Doctoral Colloquium

AFRAD001

Doctoral Colloquium

Risk Parameters and Profitability of Listed Deposit Money Banks in Nigeria: The Moderating Effect of Managerial Ownership

By

Musa Muhammad Bello

INTRODUCTION

Background to the Study

The collapse of large financial institutions during the global financial crises between 2007 and 2008 made governments even in the wealthiest nations to come up with strategies in order to rescue their financial system. A lot of financial institutions have collapsed or at verge of collapse due to badly function loan lending to firms and people with bad and unreliable credit reputation. (Olalekan et al. 2018). Therefore, global financial crisis became one of the major area in the aftermath of financial risk among financial intermediaries, also financial risk dwells on the continuous financial position of an enterprise. Any kind of predisposition to activities that could result to possible loss of funds by the business is a financial risk (Njogo, 2012). In addition, Stephen and Akele, (2014) stated that banking crises in Nigeria have shown that not only do banks often take excessive risks, but the risk differ among banks.

Similarly, Yimka et al. (2015) stated that variety of risks which financial institutions especially banks are exposed to include; market risk, liquidity risk, operational risk, credit risk interest rate risk, foreign exchange risk and political risk. Though, the Nigerian banking sector has been undergoing continuous reform process since 1999 directed at improving the capacity and health of the Nigeria banks. The first major exercise was the assessment of the risk asset quality of banks which led to the removal of eight CEOs and the injection of N600 billion into the banks in 2010 (Oluwafemi et al. 2013).

Moreover, Profitability represents quantifying the outcome of a business entire polices and operations in terms of money. In order to gauge firms profitability diverse alternatives key financial ratios can be employed for example, earnings per share, net profit ratio, gross profit ratio, return on equity, assets, and capital employed etc. (Bagh et al. 2016). Profitability is an important construct used by several scholars as a yard stick for measuring firm attributes. Hassan and Farouk (2014) use profitability as a proportion of profit after tax to total asset of a firm. Profitability is considered as earnings per share (EPS) of a firm. Mohamad et al. (2014) use return on asset (ROA) and return on equity (ROE) as proxies of firm’s profitability. Similarly,

Hashem et al. (2012) use profitability as a return on assets of a company.

The main focus of corporate governance literature is the separation of ownership and control and the conflict of interests between the managers (agents) and the owners (principals) (Jensen and Meckling, 1976). However, this is narrow as it focuses on the classic agency conflict between managers and shareholders, but ignores the potential conflicts of interest among other parties (Cornet et al., 2007). Edward and Nibler (1999), stated that delegating the responsibility of monitoring management to the board of directors may lead to another agency conflict between the board of directors and shareholders. Therefore, the board of directors may shun effective monitoring because they rely on managers or because they do not have reason to put much effort in monitoring managers.

Managerial ownership is a proportion of the executive directors’ ownership of shares to the total number of shares issued excluding chief executive director ownership (Bekiris, 2013).

Deposit money banks are engaged in the business of providing financial capital to the business community as well as individuals. This they do with the expectation of achieving targeted rate of returns as a result of credit granted to customer over a period of time. They are

considered as the backbone of economic development because of financial services provided by them. It should be noted that any extension of credit carries with it the risk of non-payment, under the terms of the financial relationship between the bank and the individual or corporate body.

It is on the basis of the above, that this study is set out to examine the moderating effect of risk management committee on the correlation between risk management and profitability of listed deposit money banks in Nigeria.

Statement   of   the   Research   Problem

The crises in the Nigerian banking sector have shown that not only do banks frequently take unnecessary risks, this risk differ from one bank to another. Some banks involve themselves in more risky activities than their capital could bear. Other banks are more prudent and would be able to contain a banking crisis. The Central Bank of Nigeria (CBN) on July, 2004, in a way to stem the tide introduced some measures to make the whole banking system a safe, sound and stable environment that could sustain public confidence. As part of the measures, the CBN further announced a 13-point agenda to stabilize the base of the banking industry. The key elements in the agenda included the          compulsory          recapitalization

requirement     of     N25     billion     for  a

commercial bank operating in the country (this requirement, it stressed, must be complied with by December 31, 2005). The main reason of the reform policy was to consolidate the banking institutions through mergers and acquisitions.

Most of the distress in the Nigerian banking industry was as a result of bad loans and advances. The Nigeria Deposit Insurance Corporation assessed bad loans and advances with a contribution of 19.5%. Despite the fact that there are guide-lines on credit policies, some banks still fail to adhere when granting loans. This might be the reason for this problem. For example, Section 18(1b) of the Banks and Other Financial Institution Act (BOFIA) of 1991, as amended, forbids a bank from granting any advance, loan or credit facility to any person, unless it is authorized in accordance with the rules and regulations of the banks. It can be deduced from this problem that despite the fact that deposit money banks have laid down rules on how credit can be granted to customers, some of the banks still went into liquidation due to risk. This might be due to lack of effective corporate governance mechanism to checkmate the problem.

