ASSESSMENT OF THE IMPACT OF CORPORATE SOCIAL RESPONSIBILITY ON FINANCIAL PERFORMANCE OF THE BANKING INSTITUTION

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CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY        

Corporate social responsibility has become a common practice among most financial institutions in Nigeria. It is one of the newest management strategies where companies try to create a positive impact on society while doing business. Holme and Watts (2000) defined CSR as the continuous commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as the local community and society at large. Businesses can use ethical decision making to secure their businesses by making decisions that allow for government agencies to minimize their involvement in the corporation. Several reasons have been advanced to explain why commercial institutions voluntarily engage in social activities. Most companies practice social activities to satisfy their primary needs of presenting themselves as legitimate members of society (Bowen, 1953). This legitimacy has led companies to pursue their primary purpose of seeking sustainable profitability.

Leaving aside the fact that the corporate sector provides significant economic benefits to society, there are growing concerns that larger society provides great opportunities for companies to use public resources to operate their businesses (Carroll, 1979). Some experts are of the idea that most rules and regulations are formed due to public outcry, which threatens profit maximization and therefore the well-being of the shareholder and that if there were no outcry, there would be little regulation (Carroll, 1999). A firm is not socially responsible if it merely complies with the minimum required of the law, because this is what a good citizen would do.

It’s now recognized that sustainable development and reduction of poverty are the key issues that need to be addressed by the governments, mostly in the developing world. However, the government cannot meet this alone without the help of the private sector. Policy makers are paying much attention to the potential contribution of the private sector to such policy objectives. As the issue of sustainable development becomes more important, CSR becomes an element that addresses these issues and therefore it becomes more vital in the daily operations of financial institution in the banking industry. According to Pranjali (2011)The World Business Council for Sustainable Development (WBCSD) describes CSR as a contribution to sustainable economic development ;It is said that there is no way to avoid paying serious attention to corporate social responsibility: the costs of failing are simply too high. There are countless win opportunities waiting to be discovered: every activity in a firm’s value chain overlaps in some way with social factors, everything from how you buy or procure to how you do your research, yet very few companies have thought about this. The goal is to leverage your company’s unique capabilities in supporting social causes, and improve your competitive context at the same time. The job of today’s leaders is to stop being defensive and start thinking systematically about corporate responsibility according to Michael Porter (2005) who says successful executive or leaders know that CSR is inevitable and their long term success is based on continued good relationship with the society.

Corporate social responsibility is applicable to almost all organization but the banks are keener to these programmers as they have to do extra in order to satisfy their multiplicity of stakeholders. According to Nwankwo (1991) he points the advantages of CSR as, maximizing profit to shareholders who are the real owners of the business, maintaining optimal liquidity for depositors, Complying with regulators demand, Satisfying the deficit sector demand for credits, contributing to the development of the economy and Satisfying the needs of the immediate community in which they operate. CSR is being used today to establish good rapport with the public according to Nolan, Norton and Co (2009). It is also used as pre-emption strategy by the corporations to save their skin from unforeseen risks and corporate scandals, possible environmental accidents, governmental rules and regulations, protect eye-catching profits, brand differentiation, and better relationship with employees based on volunteerism terms. Corporations today are much conscious to publish their CSR activities on their websites, sustainability reports and their advertising campaigns in order to get the sympathy of the customer. CSR is also practiced because customers as well as governments today are demanding more ethical behaviors from organizations. In response, corporations are volunteering themselves to incorporate CSR as part of their business strategies, mission statement and values in multiple domains, respecting labor and environmental laws, while taking care of the contradictory interest of various stake holders according to Kashyap et al., (2006).

A study reveals that the largest banks consistently have higher CSR strengths and CSR concerns during the sample period. Further, this group sees a steep increase in CSR strengths and a steep drop in CSR concerns after 2009, as the worst of the financial crisis passed. We also find that more profitable banks, banks with higher capital ratios, and banks that charge lower fees on deposits have significantly higher CSR strengths. Therefore, this study focuses on the assessment of the impact of corporate social responsibility on financial performance of the banking institution.

1.2     STATEMENT OF THE PROBLEM

As for the banking industry, the relation between corporate social responsibility and financial performance has not been examined extensively, and the few existing studies offer conflicting evidence. In spite of the existing of some literature about the role of corporate social responsibility in the aspects of environment and society, there is a significance gap about how corporate social responsibility improves organization performance due to lack of documented evidence of the benefits hence the researchers focus was to find out the effect of CSR on organization performance based on selected commercial banks as we find out whether these institutions realize any benefits from the much they spend.

Financial institutions with good operating results and strategies can reduce screening and monitoring costs and diversify risk across different projects and overcome liquidity risks which ultimately provide savers with high return. Having long term financial success can attract investment in long-term projects while allowing investors access to their savings at short-term notice (Levine, 1991).

These institutions allow cross-sectional diversification across projects, allowing risky innovative activity while guaranteeing contracted interest rate to savers (King and Levine, 1993). Financial institutions can boost the rate of technological innovation by identifying the entrepreneurs with most promising technologies. Successful institutions can help reduce liquidity risk and enable long-term investment (Diamond and Dybvig, 1983). Banks with sound long term performance can offer job security to its employees, create new employment opportunities, assure government of continuous revenue apart from satisfying their shareholders’ expectations. These problems necessitates the need to carry out a study on the assessment of the impact of corporate social responsibility on financial performance of the banking institution.

1.3     OBJECTIVES OF THE STUDY  

The general objective of this study is to carry out a study on the assessment of the impact of corporate social responsibility on financial performance of the banking institution. The specific objectives include the following:

1.     To ascertain the activities of the corporate social responsibility carried out by banking institution.

2.     To find out the determinants of the performance of banks’ corporate social responsibility.

3.     To find out if the banks’ corporate social responsibility influences the level of customers’ patronage.

4.     To determine the roles of corporate social responsibility in improving the organizational performance of banking institutions.

5.     To investigate if there is a relation between corporate social responsibility and the financial performance of the banking institutions.

1.4     RESEARCH QUESTIONS

The relevant research questions related to this study include the following:

1.     What are the activities of the corporate social responsibility carried out by banking institution?

2.     What are the determinants of the performance of banks’

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