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

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CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND OF THE STUDY

At an earlier point in history, societal expectations from business organizations did not go beyond official resources allocation and its maximization. In recent time, modern businesses think beyond profit maximization towards being at least socially responsible to its society. Today’s heightened interest in the role of business in society has been promoted by increased sensitivity to the awareness of environment and its ethical issues. However, there is no agreement on the literature concerning definitions of corporate social responsibility (CSR) that would comprise all the aspects this term involves, (Hopkins, 2003). The world business council for sustainable development defines companies social responsibility towards the society in general; “CSR as the continuing commitment by business to behave ethically and to contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.

The role of banking system in the development of any economy cannot be overemphasized because is the pivot of socioeconomic development of the nation. The banking system plays an active developmental role in the economy such as mobilizing fund from surplus to deficit spending units. The Nigeria banking system is primarily designed to have positive impact on the Nigeria economy. As crucial as the banking system is to the Nigerian economy, reforms that took place in the system contributes positive or negative impact on the Nigerian economy. Example of such reforms is the implementation of the twenty-five billion naira minimum capital base for banks.

The CBN reform increased the awareness and demand of the Nigerian public about the social and environmental performance of banks hence making corporate social responsibility a thing of continuous quest. This could be that the business of banking is too important and sensitive to be left to bankers alone; the business strives only on public trust and confidence.

Corporate Social Responsibility (CSR) is one among other things which can help banks earn trust, reputation and confidence of stakeholders. CSR is what an organization does to contribute to the social, economic, political or educational development of the community where it is located, but which it is not compelled to do by any law (Adebayo, 1998).

According to Achua (2008) banks need to be socially responsible to be able to build their “reputational capital” which enables them to attract high-quality employees, enable them to charge higher fees, negotiate better deals, expand customer base, attract more investors and win public trust.

The Nigerian Economy is a stakeholder in the Banking system since it is considered to be the ‘community’ or “environment” where the banks exist. There is an increasing demand by stakeholders for clear and hard facts about social and environmental performance of banks thereby making CSR an issue to be emphasized. Banks could be seen to be responsible if they can figure out key areas that will help develop the Nigeria Economy.

Corporate social responsibility (CSR) is an established and interesting topic in the developed world (i.e. Europe, America, Canada and recently Asia and South America). However, the next place to pick a lot of interest would be Africa and Nigeria precisely. Many firms in Nigeria engage in CSR and spend lot of money in their commitment to the society.

However, the government is picking up interest in CSR by recognizing firms on the basis of their CSR initiation. Researchers like Ajadi (2006), in his paper ‘concept of corporate social responsibility in Nigeria’ and Ameshi, Adi, Ogbechie and Amao (2006) in their paper ‘corporate social responsibility in Nigeria’ carried out research on CSR in Nigeria focusing on what it entails. However, the volume of published research in the area of CSR on Nigeria banks is still low, with most focusing on business ethic.

There is great scope of expanding the amount of research on CSR in Nigeria as well as improving the diversity of its content. The study picked interest in the topic having read a lot of journals, articles and observed issues of CSR in Nigeria banks. Much as there have been researches carried out on CSR in the country, scholars seemed tended to focus on what CSR is, the trend of CSR in Nigeria, public perception and relevancy of established CSR models in  Nigeria. To the researcher’s knowledge, very few studies have focused on CSR and its impact on profitability of commercial banks in Nigeria.

1.2  STATEMENT OF THE PROBLEM

The concept of corporate social responsibility can make a positive contribution to the development of society and businesses. However, most businesses exist solely to make profit in the short run and maximize value in the long run. A socially responsible bank should supersede the main objective of maximizing its shareholder’s wealth. It should extends its mandate by undertaking social and environmental activities in society within which it carries out its operation through initiative such as environment conservation, improving the quality of life of its employees and society in general. However, a careless spending without understanding the future returns expenditure generates for an organization could cumulatively put an organization into financial mess. Thus, CSR expenditure should rather improve the profitability position of organization not otherwise.

Rolling forward four decades and it is evident that the relatively nascent field of CSR has grown in prominence in practice as well as theory. A multitide of case studies and data now exists which researchers can draw on to test theories One of the key questions that dominate the literature is the link between CSR and profitability often phrased as the relationship between corporate social performance (CSP) and corporate financial performance (CFP). To date the results have been mixed with some researchers finding a strong positive correlation (see: Orlitzky, Schmidt and Rynes, 2004), whilst others suggesting no discernible correlation (see: Bauer, Koedijk and Otten, 2005) and in some instances a negative relationship (see: Brammer, Brooks and Pavelin, 2006). Of course, the challenge with looking at CSR from a profitability perspective is that it is very difficult to establish causation between CSR activities and financial performance – the former is often very abstract and intangible.