Therefore, introduction of Managerial ownership as a corporate governance mechanism will help reduce the agency conflict between the corporate managers

and the equity shareholder. This is because when corporate managers own certain proportion of a company’s shares the interest of the shareholders and the managers are aligned and the conflict between them decline (Jensen and Meckling, 1976). When there is alignment of interest between the managers and shareholders, there will be good working relationship between them. This will assist them in how best to go about the issues regarding risk. Therefore, with a higher proportion of shares in the hands of managers, they will work harder to improve the firm performance, which will increase the value of the firm and consequently the managers’ wealth.

Previous studies conducted to investigate the issues of risk and profitability remain inconclusive. Some stream of the studies show a negative relationship between risk and profitability (Shen et al. 2009; Pana et al. 2010; Distinguin et al. 2012; Cucinelli, 2013; Al-Tamimi et al. 2015; and Muriithi & Waweru, 2017), while other empirical studies documented a positive relationship between risk parameters and profitability (Hossein et al. 2014, and Otieno & Nyagol, 2016). The reason might be that they were studied in isolation and focused mainly on linking risk management and profitability. That is, the previous studies only try to find

the direct relationship between risk management and profitability.

The inconclusive findings on the relationship between risk parameters and profitability of previous studies highlighted the gap that needs to be addressed in this research. It is appropriate to introduce a moderating variable to strengthen the dependent and independent variables’ relationship (Barron & Kenny, 1986; Frazier et al. 2004). This study will introduce managerial ownership as a moderating variable that serve as a monitoring mechanism to monitor the corporate managers’ activities to protect the interest of shareholders and other stakeholders. Similarly, the stock ownership by directors can provide a direct economic incentive for managers to engage in active monitoring and also align ownership and control. According to the agency theory, the separation of ownership from control in a company may lead to agency conflict and agency cost that decrease the company’s value. Managerial ownership is expected to reduce this agency conflict because having an executive stake in the company may align the interest of shareholders and executives.

Furthermore, Enterprise risk management theory is a frame work that emphases on adopting a systematic and consistent approach to managing all risks facing the

organization. This study will utilize enterprise risk management theory in order to appreciate the risk influence on profitability of DMBs in Nigeria. Therefore, having managerial ownership as a moderating variable will be one of the contribution for this study to identify the nature of the relationship between risk parameters (credit risk, interest rate risk, operational risk and liquidity risk) with profitability. Also combining enterprise management theory and agency theory as the underpinning theory is another contribution of the study.

Objectives of the Study

The main objective of this study is to examine the moderating effect of managerial ownership on the relationship between risk parameters and profitability of listed Deposit Money Banks in Nigeria. The specific objectives are to assess the impact of:

  1. Risk parameters (credit risk, interest rate risk, operational risk and liquidity risk) on profitability of listed deposit money banks in Nigeria.
    1. Managerial ownership on profitability of listed deposit money banks in Nigeria.
    1. To evaluate the moderating effect of managerial ownership on the

relationship between risk parameters and profitability of listed deposit money banks in Nigeria.

Hypotheses of the Study

Based on the statement of the research problem and objective of the study, the following hypotheses are formulated in null form to guide the study.

H01: Risk parameters (credit risk, interest rate risk, operating risk and liquidity risk) has no significant impact on profitability of listed deposit money banks in Nigeria.

H02: Managerial ownership has no significant impact on profitability of listed deposit money banks in Nigeria.

H03: Managerial ownership does not significantly moderate the relationship between risk parameters and profitability of listed deposit money banks in Nigeria.

Significance of the Study

The study will be significant both in the following areas; in practice, and in theory. In practice it will be significant to shareholders as it will be of immense importance to them as it will facilitate their interest in the company and they will also benefit through monitoring performance over time that is, whether risk management have any influence on profitability. It will also be significant in theory with the combination of agency theory and risk

management theory which were used together in previous studies.

Scope of the Study

The study examines the moderating effect of risk managerial ownership on the relationship between risk parameters and profitability of listed deposit money banks in Nigeria. The time frame of the study is eleven years (2009-2019), the choice of 2009 as the base year is the fact that risk management activities were taken seriously by banks during the global economic meltdown which affected many banks and the year 2009 was within the range of the period. The study will cover all the listed deposit money banks listed in the Nigerian Stock Exchange as at 31St December, 2019.

LITERATURE REVIEW

This section reviews related literature on the subject matter of the study with a view to identify the possible gap(s) in the existing literature as well as to explore the relationship between risk parameters, managerial ownership and profitability of money deposit banks. The section also covers the concept of risk, concept of profitability, concept of managerial ownership, empirical review and theoretical review. This is with a view to identify the gap to be filled by this study.

