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THE IMPACT OF CORPORATE SOCIAL RESPONSIBILITY ON PROFITABILITY OF COMMERCIAL BANKS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1    Background of the Study      

The Banking System is very important for any nation because it is the pivot of socio-economic development of any economy.  They have active developmental roles to play in the economy such as mobilizing fund from the surplus to the deficit spending units. The design of the Nigerian Banking System is geared towards greater impact on the Nigerian economy.

In the current era companies are not only responsible to their shareholders alone, they said to be standing on the triple bottom lines of corporate responsibility which include social, environmental, and financial (Tjia and Setiawati, 2012). Accountability of the business organizations is therefore extended not only to direct stakeholders concern but also to different external parties through the implementation of different socially desirable activities (Masud and Hossain, 2012). These social activities are no longer considered as a financial burden, but rather as social capital investment (Tjia and Setiawati, 2012). They are also called ethical investment simply because they increase the positive impacts of an organization (Abbasi et al. 2012).

Corporate social responsibility (CSR) is the encompassing term for the undertaking of these social activities. According to Ahmed et al. (2012) “CSR is generally understood to be the way a company attains a balance or integration of economic, environmental, and social imperatives while at the same time addressing shareholder and stakeholder expectations, with the understanding that businesses play a key role on job and wealth creation in society”. Uddin et al.  (2008) state that CSR “is the continuing commitment by business to behave according to business ethics and contribute to economic development while improving the quality of the life of the workforce and their families as well as the local community and society at large”.

In relation to the banking sector, CSR is said to be the obligation of banks to manage their social, economic and environmental activities at local and global level (Abbasi et al. 2012).   This involves the bank considering not only their profitability and growth, but also the interests of society and the environment by taking responsibility for the impact of their activities on stakeholders, employees, shareholders, customers, suppliers and civil society represented by NGOs (Noyer 2008 in Masud and Hossain, 2012). Although banks are not directly involved in degradation of natural environment they are facilitators as they are suppliers of funds that support production process that ultimately causes environmental degradation (Sarokin and Schulkin, 1991in Ahmed et al. 2012). Thus, according to Branco and Rodrigues (2006), the activities of banks, such as their lending and investment policies, can be considered as equally environmentally-sensitive when compared with the direct impacts of polluting industries that are dependent on the banks.

Therefore Branco and Rodrigues (2006) reasoned that banks can report on what they are doing to ensure that their lending and investment policies do not facilitate industrial activities, which are harmful for the environment. On a more direct way, Branco and Rodrigues (2006) argue that financial institutions consume vast amounts of resources, such as paper and energy, and create wastes; hence their policies regarding how they contribute to the conservation of energy and natural resources and recycling activities are important aspects of their social responsibility activities. Therefore to ensure accountability, banks are to be disclosing social related information.

Social responsibility disclosure refers to the disclosure of information about companies’ interactions with society (Branco and Rodrigues, 2006). Due to informational asymmetry, disclosure of private information is imperative as it brings general gains in economic efficiency (Hossain and Reaz, 2007), and it is an important instrument in the dialog between business and society (Branco and Rodrigues, 2006).  Generally transparency is an important aspect of good corporate governance practice and in relation to the banking sector increased transparency through the disclosure of timely and accurate information ideally should enable a bank to access capital markets more efficiently (Hossain and Reaz, 2007). These CSR disclosures can be classified into environment, human resources, products and customers and community involvement (Branco and Rodrigues, 2006).

In recent decades, as societies in Nigeria have become more prosperous, better educated and more articulated, increasing attention has focused on the social responsibility of business firms, because business firms are allowed to flourish within society and to make use of various natural and human resources available as well as public services.

The primary goal of a company is profit. To make more profit, companies make good products, invest money to retain competent employees and develop new technology and retain customers. These efforts have not only benefitted businesses economically, but have also contributed to the development of modern society. This social contribution concept of passive social responsibility has governed the mind of business owners until recently.

1.2    STATEMENT OF RESEARCH PROBLEM

The Nigerian economy today is faced with multiplicity of challenges ranging from high unemployment rate, high poverty (which stood at 69 percent of the 163 million population of Nigeria (NBS, 2010) corruption, youth restiveness, political crises, security challenges (which has great effect on investments (Aimurie,I. et al) and economic growth among others). These problems are generally seen as social issues, thus the more social improvements relates to a company’s business, the more it leads to economic benefits as well (Porter, M .E. and Kramer, M .R.2002). 

Since the role of banks is to enhance economic growth and with all these challenges facing the economy thereby threatening economic growth at this critical time that the Nigerian banks want to be the financial hub of Africa in the year 2020 and the nation is prepared to be one among the top 20 largest economies in the world by the year 2020. Even if the banks are socially responsible to an extent, there is need for the Nigerian banks to rethink both where (that is sector(s) and location) they focus their CSR and how they go about their CSR as no business can thrive in chaos environment.