Intuitively it makes sense that investment in CSR by banks could lead to improvements in brand reputation which could translate into higher sales, premium prices and better attraction / retention of staff, amongst other things. But showing causation is very difficult. Significantly, socially responsible banks sometimes find it difficult to tie the short-run cost of CSR and the long-run benefits which ca prompt to the non absorbance of such relationship. For these reasons, the purpose of this study is to examine the relationship that exists between CSR expenditure and profitability in order to assist in making decision relating to CSR spending.

1.3       RESEARCH QUESTIONS

In view of the above problem, the following research questions are to be answered in the process of this study;

i.            Is there significant impact of CSR on bank profitability in Nigeria?

ii.            To what extent does CSR involvement affect banks’ profitability in Nigeria?

iii.            What is the long-run relationship between CSR expenditure and bank profitability in Nigeria?

iv.            What is the direction of causality between corporate social responsibility expenditure and bank profitability in Nigeria?

1.4       OBJECTIVES OF THE STUDY

The main objective of the study is to examine the impact of corporate social responsibility on profitability of commercial banks in Nigeria in order to assist in making decision relating to CSR spending.

. However, the study is aimed at achieving the following specific objectives:

i.            To determine the impact of CSR on bank profitability in Nigeria

ii.            To examine the extent CSR involvement affects banks’ profitability in Nigeria

iii.            To evaluate the long-run relationship between CSR expenditure and bank profitability in Nigeria

iv.            To determine the direction of causality between corporate social responsibility expenditure and bank profitability in Nigeria.

1.5  JUSTIFICATION OF THE STUDY

This study is situated within the confines of banking industry as most corporate social responsibility researches have been carried out on real sectors. However, many research works has been carried out on CSR, extensive research over the last 30 years on the effect of firm social actions on business performance have shown both a positive and negative correlation between CSR and firm financial performance, and in some cases mixed results.  Pava and Krausz (1996) examined 21 studies of corporate social performance and business performance between 1972 and 1992, finding that demonstrated a positive association, eight showed no association, and only one study indicated a negative correlation. The results of these examinations indicate uncertainty in predicting purely positive CSR and business performance correlations. Pava and Krausz (1996) summed the findings well by stating that while not all studies prove high-CSR firms perform better, there is evidence that such firms perform at least as well as lower-CSR firms. Scholars above have argued that a positive and negative effect of social responsibility on financial performance exists. Since the views across the world of the understanding of CSR differ considerably it is of great importance to try to understand how CSR is perceived in Nigeria and what the specific driving forces are. Adeyanju (2012) carried out research on the assessment of the impact of CSR on Nigeria Society and Asada (2010) carried out a research on corporate social responsibility of companies and sustainable development in Nigeria. However, very few Nigerian studies link CSR’s impact on banks profitability leaving this area plausible for research. Thus, this study will add knowledge to existing body of literature relating to CSR and bank profitability in Nigeria and other countries. The study would provide a picture of where banks stand in relation to their level of involvement in corporate social responsibility. It is however anticipated that stakeholder will use results from this study to increase their knowledge and understanding of CSR and how it affects the profitability of a socially responsible bank and also serve as a data source for further researchers working on related problem.

1.6       RESEARCH HYPOTHESES

In order to provide answers to the research questions all in the name of achieving the stated objectives of the study, the following hypothesis (expressed in their null form) was tested.

Ho1: There is no significant relationship between corporate social responsibility expenditure and bank profitability.

Ho2: There is no long-run relationship between CSR expenditure and bank profitability in Nigeria

Ho3: There is no direction of causality between corporate social responsibility expenditure and bank profitability in Nigeria.

1.7       SCOPE OF THE STUDY

This study examined the impact of CSR on the profitability of commercial banks in Nigeria. The study covers all 21 commercial banks in Nigeria, resulting from the continued banks consolidation reforms by CBN from 2005 till date. This study covers only 13randomly selected banks (representing 62% of the population) out of the 21 commercial banks in Nigeria. The time frame for this study covers the period between 2006 and 2013; this period is chosen because it is the period after consolidation (post consolidation).

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