Research Frame work

Figure 2.1 Research Framework

The research framework of this study focuses on the influence of risk on profitability of deposit money banks. This study attempts to investigate the relationship between the risk variables such as credit risk, liquidity risk, interest rate risk and operational risk as the independent variables, profitability is the dependent variable while, managerial ownership is the effective monitoring

mechanism used as the moderating variable.

Theoretical Review

Considering the objective of the study which is to examine the moderating effect of managerial ownership on the relationship between risk parameters and profitability of listed deposit money banks in Nigeria, the enterprise risk management theory and agency theory are the best theory that underpin this study and it is considered most appropriate in this context.

RESEARCH METHODOLOGY

This section presents the methodology that will be used in this study. The section will cover research design, population of the study, sample size, sampling techniques, source and method of data collection, variables of the study and their measurement as well as the method of data analysis to be used.

Research Design

In conducting a particular research, it is of immense importance to choose a particular research design. This is based on the nature and the problem of the research and how well the research objective can be achieved. Denga and Ali (1983), stated that correlational design is a design that helps to investigate relationship through identifying some existing consequences, hence, help for analyses of the data through an established possible relationship among variables. Therefore, the correlational research design will be employed for this study as the appropriate design. This is because it is more adequate in determining the relationship between two or more variables. Similarly, Gujarati, (2004) and Huang et al. (2014), stated that the correlational research design is mainly on the measurement of relationship quantitatively.

Researches undertaken in the field of social sciences are based on a number of philosophical assumptions which are influenced by the researcher’s view of the world. Samaila (2014) identified four social science philosophical assumptions namely; the ontology of the social world, epistemology, human nature and methodology. The positivism paradigm is also called the scientific paradigm. To prove or disprove a hypothesis is the purpose of research in the positivism paradigm. The positivism paradigm also have other characteristics which include; an emphasis on the scientific method, statistical analysis or the use of quantitative methodology and generalizable findings. This study is of the positivism paradigm.

Population of the Study

The population of this study is all the fourteen (14) deposit money banks listed on the floor of the Nigerian Stock Exchange as at 31St December, 2019.The population of the study is shown in table 3.1

Table 3.1 Listed Deposit Money Banks in Nigeria

S\NCompanyYear of  Listing 
1.Access Bank PLC1998
2.Eco Bank2006
3.Fidelity Bank Plc.2005
4.First bank holdings1971
5.First City MonumentBank Plc.2013
6.Guarantee Trust BankPlc.1996
7.Jaiz Bank Plc.2017
8.Stanbic IBTC BankPlc.2012
9.Sterling Bank Plc.1993
10.Union Bank Plc.1971
11.United Bank of Africa Plc.1970
12.Unity Bank Plc.2005
13.Wema bank Plc.1991
  14.Zenith Bank Plc.2004

Source: Nigerian Stock Exchange www.nigerianstockexchange.com December 2019

Sample Size and Sampling Technique of the Study

Sample size is described as a portion of the population that is utilized in the study for the purpose to draw inference on the entire population. The sampling technique of this study will be purposive sampling technique. The study sample size will be selected based on the criteria that: the bank must have been listed on the NSE before 1St January 2009 and the bank must be publishing financial statements from the year 2009- 2019. However, three banks; First City Monument Bank Plc, Jaiz Bank Plc and Stanbic IBTC Bank Plc were left

out of the sample as a result of not meeting the criteria of been listed on the NSE before 1St January 2009. The sample of the study is shown in table 3.2

Table 3.2 Sample size of the study

S\NCompanyYear of  Listing 
1.Access Bank PLC1998
2.Eco Bank2006
3.Fidelity Bank Plc.2005
4.First bank holdings1971
5.Guarantee Trust BankPlc.1996
6.Sterling Bank Plc.1993
7.Union Bank Plc.1971
8.United Bank of Africa Plc.1970
9.Unity Bank Plc.2005
10.Wema bank Plc.1991
  11.Zenith Bank Plc.2004

Source: Nigerian Stock Exchange www.nigerianstockexchange.com December 2019

3.5 Sources and Method of data collection

The study will utilize the secondary source of data. Data for the current study will be collected Nigerian Stock Exchange covering the period of eleven years from 2009 to 2019. Using annual reports have the following advantages which include: it is the main corporate communication tool, it provides companies with an effective method of managing external impression and because the auditors must read such material it gives a degree of credibility to the report. Furthermore, data for dependent variable (DV), independent variables (IV),

moderating   variable   (MV)   and  control

variables will be extracted from the annual financial reports of the listed deposit money banks in Nigeria.

