. Kashere Journal of Management Sciences, 8(2), 82–95.

Asogwa, I. E. (2016). Corporate governance in Nigerian banks: A theoretical review. International Journal of Management Science and Business Administration, 2(7), 7–15. https://researchleap.com/corporate-governance-nigerian-banks-theoretical-review/

Federal Research Division, Library of Congress. (n.d.). Nigeria: Banking and finance [Country study]. https://countrystudies.us/nigeria/66.htm

Kevser, M., & Elitaş, B. L. (2019). The relationship between the ownership structure of banks and their financial performance: Empirical research for Turkey. Economic Horizons, 21(2).

Yahaya, K. A., & Lawal, R. Y. (2018). Effect of ownership structure on financial performance of deposit money banks in Nigeria. The Journal of Accounting and Management, 8(2). https://journals.univ-danubius.ro/index.php/jam/article/view/4593