Banking operations all over the world are technological driven, right from the door that customer passes through to enter the banking hall to the recording of the transactions between the customer and the bank or with third party (ies) requires one technology or the other which must be powered with electricity. Due to epileptic power supply in Nigeria, most organizations have to provide alternative power supply rather the relatively cheaper Nationalgrid (PHCN). This and some other factors have been militating against efficient running of business organization in Nigeria. As they have to factor the cost of fueling the alternative source of power which is always costly among others (like LPFO/Black oil, AGO/diesel and GAS) into their factors of production or operations as in the case of banks.

However, in the face of the above challenges for banks in Nigeria, the practice of corporate social responsibility as a concept entails the practice whereby corporate entities voluntarily integrate both social and environment upliftment in their business philosophy and operations. A business enterprise is primarily established to create valueby producing goods and services which society demands. It therefore seems that the practices of CSR will further pose a burden on the financial performance of banks. This has made most observers perceive Nigeria business environment has been hostile.In the light of the above problems faced by most banks, there is the need to evaluate the impact of CSR on the profitability of the banking sector in Nigeria.

1.3    RESEARCH OBJECTIVES  

The main objective of this research work is to examine the impact of corporate social responsibility on bank performance, a case study of some selected commercial banks in Nigeria. The specific objectives of this study therefore, are:

(i)             To examine the impact of disclosure of CSR on community development and its implications to both economic and environmental bottom line;

(ii)           To examine the impact of corporate social responsibility on the employee’s commitment.

1.4    RESEARCH QUESTIONS

This research will attempt to provide answers to the following questions:

(i)          Does corporate social responsibility have any economic and environment impact?

(ii)         Does the practice of corporate social responsibility impacts on the financial performance of an organization?

(iii)        How does corporate social responsibility influence employee’s performance?

1.5    RESEARCH HYPOTHESIS

Hypothesis is a tentative statement about the universe which may or may not be true. The hypothesis for this study is therefore formulated on the basis of the objectives of the research work as stated below:

Ho:  There is no significant relationship between corporate social responsibility and bank performance in Nigeria

H1:  There is significant relationship between corporate social responsibility and bank performance in Nigeria.

1.6    SIGNIFICANCE OF THE STUDY

It is expected that this study will provide an indication of how the corporate social responsibility landscape looks like in Nigeria’s banking system since there are no significant differences in the structural and operational models in the various banks in Nigeria. More so, this study is important because it will add to the existing literature of banks CSR in particular on how socially responsible is the Nigerian banks in addressing the challenges and enhancing the economic growth of Nigeria, which is one of the key sector that can drive the economic growth of any nation.

The result of this research work will aid the Nigerian banking system to evaluate their level of commitment to their corporate social responsibility objectives and functions in the light of their dependency on the environment as source of inputs and market for corporate outputs. It will also highlight the degree of neglect of government as a regulatory agent in the execution of its social responsibility duties.

1.7  SCOPE OF THE STUDY

This study basically seeks to examine the impact of corporate social responsibility on bank performance. This study is limited in scope to the banking industry in Nigeria from 2003 to 2013.

1.8    DEFINITION OF TERMS

For the purpose of this research, the under – listed terms are defined thus:

Corporate Social Responsibility (CSR): is a business process that a company adopts beyond its legal obligations in order to create added economic, social and environmental value to society and to minimize potential adverse effects from business activities, which includes interactions with suppliers, employees, consumers and communities in general.It also describes a company’sobligations to be accountable to all of its stakeholders in all its operations andactivities. It is a concept describing a company’s obligations to be accountable toall of its stakeholders in all its operations and activities on a voluntary basis.

Social responsibility disclosure refers to the disclosure of information about companies’ interactions with society (Branco and Rodrigues, 2006). Due to informational asymmetry, disclosure of private information is imperative as it brings general gains in economic efficiency (Hossain and Reaz, 2007), and it is an important instrument in the dialog between business and society (Branco and Rodrigues, 2006).  Generally transparency is an important aspect of good corporate governance practice and in relation to the banking sector.

Corporate performance is a vital concept that relates to the way and manner with which the financial resources at the disposal of the organization are judiciously put into usage to achieve the corporate objectives of such organization (Kajola 2008). The corporate performance of organization would disclose to the various stakeholders of the organization the continuous ability for such organization to remain in business.

Bank: is a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank links customers that have capital deficits and customers with capital surpluses.

1.9    OUTLINE OF CHAPTERS

This research work is divided into Five Chapters. Chapter one is devoted to introduction, Chapter Two, dealt with the review of relevant literature on the constructs and variables of the study as well as the theoretical and empirical frameworks. Chapter Three disclosed the research methods, research design, sampling, sampling techniques, validity and reliability, while Chapter Four examined data presentation and Analysis and Chapter Five dealt with discussions, summary of findings, Conclusions, contribution to knowledge recommendations, limitation and suggestions for further studies.

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