Variables of the Study and their Measurements

The current study will use four types of variables, the dependent variable, the independent/ explanatory variables and the moderating variables. The dependent variable is represented by return on assets. The independent variable is risk parameters that include credit risk, liquidity risk, interest rate risk and operational risk. In addition, the moderating variable is represented by managerial ownership. The control variables of this study are firm size, firm age and firm growth. Table 3.3 presents the variables with their acronyms, measurement sources of the research variables.

Table 3.3 Measurement and Operational

   Definitions of the Variables

S/  N VariableTypeMeasurementSource
1ROADepe ndentNet profit/Total asset x 100Otieno et al. (2016); Altarawneh, (2016)and Abubakar et. al, (2019)
2.ROEDepe ndentNet profit/ equity x 100Zondi and Sibanda,(2015);Gweyi,(2018)
3.Credit riskIndep ende ntNon- performing loans/ Total loans x 100Funso et al, (2012); Kurawa & Garba, (2014); Kayode et al, (2015) and Ihsan & Hussain,(2016)
4.Liquidity riskIndep ende ntLoan and advances/ Deposits x 100Banks, (2005);Yousfi, (2014),Altarawneh, (2016); Chowdhury & Zaman, (2018) andEbenezer et. al. (2019)
5.Interest rate riskIndep ende ntTotal Loan income/ Net loan income x100Funso et al., (2015); Gweyi, (2018) and Ebenezer et. al. (2019)
6.Operatio nal riskIndepende ntOperatingexpenses/Assets x100Lyambiko, (2015);Altarawneh, (2016) and Gweyi,(2018)
7.Manager ial ownershi pMod erato rProportion of shares own by executive directors at the end of thefinancial yearBekiris(2013); Hassan and Ibrahim(2014); Mustapha and Che Ahmad(2011)
8.Firm sizeContr olNatural log of total assetsTafri et al. (2009); Akhtar et al. (2010); Kallamu, (2015)and Ebenezer et al. (2019)
9.Firm ageContr olNumber of years a company is in business since listedAhmed et al. (2010); Amran &Che-Ahmad, (2010) and Kurawa &Garba, (2014)
10.Firm growthContr olChange in total assets (current year minus preceding year divided by thepreceding yearKanagaretnam et al. (2014); Kyaw et al. (2015)

Source: Empirical Researches with Author’s Modifications (2020)

Techniques of Data Analysis

In analyzing the effect of managerial ownership on the relationship between risk parameter and profitability of listed Deposit Money Banks in Nigeria, Descriptive statistics, Correlation as well as panel Regression will be employed. The analysis will also be complemented by post regression analysis such as multicolinearity, residual normality test and heteroscedaticity. This is to enable the researcher have more information on the type of data to be analyzed.

Model Specification

In order to determine the moderating effect managerial ownership on the relationship between risk parameter and profitability, the following econometric model will be employed in the study (which is corresponding to what is mostly found in the literature, such as the works of Funso et al. (2012), Oluwafemi et al. (2013), Kurawa and Garba (2014) and Olalekan et al. (2018)) is given as:

Y = β0 +β Fit it

Where Y is the dependent variable; β0 is constant; β is the coefficient of explanatory variable; Fit is the explanatory variable; and εit is the error term (assumed to have zero mean and independent across the time period. The equation below was developed

based  on  the  econometric  model adapted

from Barron and Kenny (1986) with some modification as follows:

ROA = β0 + β1CRRit + β2LQRit + β3IRRit + β4OPRit + β5 FSZit + β6 FAGit + β7 FGRit

+εit……… (1)

ROA = β0 + β1CRRit + β2LQRit + β3IRRit + β4OPRit + β5MOW+ β6FSZit + β7 FAGit + β8 FGRit +εit (2)

ROA = β0 + β1CRRit + β2LQRit + β3IRRit + β4OPRit + β5 CRR* MOWit + β6 LQR* MOWit + β7 IRR* MOWit + β8 OPR* MOWit+ β9 FSZit + β10 FAGit + β11 FGRit

+εit (3)

ROE= β0 + β1CRRit + β2LQRit + β3IRRit + β4OPRit  + β5 FSZit  + β6 FAGit  + β7  FGRit

+εit (4) ROE= β0 + β1CRRit  + β2LQRit

+ β3IRRit + β4OPRit + β5MOW+ β6FSZit + β7 FAGit + β8 FGRit

+εit (5)

ROE= β0 + β1CRRit + β2LQRit + β3IRRit + β4OPRit + β5 CRR* MOWit + β6 LQR* MOWit + β7 IRR* MOWit + β8 OPR* MOWit+ β9 FSZit + β10 FAGit + β11 FGRit

+εit (6)

Where:

ROA = Return on Asset ROE = Return on Equity CRR = Credit Risk

LQR = Liquidity Risk

I RR = Interest Rate Risk

OPR = Operational Risk MOW = Managerial Ownership FSZ = Firm Size

FAG = Firm Age

FGR = Firm Growth

ε= Error term

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