Ownership Structure Reform and Bank Performance in Nigeria

Abstract

Nigeria undertook a major bank structure reform between 2004 and 2006. A pivotal plank of that reform was the pegging of government ownership in deposit money banks to 10%. This was informed by the general economic theory that state ownership in commercial undertakings hurts operating performance. This paper anayzes the implications of this reform on operating performance of banks in Nigeria. Results from descriptive statistics indicate that government ownership in Nigerian banks is about 4%; 6% > the limit prescribed by the Central Bank of Nigeria. The coefficient of government ownership is not only rightly signed but also statistically significant. With a coefficient of -0.0568, the results confirm theoretical conclusion that government ownership hurts operating performance. The results support the outcome of the Nigerian study of Thorsten B. et al (2003) who assessed the effect of privatization on bank performance in Nigeria over the period 1990-2001. The result further provides an empirical answer to a question recently posed by the governor of the Central Bank of Nigeria – does ownership of financial institution matter? It appears that in a normal environment government shareholding of financial institutions should be limited as far as possible because of the tendency of government to stifle performance through suboptimal investment decisions, frequently on political expediency other than economic consideration.

Keywords: Government ownership, operating performance, corporate governance, reforms